Keep Your Assets Liquid: Investing in Wine
You may have heard the story of Rudy Kurniawan, a wine connoisseur who was said to possess the greatest cellar on earth. What he was, though, was actually the world’s biggest large-scale wine-forger. Kurniawan was a big fish at auctions, buying and selling great wines from Burgundy and Bordeaux. In one auction at Acker Merrall & Condit, he sold USD 24.7 million of wine, beating the previous record by USD 10 million.
Soon after this, various anomalies started appearing in the market and in 2012, acting on tip-offs, the FBI raided his house in California, USA. There they found a counterfeiting workshop stocked with corking tools, labels, and empty bottles. Kurniawan had been decanting inexpensive wines into more expensive bottles. He was sentenced in 2014 to 10 years in prison, making him the first person ever to be convicted of wine fraud.
Naturally, an important question to explore is how Kurniawan was able to get away with his illicit activities in the first place. Well, the world’s rarest and priciest wines are hardly ever opened: the majority are moved around on computers like liquid shares while they languish in temperature-controlled warehouses. Because of this, there are not many people who know how these fine wines should actually taste.
Wine experts themselves sometimes struggle to identify wines, which is why many wine competitions are conducted blind, as a precaution against the panel being swayed by a label rather than what is in the bottle. Fortunately, duplicity like Kurniawan’s is as rare as the wines he purported to trade, and fine wine as a class of investment is on an exponential rise globally.
A minute portion of the world’s wines can be considered investable. In brief, investment wines are those from a prestigious producer who has a proven track record of producing wines that can age and that have a documented history of increasing in value. On Knight Frank’s Luxury Investment Index (KFLII) of 2017, wine overtook collectable cars for the first time ever, being placed just behind art, which held the top spot. On the 2018 KFLII, wine remained in 2nd place, recording an annual growth of 7%.
Investment wines are traded largely at live auctions — most famously in California, Chicago, Hong Kong, London, New York, and Paris, — and via online auctions.
In 2018, at an auction at Sotheby’s Hong Kong, 1,700 lots brought in USD 14.5 million, beating the estimate of USD 13 million. Standouts included a 12-bottle case of Château Le Pin 1982, which sold for just over USD 206,000 (around USD 17,000 a bottle), and a lot of Château Cheval Blanc 2010 that brought in USD 166,000.
Also in 2018, a Christie’s London auction included a 12-bottle case of Domaine de la Romanée-Conti 1988 (the world’s most sought-after single-wine producer), which was estimated to bring in more than USD 200,000; it overshot that and realized GBP 288,000.
The people whose palates are driving these prices are the world’s most influential wine critics, such as Jancis Robinson, James Suckling, and Neal Martin. But perhaps the most influential of them all is Robert Parker Jr. — also known as ‘the million-dollar nose’ because his nose and palate are insured for USD 1 million.
The Parker 100-point quality scale, a system of rating wines also known as ‘Parker Points’, has a direct effect on the pricing and perceived value of the wines tested. Only wines that score 95 and above are included in the London International Vintners Exchange (Liv-ex) Fine Wine 100 index, and 100-point wines are seen as the most valuable. For example, when Parker surprised the market with a 98-point score for Lafite 2008 in 2009, the price leapt 75% overnight.
Wine as an Investment Class
Fine wines made their start in auction houses alongside more prosaic commodities. In 1766, Londoner James Christie held his first auction, an offering that included a feather bed and pillow, twelve oblong dishes, a pallet of Madeira, a pair of candlesticks, and more than three dozen cases of Bordeaux. This nascent sale soon became Christie’s — now the global empire of auction houses owned by French billionaire François Pinault.
Working hand in hand with the world’s auction houses are formal exchanges. Exchanges for foods, fuels, metals, and stocks have long been in existence, but it was not until 2000 — with the formation of Liv-ex — that an exchange was available to merchants of fine wines.
Speaking at the Hong Kong International Wine and Spirits Fair conference in 2009, the Director of Liv-ex, James Miles, said: “The wine investment market today looks increasingly mainstream. Private collectors in the UK alone hold more than USD 2 billion worth of fine wine in bonded warehouses. Liv-ex membership is currently offering USD 1.5 billion for sale, and professionally managed wine funds have invested some USD 300 million.”
The Netflix documentary Red Obsession tells of how the Chinese demand for Bordeaux has caused prices to skyrocket, forcing traditional buyers out. This is not restricted to Asian markets, however: the world is thirsty for fine wine investments. According to financial news website MarketWatch, a key reason for fine-wine trading’s year-on-year growth is “that yield-thirsty investors have turned to tangible assets in a world of ultra low interest rates, where many other assets, such as bonds, are returning next to nothing”. Investing in rare wines is a long-term commitment, and you can expect around a 10-year wait to see a significant return. When that return comes, it can be highly lucrative.
Looking at wine investments with some foresight, new world wine countries — Argentina, Australia, Chile, New Zealand, South Africa, and USA — are emerging with their own investment-class wines. As the demand for these competitive liquid assets grows, so will the reach beyond the traditional markets.
In Australia, Langton’s Classification of Australian Wines is the go-to resource for Australian investment-grade wines. Those that make the list include Penfolds Grange, Henschke Hill of Grace, Rockford’s Basket Press Shiraz, Brokenwood Graveyard Vineyard Shiraz, Wendouree Shiraz, Torbreck RunRig Shiraz, Chris Ringland Shiraz, and Mount Mary Quintet.
In South Africa, the big names are Vilafonté, De Toren, the Sadie Family (Columella), and Kanonkop (Paul Sauer). New investment platforms have recently been introduced, such as the Fine Diamond Wine Investment Fund, which for the first time introduced a 20% weighting of South Africa’s greatest wines into a global wine investment fund.
Does investing in wine sound like a good way to keep liquid? Before raising the bidding paddle, keep these golden rules in mind: buy the best and rarest wines from the world’s acknowledged leading houses; purchase the largest quantity possible of these wines in their original packaging, when possible; ensure the wines are stored correctly — either by yourself or in an outsourced cellar that exists for this purpose — at optimal temperatures and in humidity-controlled conditions.
Most importantly, if you are going to invest, make sure you insure your collection. According to Forbes, the total value of collectible wines and spirits in private hands has been estimated to be between USD 5 billion and
USD 10 billion, and less than 10% of those collections are insured. It is worth remembering that if you are storing your collection yourself, your homeowner’s policy will not cover it, since wine is deemed a ‘consumable good’. Investment wine should be insured with a rider or separate policy, as you would do for fine art or jewelry.
Unlike jewelry or art, wine as a luxury investment has one clear benefit over any other: if it does not realize the required returns, you can always drink it.