With portfolio diversification an essential component of wealth planning, investors are embracing less obvious options, according to Aarash Ghatineh, global head of sales at Cult Wines.
How significant is wine investment to wealth planning?
Wine investment definitely has a place in well-diversified investment portfolios. In the current environment of record low interest rates, wealth planning is absolutely critical. Fine wine can act as a defensive holding as it has the capacity to remain stable under difficult economic conditions.
Luxury assets or ‘passion’ assets such as fine wine will inevitably form a part of that diversification. The challenge of preserving your wealth opens your eyes to physical assets that have intrinsic value, where supply is limited. It’s interesting to compare returns on fine wine investments with that of other passion assets – be it classic cars, fine art or collectible stamps. The outperformance of fine wine versus other asset classes really stands out.
In 2016, all five major wine market indices witnessed growth of more than 20%. Leading the way was the Bordeaux First Growth index FW 50 at 26%.
How can you invest in fine wine?
There are various ways you can gain exposure to the fine wine market. But the most efficient way is to invest in the tangible asset held in professional storage (under bond). Our clients enjoy owning the tangible asset versus investing through a fund. The recommended minimum investment amount is £25,000 in order to build a well-balanced portfolio, touching upon key regions, vintages and creating the desired liquidity for your investment.
In the purest form of investment, our clients hold wine for a minimum of five years and an optimum period of 10 years. If you are willing to buy into the fundamentals of fine wine then it is important to hold your wine long enough for corks to be pulled, bottles to be consumed and stock levels to be depleted. That’s the most sustainable factor driving prices.
We initially advise our clients to keep exposure to fine wine at 5% of their total investable assets. Once you get comfortable with the market, you’re likely to increase that and that could potentially go up to even 20%.
What are some of the regional trends in wine demand?
Asian demand is growing rapidly, particularly in Hong Kong, mainland China and other less reported countries, such as Singapore, Malaysia and Indonesia.
Chinese wine imports were up 15% year on year last year. They imported 638 million litres in 2016, and the import value of wines also grew by more than 16%. In total, they imported a staggering $2.4 billion worth of wines in 2016.
There also appears to be a shift in investor sentiment in the Far East when it comes to asset classes such as fine wine. Investing in wine is a new phenomenon and the growing interest in wine consumption, coupled with disillusionment with more traditional markets, such as real estate, has served as a catalyst for an increased appetite for wine investment.
Interest in the Far East has prompted Cult Wines to open its first Asia office in Hong Kong, where the burgeoning client base ranges from HNW individuals seeking diversification to the wine cognoscenti who require assistance managing their existing portfolios.
What brands is Asia buying?
The Asian market is fixated on Burgundy: Domaine de la Romanée Conti, Armand Rousseau, Comte Liger-Belair. Demand has been constant for these producers and White Burgundy is very much on trend right now.
The likes of Leflaive, Coche-Dury and Roulot are high on the wish lists of Hong Kong buyers. Asia is also very brand-conscious, particularly in mainland China. You see a lot of Asian buyers looking at the second labels of the top Bordeaux wines. They may be reticent to shell out HKD50,000 for a case of first growth but the market doesn’t flinch at paying for the second labels.
Mouton is a strong brand in Asia. Petit Mouton, their second label, is one of our best performers over the past five years because the quality is exceptionally high (it’s almost renounced its second wine status) and consumers take comfort in the status of the Mouton brand.
Lafite, as a brand, could be considered an enigma. It went through a period of being the darling wine of Asia from 2009-2011. It was everything they wanted. Then there was a clampdown on corruption and gifting in China. Lafite went into a period of complete stagnation and prices fell sharply. But in 2016, by value and volume, Lafite was the most traded wine. There is renewed interest in Lafite, which I must admit I have been surprised by.
In Asia, what is the average percentage of wealth invested in wine?
That’s difficult to quantify at this stage. Our client base is 65% UK-based and 35% overseas, skewed heavily by the Far East accounting for more than 350 clients. Over the past 12 months, our sales to Asia have increased by 40% and, at the very least, we expect to maintain these levels for the next 12 months.
With Chinese investors looking at alternative investments amid yuan weakness and new capital controls, we are confident that there is plenty of untapped potential in Asia especially with our investment ideas and numbers-driven approach.
What are your growth markets in Asia?
We’ve noticed a marked increase in the number of enquiries from India over the past six to 12 months. It’s only scratching the surface at this stage, but we could potentially see a similar growth curve in the next 10 years to what we’ve seen from Hong Kong and China. It’s all about the restrictions in terms of import taxes. Removal of them could be a pivotal moment for the Indian wine market. I think Indonesia could potentially be another growth area in Asia. We are always evaluating the data available by tracking website visitors and specific wine requests by region, and we’ve noticed an increase in interest from India and Indonesia. These are the glaring examples.
Do you see any challenge to wine investment growing in Asia?
Demand for wine investment is still at an embryonic stage in Asia. Education and exposure are the main challenges right now. Preconceptions that wine investment is for connoisseurs only can put up barriers, but these are easy to overcome with our ability to present critical wine market information in a simple manner.
What fees do you charge?
We have two models for our investment portfolios. The most common is an upfront 15% management fee that covers the investor for a five-year period. It is a one-off charge that covers all our services – access to the most competitive prices, online portfolio valuation and selling. There are no brokerage fees for liquidation. You can also trade in and out of the portfolio without any charges.
The alternative model is more akin to the traditional investment sector – it’s a 5% set-up cost and 2% annual charge. We introduced this two years ago for our business with private banks and financial intermediaries. They wanted a structure that their clients were more used to.
What kind of liquidity are investors looking at?
Typically, the process is six to eight weeks from sale request to full settlement. There’s a common misconception that fine wine investment is illiquid. It is, when compared with traditional investments, but if you compare it with fine art or classic cars, it’s inherently more flexible.
One of the key aspects of our model is that we have an ever-expanding network of trade customers – more than 450 across the world. But most crucially it also provides us with a greater market feel – we are continuously analysing data from our trade sales arm to understand demand and catch trends early.
What’s your outlook for the wine investment industry?
The outlook is positive. There is a lot more interest in Bordeaux than there has been over the past two years and that’s been aided by higher-quality vintages such as 2014/2015. Interest has grown amid weakness in the sterling and the euro relative to the Hong Kong dollar and US dollar. Bordeaux still accounts for the biggest share of fine wine traded annually, so it is important for the overall health of the market that Bordeaux is back.
US dollar pegged markets are in a strong position in 2017, having rallied by almost 10% against the euro and sterling. This could continue to serve as a catalyst for demand from Asia. There are high expectations for the latest En Primeur campaign from Bordeaux, and if early predictions of a great vintage are true, this could increase demand for it in Asia.
Myself and the Cult Wines HK/UK team were in Bordeaux in March, and after our reconnaissance mission, provided our En Primeur report.
This article originally appeared in the April issue of the Citywire Asia magazine.