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Fine-wine investors toast despite stock market tumble

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Fine-wine investors toast despite stock market tumble

Fine wine is one of the few luxury goods that has withstood the severe hit to assets triggered by the coronavirus pandemic, an outcome that might increase its allure as an alternative investment for well-heeled buyers.

Since the beginning of the year, the S&P Global Luxury Index, which tracks 80 of the largest publicly traded luxury goods companies, has fallen about 24% as the unfolding COVID-19 crisis has pummeled sales. Meanwhile, the trading prices of the world's most popular investment wines are holding their own. Between Jan. 1 and March 31, when the S&P 500 fell more than 23%, the Liv-ex Fine Wine 1000, an index that measures the price performance of the 1,000 most traded wines, fell about 4%.

A similar trend occurred during the previous financial crisis, when the S&P 500 crashed 38.5% in 2007-2008 while the Liv-ex Fine Wine 1000 index slipped a mere 0.6%. Over longer periods, fine-wine investments can deliver similar returns as equities, but usually with less volatility.

"Over the last decade, with interest rates so low, investors are struggling to find a good source of returns," said Tom Gearing, managing director of London-based Cult Wines, which manages a £125 million wine portfolio on behalf of 1,200 high-net-worth clients globally. "Wine can be an incredible addition at the portfolio because it has a low propensity to lose value in a market sell-off. It can help investors diversify, to hedge, and to provide a safe haven" in times of market stress, he said.

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Amid the coronavirus crisis, that resilience should come as good news to both individual investors as well as several large corporations with a sizable stake in investment-grade wine assets. One of the biggest is LVMH Moët Hennessy - Louis Vuitton Société Européenne, owner of Château Cheval Blanc in Bordeaux, Château D'Yquem in Sauternes, Clos de Lambrays in Burgundy, plus several top-end Champagne houses, including Dom Pérignon, Krug and Ruinart. The closely held cosmetics company Chanel owns Château Rauzan-Ségla in Bordeaux, while French insurer AXA SA owns Château Pichon Baron, founded in Bordeaux in the late 17th century.

An investment wine is nothing like ordinary plonk: rather, it carries a super-premium price, global brand recognition and high scores from established critics. Its true drinking potential — and price appreciation — emerges only after many years of maturing in the bottle. As bottles get drunk, the scarcity factor can push prices up further.

The downsides? Some wines can go out of fashion and lose value. Nor are even the finest of fine wines as "liquid," in the investment sense, as stocks or bonds. And wine is an unregulated market, so investors have no protection.

Macro-effects can take their toll, too. Over the last 18 months, the London-based fine-wine market, which is denominated in sterling, was hit by a succession of events including uncertainty around Brexit, political upheaval in Hong Kong and a 25% tariff on most European wines introduced by the Trump administration in the fall.

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"It was a market that was struggling to go anywhere and was feeling a bit tense," said Justin Gibbs, co-founder of Liv-ex, the London-based online exchange for wines, and a former banker at BNP Paribas. In the first two months of 2020, coronavirus-induced lockdowns sharply lowered demand for fine wine at bars, restaurants and hotels but caused private sales to soar, Gibbs said. "Now we're in April and the market's reasonably steady."

Gibbs and others argue that anyone fretting about monthly or annual price fluctuations is missing the point: Wine investment is a long-term game more suited to high-net-worth individuals than to retail investors. Top wines "have produced a pretty steady increase in the past five years, and it's hard to find any five-year period where fine wines produced a negative return," said Matthew O'Connell, head of investment at BI Wines & Spirits, a U.K. fine-wine merchant that manages about £200 million of wine assets.

Cult Wines says that since 2009 it has achieved a total return of 120%, or 7.9% on an annualized basis. The average portfolio size for clients is just under £100,000 and portfolios are held, on average, for five years. Like a mutual fund, Cult Wines rotates 10% of its wine assets each year in its Bordeaux-dominated portfolio.

The company's flagship account requires a minimum investment of £25,000 from a client. Amid the recent equity market meltdown, investor interest has increased. "Typically we'd expect 12-15 [new accounts] per month," said Gearing. "In the last month, we've taken on 25 new ones."

London-based Amphora Portfolio Management focuses on only 120-130 fine-wine producers, about 160 specific wines they produce, and 20 vintages — about 3,000 wines in all. None of them are cheap. When it comes to investing, "you want the wines to have pedigree, history, and to be quite expensive, to offset storage and transaction costs," said David Jackson, a former stockbroker and founding member of Amphora.

Another U.K. company, the Wine Investment Fund, which opened its doors in 2003 and has about £30 million of assets under management, is even more specialized. With the goal of reducing risk and yielding higher-than-average returns, it deals only with Bordeaux châteaux that produce at least 20,000 cases per year. It charges a 1.5% annual management fee and says it has generated about 6% returns on an annualized basis.

"Instead of stock markets that have fallen out of bed, it's been a gentle downturn for fine wine" in recent weeks, said Andrew della Casa, a former banker and founder of the fund. As a result, "investors are looking to increase their positions," della Casa said.

But the bellwether Bordeaux market, like other sectors of the global economy, is not immune to the impact of COVID-19. Every year, in early April, a few thousand wine critics and merchants gather in the town of Bordeaux to taste barrel-stored wine from the most recent vintage, an event known as "en primeur" tastings. It allows attendees to sample and buy wine at what they hope is a discounted price, before it is bottled by châteaux and sold en masse. This year, because of the lockdown in France, the en primeur event for the well-regarded 2019 Bordeaux vintage was canceled.

The upshot: Wine critics have not yet been able to taste the wines, which means that châteaux will release them to the market later than expected, perhaps in June-July instead of May-June. The delay and the pandemic-triggered loss of wealth among wine lovers could potentially reduce the immediate demand for the 2019 vintage. That is what happened in the aftermath of the 2008-2009 financial crisis. It forced many Bordeaux châteaux to cut prices.

"In 2008-2009, the Bordelais released the wines at a price the market couldn't refuse," according to Gibbs of Liv-ex. "They effectively refloated the market — a central bank liquidity moment, you might say." If that happens again, Gibbs said, it could allow investors to scoop up top-end Bordeaux wine for attractive prices and potentially reap a solid return in the long to medium term.

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