James Miles Director, Liv-ex.com Investing in fine wine Thursday 10 th March 2011 The Family Alternative Investment Conference
Compelling investment case
Supply/demand dynamic: supply is static (even falling), whereas demand is rising due to new markets.
Useful portfolio diversification characteristics: strong annual returns, low volatility and limited correlation with mainstream assets.
Exposure to emerging market economies.
1. Compound Annual Growth rate (Jan 1990 - Dec 2010) 2. Annualised standard deviation (lower equals lower volatility) 3. Monthly correlation (Pearson) with fine wine: 0.5-1 is a high positive correlation, -0.5 to -1 is a high negative correlation. Index/commodity CAGR 1 Vol 2 Corr 3 Fine Wine (LVX INV INDEX) 14.45% 11.74 NA Equities (FTSE 100) 5.13% 14.51 -0.01 Gold (London PM Fix) 8.25% 16.06 -0.06
But it is no Panacea
Liquidity – the market is small and dealing costs are high.
Settlement & regulation – the market is not independently regulated and is still very immature.
Emerging market exposure – current buying is heavily concentrated in HK & China.
Anecdotal evidence suggests that major merchants rely on Asia for as much as 50% of their turnover.
Today’s market The wine market has expanded rapidly. Greater transparency and new markets have been the drivers.
The fine wine market is worth US$4-5 billion annually (up from US$1bn in 2004).
Merchants dominate: in Europe they account for 50 times more turnover than the auction houses.
Global auctions total $408 million, with Hong Kong now accounting for 40% of this figure.
What is a fine wine?
A wine with:
Secondary market value
Ability to improve in bottle
Strong track record
In practice, this is 25 top Bordeaux Chateaux and a handful of others from elsewhere.
Eight wines account for 80%+ of leading wine funds’ portfolios by value.
The five First Growths alone account for 61% of Liv-ex trade by value. Bordeaux wines accounted for 95% in 2010.
Factors that influence price
Supply is constant, price is demand driven by:
Global economic conditions
Critical opinion – led by Parker
Brand – the China effect
IMF research indicates that wine prices are closely correlated to emerging market growth. China has led a shift in focus from vintage and Parker scores to brand and price.
Supply & Demand
Wine, GEMs & Billionaires IMF found that the relationship between emerging market industrial output and wine prices was 5x higher than with advanced economies.
Wine, GEMs & Billionaires We have also identified a close relationship between wine prices and the number of billionaires!
Brand vs Score Prior to 2008, Parker scores were the most important factor in determining price performance.
Brand vs Score Since 2008, brand has taken over from Parker score in determining how a wine will perform. source: liv-ex.com
Brand power Despite poor ratings from Parker, the 2002 vintages of the First Growths’ second wines have increased in value by more than 800% since their release.
“ Little Lafite”: The second labels In order to strengthen associations with the core brand, the second wines bear very similar labels to their respective grand vins.
The Chinese factor In October, Lafite announced that its 2008 vintage would feature the Chinese figure 8 on the neck of its bottle – a symbol of luck and prosperity. A few weeks later, Mouton announced it had commissioned a Chinese artist for its 2008 label.
Super cycle or bubble? Liv-ex Fine Wine 100: Yuan Liv-ex Fine Wine 100: Gold
In Yuan or Gold terms wine looks less worrisome.
Our sense is that China’s interest in wine is not a fad.
Interest is currently polarised but is starting to broaden.
A very polarised bubble? Lafite has massively outperformed its First-Growth peers in recent years. Lafite accounted for 35% of Liv-ex trade by value in 2010, up from just 8% in 2004.
Momentum or value? In the last few years momentum has outperformed value.
Momentum: the top 25 The top 25 wines in the Liv-ex Fine Wine Investables by 12- month performance. Over a 3 and 6 month timeframe we are seeing strong numbers from the “Super Seconds”, suggesting that the market is broadening Name Vintage Feb-11 Feb-10 Change Lafite Rothschild 2007 7,500 3,475 115.8% Haut Brion 2004 3,450 1,760 96.0% Lafite Rothschild 1997 7,638 4,002 90.9% Margaux 2004 3,800 2,012 88.9% Haut Brion 2001 3,450 1,850 86.5% Mouton Rothschild 1996 5,126 2,750 86.4% Margaux 2001 3,775 2,050 84.1% Haut Brion 1996 3,975 2,212 79.7% Latour 1998 4,048 2,253 79.7% Latour 2007 4,250 2,385 78.2% Mouton Rothschild 1994 3,200 1,800 77.8% Latour 1999 4,250 2,395 77.5% Lafite Rothschild 2001 8,400 4,738 77.3% Margaux 1999 3,800 2,150 76.7% Mouton Rothschild 2004 3,551 2,018 76.0% Haut Brion 1999 3,300 1,883 75.3% Lafite Rothschild 1994 7,622 4,358 74.9% Margaux 1998 3,689 2,125 73.6% Latour 1994 3,705 2,150 72.3% Lafite Rothschild 2002 7,800 4,575 70.5% Cheval Blanc 2004 2,800 1,650 69.7% Cheval Blanc 2002 2,712 1,609 68.6% Margaux 2002 3,572 2,125 68.1% Margaux 1997 3,099 1,846 67.9% Mouton Rothschild 2002 3,520 2,125 65.6%
To en primeur, or not? Buying at the en primeur stage rarely produces better returns than buying into back vintages that are physically available. And the risks are much higher. For each vintage from 2000–2007, we calculated the price move for a basket of the five First Growths (one case of each) from the initial London Release Price to the December three years after the vintage (i.e. six months after the wine became physical). We then compared this to the l price movement of the corresponding chateaux in the physical market, as represented by the Liv-ex Fine Wine 50 Index.