As investment managers, The Wine Investment Fund (TWIF) needs to look at the potential returns associated with each wine they invest in, but also at the risk associated with these investments. When looked at in this way, the issue with wines from regions other than Bordeaux is not their quality (which may certainly be high), but their suitability for investment.
In the wine market the largest potential risk is (perhaps ironically) liquidity risk – that is, the risk that a wine may not be bought or sold quickly enough and/or at an acceptable price.
Liquidity risk is much higher where the market for that particular wine is inactive – i.e. there are no live bids and offers, or the spread between the best bid and the best offer is very wide. To manage liquidity risk, TWIF only considers investing in wines which have active secondary markets. In practice this means only the top chateaux of Bordeaux.
To illustrate this, the most comprehensive index produced by Liv-ex, the wine exchange, has 1,000 components, around half of which are Bordeaux. For these Bordeaux wines, the average bid-offer spread is currently 11.8% (and within this, the spread for the wines that TWIF consider investing in and which make it into their stock picking universe is much lower still).
The spread for wines from outside Bordeaux currently averages 23.1% – more than twice that of Bordeaux. Therefore these non-Bordeaux wines can be seen straight away to have higher liquidity risk.
Bordeaux’s more active markets arise partly for historical reasons – it has always been heavily traded – but also because Bordeaux typically has higher average production than other areas. A typical Bordeaux chateau in TWIF’s universe might, for example, produce 10-20,000 cases per year: a Burgundy or Barolo of equivalent quality might produce 500-1,000 cases.
It is also important to note that the supply from Bordeaux, while sufficient to generate active secondary markets and therefore reduce risk, is still limited (once a vintage has been bottled, no more of that wine is available, no matter how good or otherwise that vintage may be considered). The boundaries of the appellation are defined by law and the size of each individual property changes only very rarely.
Supply in each vintage is therefore broadly fixed, subject to vagaries of the weather. With California, for example, it is perfectly possible for a successful estate to plant more grapes and use these to expand production of their wine – or buy in grapes from another property or area – which may be economically advantageous to the estate, but will not be for the investor.
Ultimately, it is this combination of supply which is limited (and, of course, diminishing over time due to consumption, while also improving in quality while in bottle) but sufficient to generate liquid secondary markets, which is unique to Bordeaux and which means that TWIF restrict their investments to wines from that region.
“We have adhered to a clearly defined and tried and tested investment philosophy since we launched in 2003,” said Andrew della Casa, founding director, The Wine Investment Fund.
“We exclude en primeur and wines nearing the end of their drinking windows from our stock picking universe of approx £5bn of Bordeaux wine. Our wines are stored in UK government bonded warehousing and are insured at market value.
“Fine wine, as a physical commodity with similar characteristics to gold, benefits from uncertain conditions elsewhere, while wine’s intrinsic value and inherently diminishing supply dynamic means that it retains its appeal in unstable market conditions.
“An investment in fine wine continues to make a very useful addition to a wider investment portfolio. Investors may also profit from the fiscal benefits of our EIS scheme (30% income tax relief and carry back provision, no CGT, no IHT and CGT deferral), thereby locking in substantial downside protection to their investment.
“The fundamentals of fine wine as an asset remain sound and we remain optimistic for the long term.”