Particular asset classes are blessed by characteristics that allow them to ride economic crises and market uncertainty. Among those is definitely fine wine.
Yet knowing where to begin when diversifying your investment portfolio can often seem daunting and full of risks. So The European caught up with Scott A.W. Assemakis, Managing Director at fine wine brokers, European Fine Wines (EFW), to ask him about wine investment, and the best way to make it part of your investment strategy.
The European: What advantages does fine wine have over other kinds of investments?
Scott Assemakis: The first advantage of fine wine over other kinds of investments is the fact that it is an altogether different type of investment, and therefore not subject to many of the factors affecting the current investment scene.
To explain why that’s a benefit, I’d like to take a brief look at some of the more traditional asset classes. There is, deservedly, a great deal of caution surrounding stock market investments, and the outlook for the developed economies of Europe is grim. Whether or not the euro survives, some countries have already embarked on a programme of cutbacks and debt repayments which will act as a drag on recovery. In the emerging markets, it will be difficult for China to sustain economic growth at previous rates, as a lowering of consumption in Europe will inevitably result in reduced demand for manufacturing.
UK property is also in the doldrums, except for select areas of London. After the buying sprees of Arabs and Russians in the last 10-20 years, Greek buyers are among those paying premium prices for London residences, while house prices are in general decline across the regions. There are also signs that property prices in China are over-heating; housing developers are offering large price reductions and the Chinese government has introduced credit restrictions and raised the interest rate for borrowing in an attempt to cool down the economy. While commodity prices and mining companies have shown tremendous growth in recent years, there are signs that the high cost of raw materials is in itself a barrier to growth, while lowered consumption will affect demand.
We are not suggesting that all traditional investments types are redundant, but it is clear that previous certainties are being overturned. Where conventional wisdom would have said, even as recently as five years ago, that emerging markets were high risk, today many financial advisors would say that portfolios are at risk if they don’t include emerging markets, as these are the likely growth areas.
The inception of European Fine Wines (EFW) was a classic case of working for a merchant for a number of years and deciding there was a better way. EFW launched their company in August 2005 and have worked hard to build their reputation and client base.
The key to business is relationships, and the key to relationships is confidence. EFW’s style is to maintain regular contact with their clients and provide them with an assessment of the fine wine market, together with a review of their holdings. It follows that attitude is the most important component EFW look for in new recruits.
The wine industry is one of those fortunate sectors where you can combine a business with something that interests you personally, and the staff at EFW are encouraged to develop their own wine knowledge. They have an internal programme of sponsored wine education courses leading to formal qualifications at the highest level, which is part of the company’s objective of always strengthening and expanding their base of technical knowledge. EFW also take groups to Bordeaux every year – nothing inspires their sales team more than a visit to the actual vineyard and a chance to meet the people who make the wine that they sell, and to hear first hand the features and characteristics of a vintage.
With outlets in the UK and the Far East, EFW are well placed to monitor developments and trends in the fine wine market, and part of their responsibility is to help all clients benefit from this market knowledge.
If you wish to learn more about this exciting opportunity, please call EFW on: 0844 998 11 11 or visit: European Fine Wines
TE: So what should investors do?
SA: Most people believe that the secret of investing is to buy low and sell high (otherwise known as “market timing”), but the reality is that it is very difficult to get this strategy right – particularly for wealth managers! Less than half of fund managers, with all their benefits of extensive research and analysis, actually beat the market over time, so what chance does the average investor stand? For most successful investment portfolios there is a simple underlying principle – diversity – and there is extensive evidence to show that the majority of returns are obtained by holding a wide range of investments.
At European Fine Wines, we have built a business on the basis that many independent financial commentators believe fine wines deserve consideration as part of a comprehensive investment strategy. A holding in fine wines is part of the diversity argument. At this point, it is worth explaining how fine wine prices are sustained.
For all the lyrical descriptions of superb vintages, it is difficult to justify the cost of premium wines purely on their taste alone; we would argue that an £80 bottle of wine can definitely be 10 times better than a bottle costing £8, but it is a case of diminishing returns when we then compare the £80 wine with a vintage costing £800.
In this context, if we think of wine as a luxury product, then the pricing makes sense.
Fine wine is often a status purchase; in the same way that no one buys a Patek Phillipe watch because they need an extra level of precision in time-keeping, or a Louis Vuitton handbag because it’s better at holding personal items.
It goes without saying that no luxury product will survive without clearly being of the highest quality, but once a brand achieves recognition as representing the best that money can buy then price is not the main consideration. This is the level of eminence attained by certain vineyards in Bordeaux and the Burgundy region. If we conducted a survey among the general public, the names Château Lafite, Mouton Rothschild and Château Margaux, together with Petrus and Le Pin, are among examples of wine brands that we might expect anyone to recognise, regardless of their interest in wine.
TE: A feature of the wine investment market is the ratio of high demand to limited supply. How can EFW help investors make the most of available opportunities?
SA: There are a number of factors that ensure a limited supply of the best wines, not least the production restrictions built into the Bordeaux wine classification system, e.g. a vineyard can only produce a maximum of 177 cases per acre of their premium labelled wine, regardless of the size of the harvest.
There are also natural restrictions; some of the vineyards are quite small; wine makers pursuing quality will take great care in extracting the best grade of juice (think extra virgin olive oil, first pressing); and the most intense flavours come from the smallest berries (i.e. the lowest yield).
This creates an opportunity as top vintages have become harder to acquire, and this is due in part to a huge increase in affluence, particularly in the Far East (not just China – Korea, for example, is a big market for fine wines). Once the supply of the best-known labels is exhausted, knowledgeable buyers seek suitable alternatives.
A lot more attention is now turned towards chateaux outside the first growths that consistently produce superlative wines. Indeed, such is the gulf between the established labels and the vineyards’ need to succeed entirely on merit that there is potential for substantial price increases. This is an opportunity for the shrewd buyer to capitalise on the consequent recognition and increased interest, and our portfolio recommendations over the last year have taken this into account.
TE: Is there any need to mitigate risks in fine wine investment? If so, what might the risks include? And what tools are available within the industry to offset these risks?
SA: Until fairly recent times, fine wine investment was very much a niche activity, but the industry has been transformed by the same features that have affected the way all businesses function. The last 20 years have seen increased transparency in pricing and supply, with far more choice of, and competition between, merchants. Fine wine indices and pricing sites allow even the novice buyer to verify performance and value. A vast amount of specialist information and opinion is available within a few keystrokes.
But one thing that has not changed is the need to evaluate your merchant, and make a few basic enquiries.
As a businessperson, there will be certain steps you take before making a purchase from a new supplier. The most basic question regarding the stability and credibility of the company is the easiest to establish – have a look at Companies House, where you will immediately see how long the merchant has been in business. Look whether statutory requirements being met – if they can’t submit an annual return on time, they are unlikely to be a well-run organisation. Company accounts can be obtained for £1 – a superb investment; a cursory look will tell you whether this company is capable of running a multi-million pound business. If accounts are not yet submitted, or the balance sheet is weak, then why consider trusting them with a substantial investment? Further precautions are necessary in the world of fine wine investment for a very simple reason – investment grade fine wine in the UK is held in bond, i.e. the investor will usually not see their purchase.
This leads to our suggestion that the biggest risk in buying fine wine is not whether a better price could have been obtained, but whether it actually exists. A few very simple precautions can, must, be taken to protect your purchase.
- Use a credit card for at least the initial purchase, and benefit from the protection of the Consumer Credit Act in the event of non-supply;
- Ensure that your wine is stored in a private account in your name, with a clear guarantee of title;
- Obtain a condition report from your merchant, or the bonded warehouse, ensuring that the wine is in investment grade condition.
SA: A fine wine portfolio is a medium to long-term investment (3-5 years at a minimum), and you should look at your relationship with a merchant in this context. You will want to review your holdings on a regular basis, and this dictates that you need to feel comfortable in your dealings with your merchant. All relationships are based on confidence, and this certainly applies to the merchant you choose to guide you through the interesting but sometimes Byzantine world of fine wine investment.
To finish where we began – fine wine has proven that it deserves to be regarded as a credible alternative investment. It will never be a mainstream asset class, because they just don’t make enough of it. And this is the key to fine wine investment – every bottle that remains increases in value with each bottle consumed.
LEADING THE TEAM
Sebastian Woolf and Sean Dineen, are Senior Managers at European Fine Wines and are responsible for running the trading teams. Both Sean and Sebastian enjoyed working with the public in their previous careers in the property and finance sectors, but were delighted to be able to turn their interest in fine wines into their profession.