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A smarter way to get into the red

Kelvin Chan

Talk about your liquid assets: a London-based fund that invests in fine wines is opening up to international investors for the first time and is bringing its roadshow to Hong Kong this week.

The managers of the Wine Investment Fund, established in 2003, say they have achieved a track record of generating good returns from top-quality tipple and are confident foreign investors will want in. The fund, which invests primarily in prized bottles of wine from the Bordeaux region of France, has opened its fifth tranche to investors willing to put up at least GBP10,000 ($135,000).

'Research shows when many other asset classes suffer negative results, wine very often stays static. When other asset classes rise dramatically, wine will rise even more dramatically,' said Peter Lunzer, one of the fund's three directors. He said research has also found fine wine prices tend to rise in stages, as people start opening bottles they bought years before to drink.

The wine fund's strategy is simple: to buy good-quality French wines, hold them for five years and then sell them off and give the money back to investors. Mr Lunzer, who has worked in the wine industry for 25 years and is also the fund's wine adviser, said it will invest in vintages that are widely recognised by critics to be high quality.

Returns so far would inspire most investors to raise a glass. Since the first tranche on August 1, 2003, the value of its wines has leaped 33 per cent, while the 2004 tranche has done even better with 36 per cent. The first half of the 2005 offering has risen 11.5 per cent.

The fund's choices are 'extremely repetitive in terms of first growth' or, in French, the 'premier cru', Mr Lunzer explained. The chateaux in Bordeaux, southwest France, are home to some of the world's most prestigious and sought-after wines and since 1855 they have been grouped into a league comprised of five growths, each known as a 'cru', and made up mostly of reds. The premier cru includes the chateaux Lafite-Rothschild, Latour, Margaux, Haut-Brion and Mouton Rothschild. The fund will invest 95 per cent of its money in Bordeaux wines, with the remaining 5 per cent going on 'exceptional' wines from Burgundy, Mr Lunzer said.

While the first-growth wines are all recognised to be good quality, the key is to pick out those that are exceptional, Mr Lunzer said.

'Only three or four vintages every decade combine the right number of hours of sunlight together with the right amount of rainfall to produce perfect fruit,' he said.

But like any good stock picker, Mr Lunzer will also go for vintages that are underpriced. 'It's well known that the Lafite '96 is performing much better [price-wise] than the '96 Haut Brion, even though they are both from first growth.' However, 'if you buy the Haut-Brion at a low enough price, you can make a lot of money' because it too will rise in price at some point, he added.

The Wine Investment Fund's first tranche has turned in solid results so far, with many of its picks generating double-digit returns. According to its website, the fund invested GBP210,000 in August 2003, which has risen to GBP277,000 by the end of February.

Among its picks, one 12-bottle case of 1989 Mission Haut Brion has gained 59 per cent, while a case of 1982 Latour has surged 80 per cent. Only one has fallen - by 0.2 per cent.

The wine fund is among a number of so-called alternative investments that have gained popularity recently. Indeed, director Andrew Della Casa is also a director of the Stanley Gibbons Rare Stamp Investment Fund, launched late last year. Other funds seek to profit from rare paintings. Nor is it the only wine fund out there: a similar one was launched in 2003 in London, while the Australia-based International Wine Investment Fund has been operating since 1989.

The wine fund's directors, including Mr Lunzer, Mr Della Casa and Rodney Birrell, will visit Hong Kong from Wednesday to March 21.'There has been a tremendous response to the news of our visit to Hong Kong,' Mr Della Casa said, adding they have a full schedule of meetings and presentations. While in town, brokers at Citigroup, Cazenove, Linklaters and Allianz will be introducing them to potential investors. After Hong Kong, they will also visit Singapore, Bermuda and Toronto.

The wine fund is aiming to raise up to GBP18 million for its 2006 tranche. The directors plan to open up three separate sub-tranches, each raising about #6 million and investing it over four months each.

That may sound like a drop in the bucket in the fund management world, but Mr Lunzer said investors should keep in mind that the fine-wine market is not very big. That means the directors will limit the amount of money that comes in so as not to flood the wine market with money, causing overall prices to jump.'If we tried to accept hundreds of millions into our fund, we'd change the natural structure of pricing,' Mr Lunzer said, adding that if they get all the money they are aiming for right away, they won't open the additional sub-tranches later in the year.

In addition to the GBP10,000 minimum, the fund also charges a 5 per cent upfront subscription fee and an annual 1.25 per cent management fee. If the value of the fund grows by more than 50 per cent after five years, the directors earn a bonus of 20 per cent of any of the extra money above that minimum benchmark.

And is the fund only for oenophiles? Not at all, said Mr Lunzer. In fact, it might even be better if potential investors aren't aficionados because those who are tend to get confused on whether to buy for returns or taste.

'Forget it's wine. We're going to change the value of your money from A to B,' he said. 'It's cash in, cash out, there's no drinking at all. We wanted to be seen as an intelligent alternative investment that could represent 5 per cent of somebody's portfolio,' he said.

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