Investors today and in particular in these difficult times are looking for diversification, de-correlation, low volatility and good returns. Demand for alternative investments such as fine wines, vintage watches and art has grown in recent decades as investors seek refuge from inflation and look for asset classes in which to store wealth beyond traditional investments. As revealed in the latest Cap Gemini report, these ‘Passion Investments TM’ consist of luxury collectibles, jewellery and watches, with the fine wines, antiques and coins category accounting for 22%. But how do you select the most appropriate or even access advice in this area?
Wine
Are you are a wine lover or just someone who understands wine? You may even hold a few exceptional bottles in your cellar but as you may have experienced, wine isn’t an investment for the unprepared. It requires all the experience of a specialised investment team be that in the selection of the region, the domain, the millesime and/or the merchants. This is why there is a clear distinction between handling a private collection for one’s personal pleasure and the management of a wine fund as an investment, as in-depth knowledge, expertise of costs (transactions costs, transportation, storage etc) and active management are required.
Research has shown that over the past 50 years, top wines have demonstrated a long term consistent return on investment, with an average return of 14.95%. That is also the conclusion of a study published in April 2010, by two economists at the University of Fribourg, Philippe Masset and Jean-Philippe Weisskopf, who both recommended investing up to 20% of portfolios in top grade wines. Having compiled data from 144 auctions in the United States between 1995 and 2009, involving USD$237 million worth of transactions, they observed the value of wine withstood the 11 September 2001 attacks. Even the financial crisis of 2008-09 scarcely impacted on the wine index created by the two researchers, reducing it by just 18%. An insignificant decrease compared to the plunge of 50% or more taken by most of the stock markets.
Constituting one’s own cellar is a seducing investment. But it is also very complex. Let’s take the example of a person who bought the top five domains in ‘en primeur’ – a case of 12 Mouton Rothschild, one of Château Lafite-Rothschild, one of Margaux, one of Cheval Blanc and one of Latour in the excellent 1990 vintage. This person would hold a portfolio whose value would exceed nowadays €44,000 for an initial investment of € 3 000. However, if the investor had excluded the Mouton Rothschild because in fact it was a very poor year for Mouton and replaced it with another case of Margaux the gain would have been €52,000.
The private investor also has to have access to good buying prices in the first place. Besides the prices, there are specific criteria to be taken into account: the wines selection (regions, vintage), when to sell, to whom and at what price, the storage conditions (humidity, vibration, temperature).
Finally, one needs to be aware of forgery. Château Lafite-Rothschild, Cheval Blanc, Mouton-Cadet those fine wines which make French, amateurs of wines, but also the swindlers dream. The forgery of great wines is a new business, rapidly expanding. Every year false Bordeaux, Burgundy and Champagne would generate some €200 million to very organised networks. Therefore, one needs to be particularly careful when buying a wine of exception.
Wine funds
Wine represents the only physical good that improves with time, produced in very limited quantity and where quantities produced cannot be increased. Demand for rare millesimes from emerging countries is also increasing as these populations are becoming more affluent.
Also even in bad economic conditions as it is the case today there will be more and more wealthy people around the world able to buy these wines, to consume them every year which leads to even lesser quantities of older millesimes available bringing additional pressure on prices. The rarity and the age of wines are obviously criteria of choice in the composition of a wine portfolio.
In 2010, the value of the international wine market exceeded USD$100 billion. Within this $100 billion, only a few categories of wines, about $1.5 billion, are of interest when it comes to building a portfolio of grands crus, namely the Premiers Crus Classés of Bordeaux and the Grands Crus of Burgundy, Italy and Spain.
There are around 15 funds investing in wines around the world. Most of them seem complex, as they are located in offshore jurisdictions, can be difficult to access and some of them are closed to further investments. The few investment funds that are relatively successful are highly concentrated in Bordeaux (1st, 2nd and 3rd crus), and primeur, easier to manage because there are no logistic problems.
Nobles Crus, the only Luxembourg Specialised Investment Fund, with a monthly valuation, concentrates on the contrary on vintage wines (only the 1st crus) for 70% of the portfolio even if this is more complicated to manage (because of the transportation, the insurances). It plays the card of Burgundy wines, which are more difficult to find as one needs to be well introduced to be able to access some of the most prestigious names from that area.
Launched in 2007, the fund is monitored and controlled by some of the top providers. Its performance, since launch, is 61.85%. The portfolio’s 30,000 bottles, of an overall value of €56 million, are stored at the Geneva Port Francs under optimal conditions.
Watches
The watch and clock industry, Switzerland’s third largest exporter after the machine and chemical industries, has only one market: the world. Swiss-made timepieces are to be found in all the countries of the globe.
The watch industry is today, as it was yesterday, one of the brightest stars in the Swiss economic firmament. Better still, during the past five or six years, it has taken the leading position among the country’s most successful industries, breaking its own records in exporting each year and going from SF4.3 billion in 1986 to SF17 billion in 2008.
The market is characterised by the fact it is relatively young (just 25 years old) and production is very limited. The returns of investment in fine and rare watches are significant compared to other asset classes. This is sustained by a strong and consistent demand from both investment grade and emerging market investors who want to invest in tangible assets and who are looking for quality and rarity driven assets
There are a few watch-based funds available to investors. Precious Time, launched by Elite Advisers, invests in very fine and important vintage watches (pocket and wrist watches) manufactured by Patek Philippe, Rolex, Cartier, Audemars Piguet, Vacheron Constantin and many other watch manufacturers. It targets an annual return of 15% net.
