Investing in (actually) liquid assets

The annual release of legendary Australian red wine Penfolds Grange is one of the wine events of the year. And this year’s release of the 2017 vintage commemorates the 70th anniversary of when Grange was first made.

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Glass of red wine in a vineyard.

But it’s not just the new release making headlines. A bottle of Grange 1951 was recently sold locally at auction for a record price of $A142,131. According to auctioneers Langton’s Fine Wines: “the bottle is one of the few rare examples in existence of the first vintage of Penfolds Grange ever made.” The buyer was a Sydney-based wine collector.

“But in the case of wine, art or vintage cars, there are complexities around the nature of the actual investment article.”

But not all Grange buyers are Grange drinkers. Some don’t drink alcohol at all and buy the wine solely to continue an unbroken sequence of vintages comprising the Grange “set”. Ultimately, the aim of such buyers is to eventually sell the full series for a tidy capital gain.

But does Grange – or indeed any wine - merit consideration as an investment proposition? Perhaps - but not in the sense that a financial adviser would frame the question.

Like other “unconventional” asset classes include art, holiday properties or classic cars, and despite the possibility of treating such assets as investments for tax purposes, the vagaries of these classes, their opacity and volatility make them questionable for traditional portfolios.

But that doesn’t mean they won’t appreciate in value. Just that independent, professional advice would be highly recommended if anyone is looking at the investment perspective.

Collecting the classics

Wine is often cited as part of the “collectibles” tangible-asset category which has its roots in the classic collecting of art, coins and stamps. This has recently evolved to include cars, sporting memorabilia, electric guitars, Pokémon cards and sneakers. Even more recent is the emerging phenomenon of digital assets stored on non-fungible tokens or “NFT’s” as they are referred to.

In Australia, there is a growing body of analysis and opinion around holding such assets in vehicles such as self-managed superannuation funds (SMSF) which the Australian Tax Office (ATO) watches closely.

But the fundamental challenge with many of these classes is market structure. While it may be impossible to forecast the future price of something like gold or a bond, they are what they are: fixed commodities which rise or fall.

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Pic: Wilden's tasting notes read: "2017 Penfolds Grange RRP $950. Just the seventh Grange in history to be 100% shiraz, from Barossa Valley and McLaren Vale. Maturation for 18 months in 100% new American oak. Very dark appearance, purple rim with black centre. The nose is unmistakably Grange with a voluminous bouquet exhibiting a panoply of exotic ripe fruit and new oak. Totally seductive. The wine bursts onto the palate with extraordinary intensity, flowing to the superb mid palate of great weight and complexity. The poise is astonishing with such drive, length and persistence. A great Grange. Yes!"

But in the case of wine, art or vintage cars, there are complexities around the nature of the actual investment article.

Anyone interested in these unconventional investments should consider some fundamental questions. For wine they’d include:

1. How well do you understand what it is you are investing in?

Irrespective of whether you a wine lover with decades of elite experience or a neophyte, there is no substitute for doing plenty of “R&D” (reading and drinking). Local authorities include Jeremy Oliver or Nick Stock. Internationally, look for Tim Atkin and Vinous by Antonio Galloni. But remember, these writers are focused on wine quality, not investment potential – the two are not the same. However, the better the wine, the more likely it is to be in demand and be worthy of “collecting”, especially if it is restricted in availability.

2. Will all wines increase in value if kept long enough?

Emphatically, no. Like all collectible categories, all things being equal, the fine and rare will usually outperform the everyday. Do not expect today’s $A30 purchase to show capital growth. In fact, you are almost assured of negative growth as the overwhelming majority of wines – even those labelled fine wines - depreciate over time. Patience in and of itself is not enough to generate positive return on investment. When it comes to wine, it must be both fine and rare to appreciate in dollar value.

3. How “liquid” is the market for my investment?

Puns aside, the short answer is “pretty liquid” and more so than many other collectibles. As an example, in Victoria it is illegal to sell your wine collection to your unlicensed mate but it is possible to sell to a licensed entity such as a retail liquor merchant, a licenced restaurant or a wine auction house.

Langtons (part of the Endeavour Drinks behemoth) and MW Wines are the biggest of these local auction houses and there are many more small businesses. Recently, the world’s largest wine auction house (by value sold), Acker Wines, entered the Australian market. This confirmed Australia’s importance as a fine and rare wine market.

4. Market volatility and opacity

In December 2020, Langtons sold an incredibly rare and complete set of 64 bottles of Penfolds Grange from 1951-2015 for $A431,000. However, another set of the same vintages went to auction in June 2021 with an estimate – including buyers’ premium – of just $A402,000 and failed to attract a bid. Why?

At first glance, we are comparing apples with apples but in this instance it is like comparing a Fuji with a Lady William. The bottles in the unsold set have superb labels and are still in their original tissue paper wrapping but some have less-than-ideal ullages (see more below) and, unlike the set sold in December, have not been through the Penfolds “wine (health) clinic” – an imprimatur of quality.

5. Protecting your asset long-term

When it comes to selling exceedingly rare wine at lofty prices, provenance is everything. The more verifiable the supply chain history and the fewer times the wine has changed hands, the more desirable it is and the greater the premium the bottle(s) will command. Witness the number of players in the blockchain marketplace trying to stake their claim as the provenance solution for the wine industry and you get a feel for how important the issue is.

Meanwhile, there are some basics:

  • Make sure your vinous gems are stored in a location with the correct, verifiable atmospheric conditions: 14-16 degrees Celsius, around 65 per cent humidity, vibration free and away from sunlight. Professional cellaring services must be seriously considered if the wine has been purchased by a SMSF and/or resale is the aim.
  • Only buy from reputable sources. There are well publicised issues with faked premium wine sales in China and fakes exist in Australia as well. Be very wary of deeply discounted or cheap rare-vintage Grange/Mouton/Petrus for sale on an auction site or at the local pub.
  • If the level of the wine in the bottle is low, do not buy it. The ullage - the headspace between the bottom of the cork and the top of the wine – is the canary in the coalmine of poor/sub-optimal storage and/or cork failure. A lot of wine collectors cellar their wines in air-conditioned comfort, only to find that in the absence of a compensating humidifier, the aircon has dried out the air in the cellar and concomitantly the elasticity of the corks, removing their efficacy as a sealant.

A pro tip - it is almost impossible for a bottle of wine of more than 5 years of age to retain an impeccable fill level and have been poorly stored (unless it is a fake!).

Remember: the higher the fill, the higher the price.

6. How do I know what to buy?

This part is quite straight forward. Study the subject for 40+ years, read voraciously, keep abreast of global market prices and be on good terms with distributors who allocate the gems. If that sounds too hard, be prepared for some tough lessons as part of a very steep learning curve.

It is a fair assumption even a casual red wine drinker in Australia would be aware of Penfolds Grange and the price and status it rightly enjoys within the Australian wine industry. But how many would casually know the value of the 2015 vintage of Domaine Leroy Musigny is approximately £90,000 per bottle?

If you are sufficiently wine savvy to know your Musigny’s from your Mouton’s, then consider taking a deep dive into the data available online. Fabled auction house Sotheby’s have a wine indices chart which compares the performance of the fine wine market in general - as well as more focused subcategories - against the major stock market indexes over a 16 year period. The data reveal the “DRC” (Domaine de La Romanee Conti in France’s Burgundy region - exceptionally rare) index has risen from a base of 100 to a peak of 723.68 in April 2021. By comparison, the Financial Times Stock Exchange recorded 139.07, Standard and Poor's was 330.64 and the Hang Seng 199.03.

Another invaluable source of data is Liv-ex - the London International Vintners Exchange. Established in 2000 by two stockbrokers, Liv-Ex evolved as their vision of creating a trading platform to enable more transparent pricing and the safe and efficient trading of fine wine. Liv-ex’s online exchange has evolved over time to include payment and logistic solutions, including appropriate storage of your precious collectible.

In Australia, while the major wine auction houses have price guides and sale results available, they have yet to mine or segment that data to the same extent as the above and other overseas entities. For now, those interested in wine investment will have to do their own heavy lifting. Seek out knowledgeable wine merchants, wine groups and societies to supplement your own “R&D”. Surely, it is no great hardship in having to read and drink fine wine?

And if you’re wine doesn’t appreciate in dollar value, you can always drink it.

Francis Wilden advises the hospitality sector on strategy and trends. He has owned restaurants in Sydney and Melbourne and has 40+ years of experience in the world of fine wine. He can be contacted via LinkedIn.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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