For those unfamiliar with the concept, it may come as a surprise to learn that people have been investing in fine wine for hundreds of years.
As early as 1787, American statesman Thomas Jefferson noted in his diary that a premium was being charged for Bordeaux wines from the more mature 1783 vintage versus the more recent 1786.
The lesson here – that fine wine improves with age, and will therefore be worth more in the future than it is today – remains the cornerstone of wine investing.
Since Jefferson’s time, investing in wine has become an increasingly mainstream pursuit for investors seeking uncorrelated, attractive risk-adjusted returns.
This trend shows no sign of slowing, with HSBC reporting in 2023 that 96% of UK wealth managers expect allocations to fine wine to increase.
Liquid Gold
When compared to other collectables, fine wine has two unique characteristics that make it stand out.
Firstly, unlike other collectables, there exists an objective, third-party price readily available through platforms such as Liv-ex.
Not only does this allow investors to ensure they are receiving a fair price, but it also allows for extensive quantitative analysis and modelling by professional wine investment businesses like WineFi.
This is in stark contrast to more opaque markets like art, whisky or classic cars, where investors are – to a greater or lesser extent – at the mercy of their broker’s valuation.
Secondly, wine’s status as a consumable ensures the existence of a unique supply-demand dynamic. There are a limited number of “blue chip” producers across a handful of top wine regions.
Only a finite number of bottles can be produced by each winery every year, the quality of which varies from vintage to vintage.
As the wines improve with age and bottles are consumed or damaged, they become
increasingly scarce. At the same time, as global wealth increases, so too does demand
for high-end wine.
This combination of ever increasing scarcity and growing demand helps to drive prices higher.
By The Numbers
Looking at the data, growing enthusiasm amongst wealth managers for investment-grade wine as a part of a broader portfolio is understandable.
Since 2004, the Liv-ex 1000 – the broadest measure of the investment-grade wine market – has returned 300%, delivering equity-like returns with a fraction of the volatility.
On a risk-adjusted returns basis, fine wine also compares favourably to more established asset classes. This is demonstrated by a higher Sharpe Ratio (shown below), which is a measure of the
average return of an asset in excess of the risk-free rate and relative to its volatility.
This characteristic stems both from fine wine’s favourable supply-demand dynamic, and the fact that it is – ironically – an illiquid asset. This means that it can take considerably longer to sell down a wine portfolio than, say, an equity portfolio.
Whilst this latter point can be a drawback if investors need to release cash quickly, it does mean that the asset class is protected from panic selling in the event of a broader economic downturn.
This is reflected in fine wine’s volatility profile, even during periods of market turbulence as was the case in 2023/24.
Uncorrelated Returns
Perhaps most fascinating, fine wine is uncorrelated to the performance of traditional asset classes, making it an attractive diversifier within a wider portfolio.
The correlation matrix below shows that wine shows almost no correlation to mainstream equity indices, bonds, commodities or gold.
Tax Treatment
A final consideration for investors is that, in many circumstances, returns from fine wine are exempt from Capital Gains Tax (CGT) in certain jurisdictions, including the UK.
Investors should be careful to do their own research to understand the tax treatment of fine wine in their locality.
