Alternative investment in wine is a fun but risky way to diversify your investor portfolio, get distracted and try something new. To do this, you don’t even need to know much about the most ancient drink, or love it, or equip a cellar for a wine cellar. Today it is almost the same prosaic asset as gold or stocks, although it requires an individual approach and is not available to everyone. In fact, there is no protection here. The investor assumes all risks exclusively.
Wine as an investment alternative
Classic investments in stocks, bonds, mutual funds or ETFs are an understandable, legally regulated option for investing money. Here you can choose an individual strategy, draw up a diversified investment portfolio. The circle of worthy alternatives is small (if we do not take dubious cases with Forex, cloud mining, binary options and other Internet enticements): these are investments in art, antiques, startups, wine.
You might be surprised to find that investment in wine has been the second best-performing asset class behind stocks in the past 100 years. Such data are provided by researchers from the Cambridge and London Business Schools. In his monograph, Elroy Dimson et al. Operates with data for 1900-2012. Scientists have calculated that the real return on investment in wine for a specified period of time after deducting inflation, insurance premiums and storage costs was 4.1% (8.2% excluding inflation). The average stock return over 112 years is 5.2% and 9.4%, respectively.
Moreover, the authors emphasize that the profitability of wine as an investment asset could be much higher if the current availability for the mass consumer was projected into the past. If you do not take into account the period of the Second World War, the stocks were several times more volatile.
In 2019, the world produced about 260 million hectoliters of wine. This is 10% less than in the harvest 2018, but on average about the same as in recent years. Moreover, in countries that account for 80% of all European production (Italy, France, Spain), the volume fell by 15-24%. The consumption of the noble drink remained at the level of the previous year.
The price of any product, as you know, is regulated by the balance of supply and demand. In this regard, wine as an investment has attractive prospects. The consumption of the drink in the world remains at a stable level, and somewhere even grows. For example, in the United States, one of the top countries for these indicators, wine consumption among millennials grew by 10% over the year.
On the contrary, wine production threatens to decline significantly in the future. Experts at Columbia Environment University have calculated that if the average temperature on the planet rises by 2%, suitable vineyards will be reduced to 56% of the current area. There is a 95% chance, according to current projections, that this will happen by 2100. In any case, the usual grape varieties will diminish if wineries move to more adaptive varieties.
In general, the years 2018–2019 were not very successful for the wine market. After 25 years of steady growth, sales have declined. This can be explained by the expansion of other alcoholic beverages, an increase in their variety. The legalization of cannabis in the US and Canada also played an important role.
Compared to other industry indices in 2019, the S&P Food & Beverage Index did not show anything outstanding. It grew 12.14% over the year. But on the other hand, if you look at the dynamics over five years, what stability!
In 1999, through the efforts of enthusiastic brokers, the London Wine Exchange – Liv-ex (the organizers themselves modestly call it a marketplace) was opened. Investing through it is problematic: it deals only with wines passing through the local British market, there are strict requirements for product verification. In addition, the commissions of the platform itself and brokers are quite high. But Liv-ex provides good data for comparing investment wine with other asset types.
All major and regional wine indices, collected from different categories and brands, showed negative results for the year. Over an interval of five years, the overall indices rose by 20-40%. Among the regions, investment wines from the Burgundy and Champagne regions rose in price the most (81 and 46%, respectively). It is incorrect to compare investment in wine with traditional assets and indices.
How to invest in wine. Profits and risks
For the vast majority of retail investors, investment in wine through various specialized funds is not available. The threshold for entering them is quite high. The funds themselves are small because they are constantly afraid of facing a liquidity problem. Investing in an investment wine requires a long horizon and patience. Several such funds closed in the 2010s. Poor results over a short period of time led to massive customer churn. In another case, the head of the fund was generally caught in fraud.
When they talk about alternative investments in wine, they usually mean the fourth option: purchasing products directly from winemakers or through intermediaries. The algorithm here is the same as in the case of investing in art or collectible cars. Over time, good wines tend to add value.
The risks and barriers to investing in wine are clear too. Buying rare wines is like investing in a startup. You need to wait about ten years before you get any satisfactory result. Moreover, it is necessary to be well-versed in the subject: to know what factors affect the price dynamics, to understand the regional specifics, to be able to assess the reputation of wineries and brands, to understand that one year can differ significantly from another in terms of wine quality.
Entering this market without having in your pocket an amount of $ 10,000 or more is generally pointless. In order to select a balanced “wine” investment portfolio, it is desirable to diversify investments depending on the brand, region, brand of wine.
If we are talking about rare collection wines, in order to sell them, it will be necessary to prove the authenticity, to conduct an examination. The market for fakes is also quite wide here.
Perhaps the most difficult part of investing in wine is figuring out where and how to store it. Improper storage can seriously harm the taste, and hence the investment, qualities of the drink. A wine cellar in your own home is not a very good and cheap solution to the problem.
Although today there are many international service companies offering wine storage services. There are even investment companies specializing in investing in wine, which provide a full package: advice, assistance in choosing, storage in a European country. Through the same company, you can subsequently sell your collection.
Investing in wine is, after all, an alternative investment with not always calculated risks, a high threshold of entry, a long horizon and limited access. They can only be useful to experienced investors for broad portfolio diversification.
The undoubted plus is that during periods of crisis in the markets, this asset demon