A special interest in fine wine has many rewards. Whether you’re a sideline connoisseur or an active collector, the world of fine wines has much to offer – the pleasure of drinking a fine vintage, the opportunity to learn about these premium products, and the fulfilment derived from owning your favourites. But investing in fine wine has its separate set of advantages, which gives it a sought-after status in the investment world.
Fine wine’s historical performance makes it an attractive tool to diversify investment portfolios, de-risk an investment strategy, and deliver better long-term returns than traditional commodities.
Fine wine investment is resistant to the volatility of stock markets
Industry reports highlight the strength of fine wine as a resilient alternative asset. Its performance is not directly correlated to volatile financial markets and can sustain through periods of economic uncertainty, whether it be the recent COVID-19 crisis or earlier events of economic downturn.
For example, during the 2008 recession, the S&P 500 plummeted by more than 38% whereas the Liv-ex 1000 dropped only about 10% from its peak in August. It shortly began a slow but steady recovery, recouping all its losses by the end of next year. More recently, at the onset of the pandemic in March last year, the S&P 500 fell by 25%. In the same month, Liv-ex 1000 slipped a mere 4%.
Fine wine has historically outperformed traditional markets and commodities
Fine wine has a track record of delivering better performance at lower risk as compared to mainstream financial markets and commodities like gold and real estate. The fine wine market has also traditionally outperformed most global equities and exchange-traded funds (ETFs). For example, when global stock markets were crashing during the pandemic, Liv-ex 100 recorded 6.7% growth in the year leading up to March 2021, compared to the FTSE 100’s loss of -11.7%.
Fine wine indices managed to gain record growth levels on the Liv-ex platform in wine traded during this period. Top performers like Burgundy’s Domaine Georges Roumier 2012 were registering a price hike of 74.5%, whereas equities and other assets continued to suffer further losses.
As a personally-owned tangible asset, fine wine offers low-risk investment
Unlike stocks and shares, physical assetshave an inherent value (you can drink the wine you can’t sell) and traditionally perform better in risk-fraught scenarios. Fine wine has lower liquidity than most conventional assets; hence they are harder to buy or sell quickly amid a market shock. This insulates them from panic selling. Consequently, their value tends to remain steadier than those of liquid assets.
Unlike other luxury assets, the fine wine market is better established with a relatively efficient secondary market. Standardised trading platforms and global exchanges such as Liv-ex.com have improved transparency and trade efficiency, minimising investment risk and boosting investor confidence.
An asset with finite supply and growing demand has steady prospects
Fine wine prices are determined by the dynamics of demand and supply. The finest of wines is an artisanal product and has limited supply, which pushes up its value. Every time a rare bottle of wine is consumed, the value of the remaining bottles gets an added boost. Demand has also generally been on the rise in the growing global market, especially in the emerging sectors of Asia, Africa, and Latin America.
Investment-grade fine wines get better with age. These typically increase in value after five years, enjoy strong secondary market demand, support ongoing price growth, and deliver stable long-term growth. So even if demand were to be temporarily disrupted, say due to a viral pandemic or state lockdown, the medium-to-long-term prospects of the investment would hold out.
Investing in fine wine for efficient portfolio diversification and risk control
A good portfolio should be diversified to distribute the risk and optimise gains. Since fine wine’s price performance generally delivers long-term stable growth that does not correlate with fluctuations in financial markets, it stands to offer the perfect opportunity to diversify and de-risk an investment portfolio.
Investors should diversify their fine wine portfolio to include staple blue-chip wines like Burgundy and Bordeaux First Growths that enjoy significant secondary market activity as well as wines from Italy, Champagne, and the United States to gain from the growing momentum in these regional markets. Wine portfolios can also be diversified by vintage.
According to the annual Knight Frank Wealth Report, the fine wine market has grown by 120% over the last decade. Despite the economic tumult of recent times, it has been a top-performing low-risk alternative asset, especially during the past five years. Today, the market is more transparent and better organised than ever before, delivering double-digit annualised returns for the past 15 years. With a little help from a fine wine expert, the best opportunities to diversify and de-risk an investment portfolio can be found even in times of economic fragility.