Is wine still a good financial investment, and is it prudent to trade it online?
Is wine still a good financial investment, and is it prudent to trade it online, Nan-Hie In reports
The recent implosion of several British wine funds (Sanderson Forbes, The London Vines and Vinance) and the entry of Bordeaux Fine Wines into provisional liquidation is not promising news for anyone considering wine as an investment.
Those failures come at a time when there is greater interest in wine investment, as shown by the popularity of online wine exchanges. Berry Bros & Rudd's Broking Exchange (BBX) has been trading wine since 2010, while Bordeaux Index's Live Trade has been making a name for itself since 2009.
They have been joined by newcomer WineWorld Exchange from merchant and storage house Wine World. Are these platforms more likely to bring a fruitful return?
There are a few fundamentals to consider first. This story focuses on Bordeaux - its lifespan is 20 to 30 years, with each phase of its life affecting its quality and so its value.
Most digital broking platforms permit trade on mid-to-full maturity bottles but not en primeur or futures (the youngest Bordeaux, still in the barrel). Futures take around two years to be released to the customers' custody.
"Because en primeur is not a physical product yet, it's sold on a merchant level, not online trading level," says Mariana Lam, founder of Wineworld Exchange. BBX also does not allow trading of futures (although it will start this year).
The market is in a downturn. A case of Lafite Rothchild 2009 would have collected around £11,000 (HK$142,000) in 2011; one recently sold on Liv-Ex exchange for £6,600, according to a report by Bloomberg.
Many claim the market is still sobering up from the unsustainable peaks of 2009 and 2010 vintages buoyed by critics such as Robert Parker, who awarded wines from those vintages near perfect scores.
Financier Julian Skeels is a fan of online trading; a prolific wine trader, he has sold more than US$10 million worth of wine, mostly through these channels.
"Online trading reduces the cost of selling and it's made faster and simpler," Skeels says. The commission is 10 per cent, less than the 20 to 30 per cent at auction houses. Another great benefit, from the buyer's perspective, is accessibility to older stocks also at decreased prices due to its increased supply to the market.
His investment approach avoids the usual suspects as he analyses the wine landscape from a banker's perspective. Skeels emphasises that one must be familiar with the lifespan of Bordeaux, its supply and demand dynamics, what drives prices and where the growth potential lies.
"Otherwise you can't make money on wine whether you're using online trading platforms or not," he says.
The crazy prices and giddiness surrounding the 2009 and 2010 vintages has put him off en primeur - especially as the subsequent readjustment has reversed the traditional thinking that rare wines should command higher prices.
"Now older wines are cheaper than younger wines," he says. For example, the banker paid £4,500 for a 1990 Haut-Brion which he rates as 98-plus points, yet he finds it incomprehensible how the 2009 sells for 50 per cent more.
Real financial opportunity lies in less label-orientated bottles such as second or third-growth Bordeaux.
"People think you earn most by buying the best label. No, the classic investment theory is you buy underpriced assets to sell when it's most expensive. That means you have to look for the next growth."
If you bought Lafite Rothschild at the top of the market, you should have been selling it at that point, he says.
Since wine lovers are consuming second growths, their supply is diminishing, creating value.
A typical target would be a mid-maturity wine, roughly 15 years old, which is yet to enter prime drinking window, but is underpriced compared to younger vintages. Skeels is keen on the 18-year-old 1996 vintage at the moment.
"With decent liquidity at that phase, there is strong reason for the prices to go up."
He's also enthusiastic about the undervalued Haut-Brion, particularly the 1990 and 1998.
Online marketplaces are not without risks. Can the exchange ensure the stock's provenance or good conditions upon storage or delivery? The standards vary depending on the platform.
Some online marketplaces are extensions of reputable merchants with storage services; these operators can minimise such concerns. That includes, BBX, which only trades wine bought from its merchant, or stock accepted by its bonded warehouses.
So far the exchange has sold nearly £50 million worth of wine. Most cases on BBX are "virgin stock" says sales and marketing director Simon Staples.
"We look after six million bottles; I would say 95 per cent of those were brought directly from the supplier, the other 5 per cent from merchants." Such policies assure provenance, he says.
Additionally, since users trade their existing holdings, "the wines don't move, it just changes ownership". He explains: "BBX allows us to sell to the next customer; because of that 10-year lifespan of the wine, before it's ready to drink, the stock may change hands three or four times."
The company houses its own inventory in temperature-controlled settings of one degree Celsius variance, which should assure customers that the assets are in pristine condition.
Peter Lunzer, CEO of Lunzer Wine Investments, says wine is an "extremely safe" investment, as one can sniff out the rotten grapes in the investment field with proper due diligence.
Says Lunzer: "Important in investing - wine or any product - is finding out the custodial situation of the cash or asset. For example, our fund uses KPMG as the auditors and HSBC as the custodian and recognised administrators who are known to investors as globally recognised service providers."
In the post-Bernie Madoff era, custodianship of the asset or cash has become paramount to investors, he says.
Also, check the financials, including the fees. Generally, the fee structure of wine funds are 2 per cent for managing the asset (akin to hedge funds), 20 per cent of profits, plus redemption fees that vary from around 5 per cent to 10 per cent.
Lunzer sees rates based on actual realisation as "fair"; his fund's "hurdle rate" of 6 per cent means the fee is charged if those gains are realised.
Fees based on a valuation should arouse suspicion: "If there is a fund fee based on a hypothetical gain, that's something to be wary of."
The story of Vinance provides a cautionary tale. The London-based wine investment vehicle folded in 2012 and went into voluntary liquidation last year; administrators discovered shoddy record-keeping and gross mismanagement of funds, including investor money used to pay for the company expenses instead of wines. According to reports, clients are owed about £5 million.
Lunzer was surprised that Vinance demanded a high fee up front (reportedly 25 per cent) but had bought less stock than investors had paid for, effectively making it a Ponzi scheme.
A dissenting voice on online platforms comes from Robert Sleigh, a senior director and wine pundit at Sotheby's. He says when it comes to selling wine the platform used is less relevant than the state of the market.
He doesn't think the majority of wine is sold on digital platforms. "It provides an outlet for smaller cellars, but I think you see the biggest collections and top prices at the live auctions, as opposed to online trading platforms."
Sleigh advises buying the best vintages from the top domains, including first-growth Bordeaux from Chateau Ausone.