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INVESTMENT SPECIAL: Rising in the East

Chinese demand boosts returns for wine investors

19 March 2011

12:00 AM

19 March 2011

12:00 AM

The last time I wrote about wine for these pages, the global recession still lay ahead of us. In June 2008, fine wine prices were soaring on the back of the decision by the Hong Kong government to abolish import duty on wine (previously 40 per cent, and prior to that 80 per cent). The huge Chinese market was just starting to open up. Since then, wine prices have weathered the recession well, fulfilling the old adage that fine wine is the last asset class to fall in value and the first to rise.

With record auction prices recorded in Hong Kong in January — Andrew Lloyd Webber’s collection of 8,600 bottles sold for £3.5 million, well above the £2 million estimate — it is still the case that brand reputation trumps quality of vintage for many Chinese buyers. They are currently obsessed with leading Bordeaux brands from the left bank of the Gironde estuary. Right-bank wines have lagged in price, though some believe this represents a buying opportunity, especially as the Chinese palate develops and becomes less enslaved to Latour, Lafite Rothschild and Mouton Rothschild.

Also, prices are affected by cultural factors. For example, it is conceivable that prices for Lafite 2008 will outstrip those for the higher-quality Lafite 2009, for the simple reason that eight is a lucky number in China. Another factor is that the Chinese palate is more accustomed to harsher spirits, so they often drink claret younger than Western connoisseurs consider appropriate.

For those considering investing in wine, this is what you need to know. Buy Bordeaux and Romanée Conti wines only (most burgundies are produced in insufficient quantities to sustain an active market). Buy only first growths, ‘super seconds’, and a clutch of others. Expect annual returns of around 15 per cent — and remember that wine is treated as a wasting asset by the Revenue, so is free of capital gains tax. Most important, find a reputable wine investment company to advise you and manage your purchases.

There have been instances over the years of wine investment companies that have taken money from investors and simply pocketed it, not even bothering to buy any wine. Others have gone bust without sending out ownership documents, so that investors’ wines have disappeared in their liquidations. Never invest with a company that cold-calls and avoid companies that use accommodation addresses, a useful list of which can be found at investdrinks.org.


Back in September 2008 I responded, out of curiosity, to an ad for Aston Lovell, a wine firm which promotes itself on financial websites. One of its principals rang to offer me what he called a ‘banker’ investment — Lafite Rothschild 1998, of which he said he had four cases available at £4,800 each. He emphasised that the wine was reaching maturity and that only 12,000 cases of it were ever produced. He urged me to take two cases for £12,000, i.e. £4,800 each plus 25 per cent up-front commission.

Immediately after his call, I rang Alan Rayne of Magnum Fine Wines, who established the first wine investment company back in the mid-1980s. He looked up the prices at which this wine was being offered. The lowest was £4,200, but there were cases available at £4,300 to £4,500.

Caveat emptor applies, of course, and I might have made a good return even if I had bought on Aston Lovell’s terms, since Lafite Rothschild 1998 now changes hands at around £10,000 a case. But the practice of charging up-front commissions (Aston Lovell later cut its rate to 20 per cent) is frowned upon by Decanter.com, which quotes HM Government advice. ‘Always ask about payment of commission. Beware of an up-front commission payable at the time of purchase instead of the time of sale.’ Some companies demanding up-front commissions say that they won’t charge commission when you sell, but there’s no guarantee that they will still be trading by then.

There is a small cluster of wine investment companies with proven track records that I can still recommend, as I did in 2008. They are Magnum Fine Wines, Premier Cru Fine Wine Investment, and Bordeaux Index. All three recommend that you invest for a minimum of five years and in a balanced portfolio, usually containing one expensive case of a leading first growth and a couple of lesser growths. Premier Cru recommends a minimum investment of £10,000. Magnum will create smaller portfolios, starting at around £2,500, but recommends year-on-year investment.

Magnum charges 5 per cent on sales plus modest storage fees. Premier Cru charges an annual management fee of 1.75 per cent of portfolio value, starting at the end of the first year. Bordeaux Index takes its fees from a bid-offer spread, similar to a market-maker on a stock exchange.

Then there are wine funds. These may be registered with the FSA, but are not formally regulated. The Vintage Wine Fund is definitely for high-net-worth investors, since its minimum subscription is €100,000. Of the other two, the Fine Wine Fund’s minimum subscription is £50,000, while for the Wine Investment Fund it is £20,000. The latter does not allow redemptions during the five-year investment period for each tranche, and charges an annual fee of 2 per cent, plus a performance fee of 20 per cent of any profits at the end of the term, like a hedge fund. Compared with the smaller wine investment companies, this seems to offer poor value, despite the high returns achieved.

Wine investment does not qualify as an investment asset for the purposes of a self-invest pension plan (Sipp), but there will soon be a way of investing in wine indirectly through a Sipp. Wine Investors, the company that owns the Wine Investment Fund, announced its launch on AIM earlier this year with the intention of raising £30 million. While this does not represent the pure tangible-asset play that traditional wine investment offers, it does mean that you will be able to buy and sell shares in Wine Investors without having to stump up £20,000.

London, with its established wine merchants, has long dominated the global fine wine market. With the extraordinary burgeoning demand from mainland China, London wholesalers and investment buyers are finding that their allocations of en primeur wines (before tasting and bottling) are being gradually shaved back. One industry insider suspects that, increasingly, the Bordelais wine growers are holding back some stock to sell later, once prices have risen significantly. They have seen the world’s wine merchants and brokers reap huge profits, he reasons, and now they too want a tiny piece of the action as investors.


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