Many of us enjoy a good glass of wine, and some of us go to great lengths to collect a fine, vintage bottle. For others still, an interest in fine wine may evolve into an investment strategy.
Similar to investing in scarce tangible assets like rare coins, classic cars or antiques, there is a growing trend around passion investing specific to wine that goes beyond simply collecting for personal use, instead offering diversification and the potential for returns.
Showcasing the heightened interest in this type of investing, a series of indices has emerged to track prices in the fine wine market. The industry-leading benchmark is the London International Vintners Exchange, which includes the Liv-ex Fine Wine 100 Index that tracks the top 100 most sought-after wines. The index generated a five-year return of more than 22 percent through the end of 2018.
But that kind of return doesn't mean you should overfill your portfolio with wine—or any one kind of investment. Wine, like other passion investments, should only represent a small part of a diversified portfolio and needs to fit within the context of an overall asset mix.
Different Approaches To Wine Investing
While many wine fans and collectors may think buying premium bottles is the only way to invest in the product, there are actually several different methods to tap this market, including:
• Wine futures, or wine that is still aging in the barrel and sold as-is. With this option, you invest upfront, but the wine is typically not bottled for at least two years and not shipped from the winery for three years after harvest. This is a speculative purchase in which you’re trying to predict the quality in advance based on a variety of factors, including your knowledge of the vintner and the weather.
• Pre-arrivals, or wine that is bottled but not yet officially released on the market. Since these are young bottles, the price you pay may be lower than the retail price. The quality may also be more evident than with wine futures, and the turnaround time for making potential profits may be faster.
• Market wines, or those that can be purchased on the open market. In this case, you may have a clear sense of what the volume of production has been for a given vintage and a better idea of the quality. Certain wines may be in high demand and sell out quickly when they initially come to market. Due to limited quantities—as with stocks, bonds and other securities—there’s also a secondary market for wine.
• Investing directly in a vineyard. Either by partnering with an established vineyard or starting your own, investing directly might be considered a long-term investment, requiring a great deal of expertise and operational know-how.
• A wine portfolio management service. A specialized portfolio manager will devise an investment strategy and select wines accordingly, make arrangements for storage of the wine, and advise on when to sell to capture optimal returns. This can be a tax-efficient way to diversify your portfolio, as you don’t pay taxes unless and until you take personal delivery of the wine. Of course, you should consult with a tax advisor to discuss the tax implications of this (and any new) investment.
How To Choose Wines For Investment
France—specifically the Bordeaux and Burgundy regions—produces the majority of high-demand wine for investment purposes. A smaller amount of investable wine comes from Italy and California.
Many investors prefer to hire a professional wine manager to help recommend and facilitate their purchases. Because this is an ever-changing marketplace, it requires a great deal of specialized knowledge to separate the best investment opportunities from the rest of the market.
Ultimately, the person advising you will also likely be the one who will take the wine you own to market for you.
Assessing The Risks
As with any investment, it's crucial to understand the risks of investing in wine, which could include:
• Market unpredictability. Market demand for specific wines may ebb and flow. The process of choosing wines as an investment involves a degree of speculation about the future demand for any vintage in which you invest.
• Storage. To maintain its value, wine must be properly stored, either by the investor or in a professional wine storage facility. If you store wine on your own, you may want to look into adding a rider on your property insurance to protect it.
• Fees. As noted above, you'll likely have to hire a wine manager to help you purchase, store and sell the wine you’ve chosen to invest in. This service comes with fees, often in the range of 15 to 20 percent.
• Fraud. In some circumstances, wines have been sold that are not actually the vintage represented on the label. Particularly in the secondary market for wine, there have been documented cases of fraud.
• Extended time horizon. Because high-demand wines typically increase in value over time, investors may need to be patient, which means being in a position to set aside a sum of money that may not deliver a return for a significant time. Expect a holding period of at least 10 years to benefit from potential price appreciation, though it's reasonable to plan on holding your investment for even longer.
The potential market for wine could make it a worthwhile means of diversifying your portfolio, but getting into the wine market with the goal of earning a return requires an understanding of the full picture: opportunities, challenges and risks. This is why many wine investors seek the guidance of professional wine buyers. Working with someone experienced in the marketplace could allow your passion investment, just like a fine bottle of wine, to appreciate with age.
Liz Jacovino is a wealth strategist at RBC Wealth Management-U.S.
