In its opinion most of the problems seen in this market relate to valuations, storage and pricing transparency.
To help investors avoid these pitfalls and to benefit from the positive characteristics of investing in this asset class, TWIF has developed an investor check list and recommends that all fine wine investors seek out these features.
Valuations of holdings should be carried out independently by Liv-ex, the fine wine industry exchange, which currently is the only source of truly reliable pricing information. The wines, whether held directly in the investor’s name or through a fund, should be independently and regularly valued and reported on.
There should be no conflicts of interest – the interests of the investment manager or investment adviser should be aligned with those of the investor. This would not be the case if wines are purchased through a merchant, for example, as a merchant’s interest lies in making as large a margin as possible on the trading of their wine stock – to the obvious disadvantage of an investor.
Invest in “liquid” wines – i.e. wines with sufficient liquidity and volume of supply, and wines with well-established track records. The risk profile of an investment can rise considerably if the wine portfolio contains less liquid wines (i.e. those outside the top châteaux of Bordeaux), very young or en primeur wines, wines older than around 25 years, and wines not in standard size bottles (75cl or 150cl).
Check that the adviser has a genuine physical office – not a virtual or serviced address with only mail forwarding and call answering services. Visit the office if possible. Investors should make sure there is physical possession of all wines purchased and the wines should be stored in a UK government bonded warehouse. If in doubt, ask to visit the warehouse to view the wines. The wine should be fully insured at replacement value.
Avoid any cold calling and unsolicited mail – not only is this bad practice, but it is also very likely to be illegal. For instance, in the UK, there are regulations preventing the promotion of an investment in fine wine to the general public. Avoid any firms making promises of guaranteed returns.
Charges should not exceed the industry norm of 5% up front or subscription fee plus 1.5% annual management fee and 20% performance fee on net returns above the high watermark. All costs associated with the investment, including the costs of buying and selling the wines and the redemption and management of the holdings, should be clear and transparent from the outset of any investment period.
Check documentation. Any information memorandum should be issued by a firm authorised and regulated by the Financial Conduct Authority in the UK or similar regulatory body operating in other jurisdictions. There must be a transparent legal structure, with recognised lawyers and auditors named in the information memorandum and all costs and expenses (including management and performance fees) clearly set out. The manager’s sole role and interests should be aligned with those of the investor, with the manager having no other business interests. Marketing should concentrate on the benefits of fine wine providing diversification to an investment portfolio. If investing through an enterprise investment scheme (EIS), although there may be attractive fiscal benefits, the fiscal tail should not wag the investment dog.
“Fine wine has very attractive investment properties as an asset class, but it is not an easy market to access successfully,” warned Andrew della Casa, founding director of TWIF.
“Many have tried and failed. To be safe, investors should entrust their savings only to an experienced investment management team which can demonstrate at least a five year published track record – the minimum which is required by institutional investors.”
And he added: “Management should be a team, not just one or two individuals, which gives rise to major key person risks. There should be a clearly defined investment process – not simply a “fun” or “if all goes wrong we can drink the assets” attitude to the investment approach. Following our checklist should help investors avoid the market’s less scrupulous operators and uncork some fine returns.”
TWIF is the market’s longest established fund with average annualised net pay outs of 8.9% since 2003.