Following the EU referendum in June some £2trn was wiped off the value of global markets within a fortnight and the pound fell to its lowest point in three decades. It is a tumultuous time both politically and economically, and investors are understandably concerned for the future of their investment portfolios.
But one alternative asset, fine wine, is not only weathering the storm but thriving in the face of financial uncertainty. Physical assets traditionally perform well in periods of economic doubt as they act as a ‘store of value’, but specific to the current situation, the dip in the value of sterling has heralded a surge in buyers from Asia, the US and Europe looking to invest in the UK market, fuelling a sharp surge in demand.
In fact, our research shows that more than one in four (27 per cent) wealth managers and IFAs expect appetite for wine investing to increase in the coming year – a figure backed by the 106 per cent increase in Cult Wine sales in the week following Brexit. As an unregulated market, an IFA is a little more restricted when it comes to advising their clients on investing in wine. There are two options; either investing in a wine fund that falls under the FSA’s unregulated collective investment scheme rules, or working with a wine merchant, broker or investment company whereby an IFA’s client would have to self-certify as a professional or sophisticated investor.
Furthermore, following Brexit the industry benchmark index – the Liv-ex Fine Wine 100 index – gained 3.6 per cent to close on 269.07 in August, and closed September up 18 per cent year-to-date. Meanwhile, the Liv-ex 1000 index – the broadest measure of the fine wine market – closed September at a record high, having risen for 10 consecutive months.
Historically, fine wine has produced long term average returns in the region of 13 per cent per annum, while also showing a low correlation with traditional financial assets.
A comparison between wine market performance and that of global equities shows that during periods of economic deterioration, wine performs significantly better. As economies and financial markets have suffered, trending downwards, wine has provided recessionary proof characteristics, highlighting the underlying benefit of investing in a physical, tangible asset. Equities can go bust and bonds can default, but a bottle of Mouton Rothschild will always be a bottle of Mouton Rothschild.
In August, Liv-ex revealed that the Fine Wine 50 index was outpacing the FTSE 100 and S&P 500, noting that if a tracker fund had invested in one case of each wine in the Liv-ex Fine Wine 50 at the end of December and sold it at the end of August, it would have made a profit of £38,538 in just eight months.
Of course, fine wine, like any investment, should be approached with a long-term view, and again here it proves its mettle. The longer you hold on to a fine wine, the more consistent returns become. This is because, over the long-term, the demand-supply imbalance is exacerbated by increasing consumption and subsequently decreasing availability, and therefore wines become more desirable due to rarity, plus improving quality as they age.
The FTSE 100 launched in January 1984 with a base level of 1,000. At the same time, the most recently released vintage of First Growth Bordeaux estate Chateau Lafite Rothschild was the 1982. At the time the FTSE 100 index was launched you could purchase a case of 12 bottles of this wine for £275. Imagine if an investor had £5,000 to invest in either Lafite Rothschild 1982 or the FTSE 100. As of today the investment in the FTSE 100 would be worth around £35,000 while the fine wine investment would be worth around £700,000.
Fine wine is a $4bn industry, and one that is piquing the interest of a growing number of investors. It offers all-important portfolio diversification, tax benefits and, as the graph demonstrates, consistent returns – something investors will increasingly seek out during this period of economic uncertainty.
Tom Gearing is managing director of Cult Wines