The northern summer has had its share of excitement for those of us who follow fine wine, with Mother Nature giving and taking away. Sharp bursts of hail in Bordeaux, Burgundy and elsewhere will take a heavy toll on this year’s vintage in parts of Europe, while unusually warm weather in California and the Pacific Northwest has sped the vintage along with an early harvest already in progress.
The fine-wine market has also had its share of hail and sun. The worst news came when summer was just beginning in June. The Cayman-based Vintage Wine fund announced that it was winding down – a victim of poor market conditions and heavy withdrawals as investors shifted to other investment categories. Vintage Wine is one of the oldest and largest wine investment funds, so its demise takes an important player out of the market.
Nobles Crus, a Luxembourg-based company that was at one time the largest registered wine investment funds, was ordered to suspend all redemptions and subscriptions. I think the concern was that a small number of institutional investors might pull out suddenly, draining the fund of its liquidity and leaving small holders hanging. John Stimpfig’s column in the September 2013 issue of Decanter speculates as to the cause of the crisis. Is it just the market being the market – in which case, other funds and their investors should take note. Or are there fundamental problems with Noble Crus’ valuation model? I guess time will tell.
Meanwhile, just to be safe, the U.K.’s Financial Conduct Authority ruled that wine funds under its jurisdiction must henceforth limit their investment offerings to those of substantial means – investors who are better equipped to cope with potential losses and periodic liquidity constraints if and when they come. A visit to the The Wine Investment Fund’s home page, for example, reveals a stern official warning about risk. You must “Accept” that you have read the terms and conditions to enter the site. Other wine-fund websites I visited were similarly protected.
Market trends continue
Since those June developments, the weather has not been entirely bright and sunny for the fine-wine market, but it has at least been free of devastating storms. The Liv-Ex 100 index is drifting up and down within a relatively narrow range, while the Liv-Ex 50 continues its steady slow decline. These wine investment indices focus on top Bordeaux wines, which is where more than 90 percent of the fine-wine market lives.
Meanwhile the Burgundy, Champagne and Super-Tuscan market niches have soared, with Domaine de la Romanée-Conti getting special attention. The interest in Burgundy seems clearly to have come at the expense of the first growths.
There may be good news on the horizon. Reports suggest that the Chinese economy may be picking up steam and this has traditionally been associated with rising fine-wine auction prices. However, Bordeaux may not benefit from this to the same extent as in the past if in fact Burgundy has become more fashionable.
Alternative or immature investment?
The summer slowdown in fine-wine news offers a chance to reflect on the nature of the market itself. Fine wine is generally presented as an alternative investment class, along with gold and oil: a pure price-play investment that pays no cash dividends, although wine, as the investment guides frequently point out, has the advantage that you can always drink up your losses if things go badly.
All of these alternative investments display a certain degree of volatility, although wine investment advisers argue that fine wine has been more stable over time. Certainly, the wine market is much smaller than gold and oil, as well as being subject to less intense speculative forces. However, I sometimes wonder if investors really treat wine as a substitute for gold or oil or if it is something else completely.
It seems to me that fine wine has more in common with fine art – and not just because both are sold by auction houses like Christie’s. In both cases, authenticity and provenance are important factors (not nearly as important in petroleum futures, I think), and critical evaluation is also key. The Liv-ex trading platform gives fine wine an edge in market efficiency over fine art.
Another way to think about fine wine is in terms of the market structure itself, and not the type of commodity being traded. International investors sometimes distinguish between mature capital markets, and immature or emerging capital markets. Fine wine is still in the emerging stage, but perhaps this is changing.
Mature capital markets feature efficient trading platforms, large numbers of listed assets, large volumes of trade, and effective regulator structures. Deeper markets in terms of traded volumes provide reliable liquidity. A broader range of investment assets reduces risk somewhat by allowing greater diversification. The main capital markets in Japan, Europe and North America fit the mature market mold.
Down with the Great 8?
Markets in developing countries, which lack one or more of the key mature market characteristics, may be considered immature or emerging (think much of Africa today or Eastern Europe after the collapse of communism). Attractively high returns are possible, but volatility is a constant threat and boom-bust cycles are endemic. Whereas business fundamentals may be key in a mature market, timing is often as – or more – important in the immature market case. Contagion is also a concern. A liquidity crunch in one market may cause a sell-off in another where cash is still available.
Viewed in this light, fine wine is best seen as an emerging market. While Liv-ex and the auction houses make trading relatively efficient (more efficient than fine art, less efficient than oil or gold), the fact that so much market volume is centered on a small number of wines is a disadvantage.
If the recent trend to expand investment beyond Bordeaux were to grow so that Burgundy, the Super-Tuscans and Champagne became more than a niche (alternative alternatives, I guess you’d say), this might well help the entire market expand. This would be to the benefit of everyone, including Bordeaux, by making the category more attractive to investors who want alternative investment products but with mature market structures.
The fine-wine market would lose some of its romance if the Big 5 (the Bordeaux first growths) or Great 8 (the first growths plus Ausone, Cheval Blanc and Pétrus) Bordeaux wines lost of bit of their luster (from a money point of view), and became components of a broader and deeper market. But it might be the best thing that could happen in terms of the evolution of a mature investment market for fine wine. Has this process begun? Too soon to say.