Why invest in the wines of Bordeaux?
The wine market is fascinating and demand for the finest and most expensive wines has never been greater. Many regions of the world produce great wines, but only in limited quantities which are not suitable for investment purposes as there is no significant secondary market upon which to base an investment strategy. For example annual production of Burgundy’s great wines is so small, many parts of the world never see them.
In contrast, every Bordeaux harvest contributes around 700 million bottles to the market, of which around 35 million (5%) are of interest for investment purposes. This amount may rise as production methods improve in Chateaux that may have under-performed over past years. In effect, however this 5% of production provides a potential investment pool of some £2bn annually and represents around 20% of total value. Typically, 25% of these wines were shipped to UK customers, hence the exceptional depth of stock held in the UK warehouses.
Lunzer Wine Investments estimates the global wine market of investment grade stock at between £6-8bn. At any one time the Fund may purchase wines from up to eight different vintages. The Fund will not invest in wines ‘en primeur’ as this presents a much higher risk – the reason is that if the subsequent vintage is judged to be better than the wine just bought then prices for that wine can stagnate for long periods of time.
The fund will aim to only buy investments wines where a strong secondary market has already been established, where the wines are maturing and tasting even better, and where consumption is reducing available supply. Typically, wines in the Fund portfolio are bought between 4 and 18 years following bottling, when a consensus has developed among wine experts as to the quality of each particular vintage and with older stock one can see where their prices are in relation to the Wine Price Ratio.
A proven opportunity
Statistics show the consistent and significant opportunity offered by investment grade wines:
- Between 1950-1985 the Vintage Claret Index demonstrated an average annual compound return of 15.2%
- The 1983-2002 Fine Wine index showed average annual compound growth of 12.3%
- Between 2003-2007 the Liv-ex 100 average annual compound growth rate was 15.3%
While fine wine increases in value in a non-linear fashion, it has averaged a growth rate of 1% per month for the last 30 years. At the same time Bordeaux prices seem to be weakly or even negatively correlated against global economic cycles. For example, while property crashed in the UK in the 1990s, values of investment-grade wines rose.
In the past, steep price rises were followed by lengthy plateaux. However with stable demand from traditional markets, and ever increasing interest from emerging markets over the past 10 years, the pattern recently seems to have been for the plateau to become shorter, with rises followed by more modest growh or nil growth. That trend looks set to continue with an increased number of wealthy individuals becoming interested.
As in any economy, rising demand and diminishing stock pushes up prices. As all vintages from the great Chateaux have a finite supply, prescribed and heavily regulated by the relevant authorities, the opportunity for investors in these assets looks to be a consistent buy.