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, an interest in wine may evolve into an investment strategy.
In a way, wine investors are like anybody else investing in scarce, tangible assets—like rare coins, classic cars or antiques. Their passion for the product aside, they are finding that wine also offers diversification and the potential for returns.
As interest in wine as an investment has increased, a series of indices have 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 tracking the top 100 most sought-after wines. The index generated a five-year return of more than 22% through the end of 2018.
That figure doesn’t mean you should overfill your portfolio with wine, of course—any more than you would another single investment. Wine, like other passion investments, should represent only a small part of a diversified portfolio and needs to fit within the context of the overall asset mix.
Different Approaches To Wine Investing
Many wine fans and collectors think buying premium bottles is the only way to invest in the product. But there are actually several different ways to tap this market:
• Wine futures: This means investing in wine that’s still aging in the barrel and sold as is. With this option, you invest up front, 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: This investment is in wine that’s 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 of the product may also be more evident than it is in wine futures, and the turnaround time for making profits may be faster.
• Market wines: This means buying wines that can already 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. Because the quantities are limited—just as those of stocks, bonds and other securities can be limited—there’s also a secondary market for wine.
• Direct investment in a vineyard: You can do this either by partnering with an established vineyard or by starting your own. In any case, it’s a long-term investment, one that requires a great deal of expertise and operational know-how.
• A wine portfolio management service: In this option, a specialist portfolio manager will devise an investment strategy and select wines accordingly, make arrangements for storage of the wine and advise you 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. 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 takes your wine to market for you.
Assessing The Risks
In any investment, it’s crucial to understand the risks. When you invest in wine, those risks are:
• 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 keep its value, wine must be properly stored, either by the investor or by 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 before, 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%.
• 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 must be patient—and able to set aside money for a significant period without expecting a return. They should expect a holding period of at least 10 years to benefit from potential price appreciation, though it’s reasonable to plan on holding the investment 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.
