Wine as an Investment and Exposure to the Yen...

Q. Wine as an Investment?

It has become popular to buy cases of wine and keep them as an investment. I once read that some wine aficionados' would buy three cases of quality wine, drink one and sell the other two at a profit to buy the next three....

Hong Kong has recently abolished all taxes and duty on the import of wine and beer. This has been followed by 2 or 3 high profile wine auctions and HK is apparently becoming a wine hub for the region. I have been approached by a fellow at Platinum Wines who are in the business of investment. Basically you buy cases of wine that have been sourced by them and they will store them with you for up to three years in optimum conditions. You can consume them or ask them to trade them for you.

Do you have any experience with this - I would be interested in hearing your comments.

A: I have a wine merchant friend who specialises in fine Bordeaux wines and can arrange purchasing en primeur. He has this question put to him very regularly by friends and clients looking for an alternative investment to the usual asset classes. He always answers the same way - if you wish to invest, as you outline above, in a small way as a method of getting to drink fine wines cheaply, that's one thing. He would, however, not advise anyone to put any significant amount of money into wine, purely as an investment, even though he personally could stand to gain considerably from selling such 'investments'. It's too uncertain, subject to fads and fashions, storage risks, etc. You also need considerable specialist knowledge or else you need to trust your adviser implicitly.

As far as the wines you buy, if you really know what you're doing, then there can be interesting sleepers, like for instance Pomerol (merlot region in Bordeaux, where Petrus comes from) seems to do well even if not an preeminent chateau.

Some observations from over the years -:
  • The English merchants set up a classification of Bordeaux wines in 1855. Even if there are quite a number of good performers buying in the top of this group has never proven a bad investment.
  • You need to find a reputable UK merchant for two reasons. First, because you want to be able to get en premier (futures) allotments of the consistent good sellers. Secondly, because should they go out of business you will be from somewhat to very screwed.
  • Put the wines in bond with the top storage facilities as you will have the best provenance when it comes time to sell.

A caveat is be really careful about whom you store your wines with. There was at least one incident some years ago of a wine merchant going bankrupt (I believe Mayfair Cellars). Prior to bankrtupcy they were robbing Peter to repay Paul - e.g., taking your case of 78 Mouton to fill someone else's order with the view that they would 'sort yours out later.'.

That said, there are tax advantages - in the UK at least, there is no capital gains tax on investment gains in wine, as it is considered a "wasting asset" by the Revenue. In my own view, however, there are easier ways of investing tax-free, notably via spread betting.

Not surprisingly the increasing interest in wine amongst investors hasn't skipped the eyes of spread betting providers and ODL Markets has even started offering quarterly spread bets on the Liv-ex 100 index of fine wines. The Liv-ex 100 index represents the price movements of 100 of the most renowned fine wines, some of which sell for prices in excess of £25,000 a case. But the spread bets can be opened for as little as £1 a point...with a bid-offer spread of five points and the margin requirement is 10% of the notional value. There is a maximum stake size of £50, equivalent to approximately £11,000 of notional value although larger orders may also be accepted if they are matched. Not that I suggest you to spread bet on wine mind you!

ODL Markets will quote prices for quarterly bets based on the Liv-ex settlement price and other costs of investing such as financing cost and storage to create fair value. Bets will not be physically settled, so clients won't take delivery of actual wine - although ODL may hedge its position by buying, but not drinking, certain vintages.

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