Today, we conclude our brief but informative series on Fine Wine Investing. Throughout this series, we have dabbled into a world that, for a time, appeared to be the playground of those with a penchant for refinement or those with enough money to appear refined. After all, mustn’t one have an intimate knowledge of the Bordeaux region and at least have heard of Robert Parker;s nose before daring to invest in Fine Wines, an asset class which not only carries principal risk, but the risk of direct consumption?
Today, thanks to the world’s leading electronic exchange for fine wines, the Liv-ex, price discovery is now within grasp of the commoner.
The London International Vintners Exchange, or Liv-ex, is like COMEX for Fine Wine. Since is was established in 1999, it has performed an important public service, as do all exchanges, it allows the commoner a peek into the most recently discovered price points for certain vintages, which can greatly aid them as they begin their adventure in Fine Wine Investing.
Understanding the Liv-ex is crucial to today’s serious Fine Wine Investor. The following are excerpts from a recent report on the market. Enjoy!
THE LIV-EX and the Financial Markets
Liv-Ex, London International Vintners Exchange, is the world’s one and only leading electronic exchange for fine wines, based in London, UK. Founded in 1999, Liv-Ex provides a marketplace and online platform for wine merchants, traders and brokers to trade wines freely and easily, just as it is done by equity stockbrokers.
Liv-Ex FEW Compared to other methods of fine wine procurement, such as auction houses, the main difference is that not everyone can trade on the Liv-Ex wine platform; only registered wine professionals/experts who have a proven track record in the industry are able to place bids (buy) and offers (sell) on the platform.
Only investment grade and blue-chip fine wines are traded on the Liv-Ex platform. Moreover, unlike auctions, no antique or collectible items are traded. Therefore, the majority of trades carried out on Liv-Ex are for French wines, usually from the highest rated vintages, mainly the more recent ones.
The Liv-Ex online wine platform also publishes its own price indices based on the amount of transactions made and has developed further into becoming the leading information source for fine wines; current prices, price fluctuations, historical stock data and the fine wine market in general.
Like any exchange, the Liv-ex has also produced a series of indices, which allow the casual observer to gauge the performance of the overall market for fine wines at a glance. It is these indices that give us the means to compare the Fine Wine Market’s performance with that of other major asset classes. The results may surprise you.
The following are the Liv-Ex Fine Wine Indices:
• Liv-Ex Fine Wine 50 Index
• Liv-Ex Fine Wine 100 Index
• Liv-Ex Fine Claret Chip Index
• Liv-Ex Fine Wine Investables Index
• Liv-Ex Fine Wine 500 Index
The Liv-Ex 100 Index is the fine wine industry’s leading benchmark index and even listed on Bloomberg. It includes and represents the price movement of the 100 most sought after wines, for which there is a strong secondary market and is calculated on a monthly basis.
By looking at the trading history of the fine wine market in the last decade, one may notice FWI demonstrated excellent track record which is appealing to absolute return investors.
According to the Liv-ex, FWI has consistently delivered positive absolute return over every. Next 5-year holding period since 2000. Figure 1 below also highlights that the average 5-year foreword performance since 2000 is as high as 111%!
While the returns on the Liv-ex 50 are compelling, they become even more compelling when considered within the context of other asset classes. The report continues:
It is also worth to note that while comparing FWI with global equities, FWI generated significant outperformance to global equities over any 5-year investment horizon since 2000, with hit rate as high as 98%, as shown in figure 2 below.
FWI provides diversification benefits to global equities portfolio. Besides outperforming global equities, FWI also gives diversification benefits as the correlation of FWI to global equities is only 0.19.
Whilst the above suggest FWI is attractive, recent trend has been less encouraging. Not only has the correction of the FWI market started to drag down the recent returns and out performance, but the diversification benefits also seem to have been diminished.
Like any market, the Fine Wine Market must be enjoyed in moderation, as out performance tends to attract attention which generally leads to…underperformance.
It is worth noting that the Fine Wine Market, while unique, has behaved similarly to that of Crude Oil over the past 10 years, as pointed out by this excerpt from a 2011 post in the Sizemore Letter:
From 1990 to 2010, the correlation between fine wine and crude oil returns was a staggering 90 percent!
What is the takeaway from all of this? While Fine Wines now have an established exchange, corresponding price index, and are a nice way to diversify from equities, they may offer returns similar to other commodities.
In the end, returns are returns, and from a pure numbers standpoint, the higher the returns, the better. From a semantic standpoint, it is much more fashionable to talk about one’s Fine Wine investments than crude oil in many social settings. Given this criteria, the answer is clear:
Fine Wine trumps Texas Tea.
This concludes our brief yet informative jaunt into the world of Fine Wines. Again, if you are interested in hearing more about Fine Wine investing, please email us.
Here’s to your health!