Risks and Rate of Return of Wine: What Investors Should Consider

Risks and Rate of Return of Wine: What Investors Should Consider

Risks and Rate of Return of Wine: What Investors Should Consider 1200 675 AltReturns
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Just because many of us enjoy drinking wine, investing in the industry isn’t necessarily a good idea for everyone. For investors with a high net worth who are looking to further diversify their portfolio, wine offers an asset class similar to art, and some experts say there are opportunities to be found.

To do so, it takes significant startup capital for any type of return, says Mathew Dahlberg, owner of Main Street Investments, a wealth management company in Kansas City, Missouri. “In order to see any type of return, you’re talking investing $10,000 or more,” he says.

Miguel Farra, an avid wine collector and chairman of the tax and accounting department of Morrison, Brown, Argiz & Farra, a public accounting firm in Miami, says some of his friends purchased cases of 1982 Chateau Lafite Rothschild on release for $40 a bottle ($480 per case) and sold their investment for $4,000 a bottle ($48,000 per case).

“Wine depends on the providence and the condition of the bottle,” he says. “When you buy it on the secondary market, you have to be careful. There’s a lot of fraud that is happening in the high-end wine market.”

Before investing in a case of these liquid assets, here are some tips to consider.

Where to go? 

Although wine futures weren’t in a great place from 2011-2014, there are a few opportunities now to buy futures of recently barreled wine that is aging in chateau cellars, says David Sokolin, author of “Investing in Liquid Assets” and president of Sokolin, a fine wine retailer in Bridgehampton, New York.

risks and rate of return wineThe rarer the wine, the better the investment, he says, because rare wines will continue to be the most sought-after vintages. “Over time they continue to appreciate,” Sokolin says. “Because they are finite and decreasing in quantity, and are now chased by a global clientele, they should go up in price.”

The 1961 Bordeaux are hard to acquire, but Sokolin recommends that investors focus on vintages of Bordeaux from 1982, 1990, 2000, 2005, 2009 and 2010. “I think the opportunity lies in those wines,” he says.

Sokolin points to “a secular change in the market” since influential U.S. wine critic Robert Parker, known for his 100-point rating system, sold his major stake in The Wine Advocate and no longer tastes Bordeaux on release. Although U.K. critic Neal Martin now rates the wine and Parker still tastes back vintages, “you can feel the absence of Robert Parker in the futures market this year,” Sokolin says. “Even though 2015 is the first excellent vintage since 2010, you don’t feel that sense of momentum in the market to buy it.”

Instead, Sokolin says historical wines that Parker rated 100 points are going to “live on in history” as the greatest wines ever made because no one reviewing wines today compares to Parker’s fame and reputation for reviewing wine. “Robert Parker exiting the market has created an opportunity to buy older Robert Parker-reviewed wines,” he says.

For wine investors who are considering Burgundy vintages, Sokolin points to Allen Meadows’s burghound.com for tips. He also suggests buying cases of wine in their original wood cases to increase the value since loose bottles are generally not investment-worthy. Look at the scores of the wines since investment grade wines are rated 97 to 100 points.

“Burgundy is a great investment, it’s very hard to get at, quantities are extremely low and there’s a lot of people chasing it,” he says. “The question is how much higher will the prices go? The general consensus says higher.”

Other Trends to Consider

While Bordeaux and Burgundy are the focus of most fine wine investors, many emerging markets are starting to come online and will likely be a factor during the next decade, says Spiros Malandrakis, senior alcoholic drinks analyst for market researcher Euromonitor International in London.

Along with the rise of the more casual mass market and millennial drinker, Malandrakis says growth has continued in countries such as Chile, Australia, China and even the U.K., citing champagne houses like Taittinger that purchased land in Kent, England, late last year to create sparkling wine. The reason, he says, is the anticipation of global warming and rising temperatures that will make the region more akin to traditional Champagne region of France in future years.

“And within the next decade we will be talking about Chinese wines,” Malandrakis says, adding that the Chinese, which only focused on French wine a few years ago, are slowly incorporating wine, most red — thanks to its symbolism as a lucky color — into their everyday life.

Review the Wine Stock Market

To get a general sense of the market, consider tracking the industry benchmark, Liv-ex, the London International Vintners Exchange, a global trading platform for fine wine merchants, and its Fine Wine 100 Index that tracks the price movement of the 100 most sought-after fine wines.

“If the index is moving down, the market is shrinking because the price for the most 100 sought-after wines is declining as people are unloading them,” says Burak Kazaz, a professor at Syracuse University’s Whitman School of Management. “Bottle prices will follow the market movement.”

Liv-ex is open only to professional fine wine traders, so private wine investors typically buy from a wholesaler, distributor or retailer who has access to the market. Before any investor makes a fine wine purchase, experts suggest asking the merchant to show proof of the storage location of the wine.

Farra also recommends using tools such as wine-searcher.com and going to vetted auctions at Sotheby’s and Zachys Wine Auctions or preferred fine wine merchants such as Hart Davis Hart Wine Co. in Chicago or Sunset Corners Fine Wine and Spirits in Miami.

Consider Risks and Rate of Return 

“As romantic as it sounds, investing in wine is risky business,” says Philip Kiernan, financial advisor and managing director at Highlander Capital Management in Short Hills, New Jersey. “A lot can go wrong from the time the wine is made to when the bottle is opened. Poor handling and storage can hurt a wine just as much as overall scarcity and positive reviews can help enhance its reputation.”

As an illiquid liquid, many experts say investors have to hold onto their wine or wine futures for a minimum of 7 to 15 years. Similar to investing in art or a private company, wine has a perceived market value – based on a customer’s opinion of the product or service’s value that may not correctly correspond with an investment’s true value when it comes time to sell.

Only a small percentage of the high-net-worth population should be investing in the market, says Phil Corcoran, a certified financial planner and managing director at Savant Capital Management in McLean, Virginia.

“When you look at the world’s supply of wine production, only 1 percent of that in any given year would fall into the investable quality category,” Corcoran says. “Those odds are terrible. In my opinion, I wouldn’t even bother. I don’t think it’s for most people.”

Instead, Corcoran recommends investing in more traditional methods such as the Standard & Poor’s 500 index, with its broad market of industries. “In any given year you’re getting 85 percent of your benchmark will outperform any group of active managers,” he says. “The 1 percenters are going to argue against me, that’s fine. They can quibble and take their chances on that 1 percent.”

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