Pouring Wine to Your Investment Portfolio - Returns on a High!
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Fine wine is presented as a lucrative long-term alternative investment with high returns and low correlation to traditional asset classes, outperforming equities and commodities in the last decade. Factors such as limited production, growing demand from emerging markets like China, and a rebound in prices since August 2014 support its attractiveness as an asset class. However, potential investors should consider challenges like low liquidity, high transaction costs, and the complexities of trading in this niche market.
Pouring Wine to Your Investment Portfolio - Returns on a High!
- 1. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 1 Wine – A long-term alternative investment that yields high returns and has low correlation with other assets Investment-grade wine is an alternative asset class similar to gold, fine art, rare coins, and stamps. In the last decade, investment in Fine Wine provided higher returns compared to the traditional asset classes such as equity, bond, real estate, or commodity due to its limited production and increasing demand from the emerging markets, especially China. Also, Fine Wine investment had low correlation with other asset classes (less than 0.4) during the same period. Higher returns and low correlation make Fine Wine an interesting investment asset class. Moreover, after moving in the negative territory for almost four years on poor vintage quality, Fine Wine prices rebounded in August 2014 due to positive investor sentiment, driven by rising demand from China. The investment-grade wine index Liv-ex has generated positive month-on-month returns for four months in a row since August 2014. Amid such historically low price levels, Fine Wine is emerging as an attractive investment alternative for long-term investors considering its high returns and low correlation with other asset classes. Fine Wine is expected to have a bright future in 2015 due to growing demand from buyers in Asia and the US; moreover, an improved vintage harvest in 2015 would support the price of Fine Wine. Ankit Goel, Bhavik Mehta, and Garima Gupta – Investment Research Team, Aranca Fine Wine investment offers portfolio diversification at higher returns and low correlation Investment in wine generated consistent (~9.5%) annual return in the last decade According to MarketLine, the global wine industry was expected to sell 22.1bn liters of wine and generate total revenues of around USD 292bn in 2014. Only ~1% of the total wine produced is used for investment purposes, while the rest is consumed. The wines used for investment purposes are also called “blue chip” or “investment-grade wines”. As the value of wine increases over time, it offers high returns if held until the maturity stage, which varies from a minimum of five years to 20 years or more. Over the last decade, the price of wine had an average annual appreciation of approximately 9.5%. Gold is the only asset class under our study which generated slightly higher returns (10%) than Fine Wine during the same period. Since investment in Fine Wine provides higher long-term returns and has low correlation with other asset classes, it is considered as an attractive alternative asset class and acts as a portfolio diversifier for an investor’s investments. Fine Wine and gold yielded highest returns among different asset classes in the last decade Source: Bloomberg 0 50 100 150 200 250 300 350 400 450 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LIVX100 Index S&P 500 S&P Global REIT MSCI World Index CISDMEW Index (Hedge fund) Gold S&P World Commodity Index MorningStar EM Corporate Bond Index Wine generated highest returns among all asset classes during 2004-11 due to higher demand from emerging markets and limited production of investable-grade Fine Wine. Wine yielded lower results than gold since 2H 2010 due to poor harvest at one of the key producers (Bordeaux)
- 2. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 2 In the last three years, the investment-grade wine index Liv-ex 100 declined 7.1% which can be mainly ascribed to a drop in the prices of Bordeaux wine which constitutes the majority of the index. In June 2014, of a total of 100 wines contributing to the Liv-ex 100 Index, about 84 wines were from Bordeaux. In the last four years, the Bordeaux region witnessed poor vintage quality, with the 2013 vintage considered as the worst in 30 years owing to weak harvests. This deteriorated the quality of wines, leading to a decline in prices. Reversing the downtrend, the Liv-ex 100 Index began generating positive month-on-month returns since August 2014. A current low price level lured buyers back to the market, as investors believe the price of wine has bottomed out. The demand for Bordeaux wine has improved since August 2014, led by increasing investor confidence, especially in Asia and the US. Among Asian countries, China is a key growth driver, where wine consumption is expected to almost double to 400mn cases of wine by 2016 from 230mn cases in 2012, according to Morgan Stanley’s estimates. With this, China could become the biggest wine consumer globally, outpacing the current leading consumers France, the US, and Italy. In 2012, the estimated wine consumption in France and the US was close to 340mn cases each, while that in Italy was 250mn cases. Overall, this rising demand for wine from the US and Asia (especially China) is expected to outrun the supply as production levels have fallen in the last few years. This would also contribute to an increase in the prices of Fine Wine. Moreover, a normal-to-good vintage harvest in early 2015 may be a key catalyst supporting the rising prices. Key advantages of wine as an asset class: High capital growth and low volatility: According to our analysis, the investment-grade wine market (represented by the Liv- ex 100 Index) generated an annualized return of 9.5% during the last decade. This is the second highest return among all major asset classes included in our study. Only gold outperformed the investment-grade wine on an absolute basis, generating an annualized return of 10.0% during this period. The volatility of annualized monthly returns of the investment-grade wine market was the second-lowest among all asset classes. Only a standard deviation of 6.8% for Hedge Funds (represented by the CISDMEW Index) was lower than that of 10.9% for the Liv-ex 100 Index. Fine Wine investment offered the lowest risk-reward than other asset classes in the last decade Source: Bloomberg. We have used available indices with data history of 10 years or more to represent various asset classes. Period: November 2004-November 2014 Superior risk-adjusted returns: During the last decade, the investment-grade wine market generated the highest risk- adjusted returns (as measured by both, the Sharpe ratio and Sortino ratio) among the asset classes included in our study. The Sharpe ratio and Sortino ratio of the Liv-ex 100 Index came at 0.67 and 0.92, respectively, higher than all other asset class. LIVX100 Index (Wine) S&P 500 MSCI EM Index S&P Global REIT CISDMEW Index (Hedge fund) Gold S&P World Commodity Index MorningStar EM Corporate Bond Index MSCI World Index 0% 2% 4% 6% 8% 10% 12% 0% 5% 10% 15% 20% 25% 30% Return Risk
- 3. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 3 Fine Wine investment yields the highest risk-adjusted returns than other asset classes Source: Bloomberg. Risk free rate considered as US 10 year Treasury bond yield. Period: November 2004-November 2014. *MorningStar EM Corporate Bond Index. Portfolio diversification: Historically, the investment-grade wine market has not shown high correlation with other major equity-type asset classes, nor does it tend to strongly move in line with hedge funds, gold, bond, or other commodities. It had a correlation of 0.24 with the S&P 500 Index, and correlations of 0.16 and 0.34 with the Gold Index and S&P World Commodity Index, respectively. Thus, investments in investment-grade wine may help investors protect their portfolio against events that have severe impact on the equity and commodity markets. Among other asset classes, only gold possesses similar portfolio diversification characteristics. The Gold Index and Fine Wine Index had correlation of less than 0.4 with all other asset classes under our analysis. Fine Wine investment provides good portfolio diversification as it has low correlation with other asset classes LIVX100 Index (Wine) Gold S&P 500 S&P Global REIT MSCI EM Index S&P World Commodity Index CISDMEW Index (Hedge fund) MorningStar EM Corporate Bond LIVX100 Index (Wine) 1.00 0.16 0.24 0.26 0.28 0.34 0.38 0.39 Gold 0.16 1.00 0.10 0.17 0.33 0.39 0.32 0.31 S&P 500 0.24 0.10 1.00 0.84 0.79 0.45 0.80 0.66 S&P Global REIT 0.26 0.17 0.84 1.00 0.71 0.36 0.68 0.73 MSCI EM Index 0.28 0.33 0.79 0.71 1.00 0.57 0.91 0.73 S&P World Commodity Index 0.34 0.39 0.45 0.36 0.57 1.00 0.64 0.51 CISDMEW Index (Hedge fund) 0.38 0.32 0.80 0.68 0.91 0.64 1.00 0.76 MorningStar EM Corporate Bond 0.39 0.31 0.66 0.73 0.73 0.51 0.76 1.00 Source: Bloomberg. Correlation of last 10 year M-o-M returns. Period: November 2004-November 2014 (0.5) - 0.5 1.0 S&P World Commodity S&P Global REIT MSCI World Index MSCI EM Index S&P 500 Gold Bond Index* CISDMEW (Hedge fund) LIVX100 Index Sharpe Ratio (0.5) - 0.5 1.0 S&P World Commodity S&P Global REIT MSCI World Index MSCI EM Index S&P 500 Gold Bond Index* CISDMEW (Hedge fund) LIVX100 Index Sortino Ratio
- 4. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 4 Consistent returns over time: Investment in Fine Wine should be considered for long term as the returns are more consistent and less volatile for longer time horizon due to supply-demand imbalance in the long term. The figure below illustrates that CAGR returns over a 10-year period are consistent and not so volatile, whereas CAGR returns over five- and seven-year periods are relatively more volatile. Liv-ex 100 Index’s 10-year CAGR has been consistent compared to 5- and 7-year CAGR Source: Bloomberg and www.liv-ex.com Tax-free investment for UK investors: The taxation authorities in the UK consider investment-grade wine, with life expectancy of less than 50 years, as a wasting asset. Thus, any profit derived from the sale of such wines is not subject to capital gains tax under the current UK taxation rules. Key concerns of wine as an asset class: Low liquidity: The investment-grade wine market is less liquid compared with the conventional equity and debt markets due to small market size and high brokerage charges (15–20%). Higher transaction, maintenance, and insurance costs: The transaction costs associated with the trading of investment- grade wine is considerably higher than those of other asset classes such as stocks and bonds. Moreover, wines need to be stored in a vibration-free environment and away from light (at a standard temperature). Investors of Fine Wine can rent a specialized wine storage unit or allow the wine merchant to store these on their behalf. However, both methods incur heavy storage costs. Additionally, investors have to spend large amounts of money on insurance costs against any damages. Thus, considering the high costs of transaction, storage, and insurance, the wine investor expects a significant price appreciation before reaping profits. No provision for interim income: Unlike the dividend-paying equity stocks and interest-bearing bonds, investment-grade wine does not generate any income for the investor until it is sold. Thus, the high expenses on the storage, transaction, and insurance would only increase the costs for the investor while waiting for the price to appreciate. Complexity in trading process: It is unlikely that a local liquor store would stock high-end wines from sought-after vintages. In addition, buying investment-grade wines on their initial offering would be difficult because wines in short supply typically go to long-term customers first. Thus, a wine investor would prefer to buy a Fine Wine at a specialty auction. Moreover, the auction route is usually the only avenue available to wine collectors seeking to sell bottles. This, coupled with multiple state laws, adds to the complexity in trading in investment-grade wines. -5% 0% 5% 10% 15% 20% 25% Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 5 year (CAGR) 7 year (CAGR) 10 year (CAGR) -15% -10% -5% 0% 5% 10% 15% 20% 25% M-o-M YTD 1yr 5yr Liv-ex Fine Wine 50 Liv-ex Fine Wine 100 Liv-ex Bordeaux 500 Liv-ex Fine Wine 1000 Liv-ex Fine Wine Investables Fine Wine indices Performance as on 30 November 2014 Liv-ex 100 Index
- 5. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 5 Spoilage, damage, or theft: Investment-grade wines, being a tangible and consumable asset, are subject to the risk of spoilage, damage, and theft. However, an investor can minimize these risks by storing wines in a safe and temperature- & humidity-controlled facility and by buying insurance for the wines’ replacement value. Supply of counterfeit wine: Wine investors are always at the risk of being supplied a counterfeit wine. A recent news article from the InsuranceNewsNet magazine estimates that 70.0% of all Chateau Lafite Rothschild in China are counterfeit. How to invest in Fine Wine? Investment in Fine Wine is not a new phenomenon. Investment in wines increased after the establishment of wine stock exchanges in 1999 which provided investors with easy access to market information, most important of which is the price of wine. In order to qualify for the investment-grade wine, the wine should possess high quality, longevity, sufficient production levels, and ability to deliver significant price appreciation. These wines have a strong demand and their value appreciates over time. Some common ways of investing in wine are listed below: Wine aging: This requires buying a high-quality vintage wine and selling it after some years. This is commonly known as “aging of wine”. The process is cumbersome as it involves storage costs, temperature control for storage, and a seller who would pay the right price for the wine. Wine auctions: Investment-grade wines can be procured from auctions. These auctions are common in the US, particularly in Chicago. The auctions in London are held mainly to decide on the retail price of other vintage wines. Wine stock market: Wine is widely traded on three wine exchanges in the UK: London International Vintners Exchange (Liv- ex), Cavex, and Berry Bros. & Rudd (BBX). These exchanges focus primarily on top wines having high saleable value. The Liv-ex has multiple indices and sub-indices (Liv-ex Fine Wine 50, Liv-ex Fine Wine 100 and others) that are widely used to track prices of tradable investment wines. Wine funds: The function of these funds is identical to that of mutual funds. A group of investors form a pool of capital. The fund manager, who is the caretaker of this pool of capital, invests the same to buy wine and waits for the right opportunity for a resale. The profits gained by the fund manager are either re-invested or passed on to the shareholders. Since this form of investment involves huge risks, most investors here are high-net-worth clients who have a large risk appetite. Some wine funds include The Wine Investment Fund, Fine Wine Fund by The Wine Asset Managers LLP (WAM), and The Vintage Wine Fund by OWC Asset Managers Ltd. REITS: Investors have the option of investing their money in vineyard lands through REITS that deal in vineyard land as an asset. For example, the Blue Chip Winery Fund of the Bahamas follows the strategy of buying stake in vineyards and wineries based in Europe and Canada.
- 6. EMsPouring Wine to Your Portfolio January 15, 2015 © Aranca 2015. All rights reserved. | [email protected] | www.aranca.com Aranca is an ISO 27001:2013 certified company P a g e | 6 ARANCA DISCLAIMER This report is published by Aranca, Inc. Aranca is a customized research and analytics services provider to global clients. The information contained in this document is confidential and is solely for use of those persons to whom it is addressed and may not be reproduced, further distributed to any other person or published, in whole or in part, for any purpose. This document is based on data sources that are publicly available and are thought to be reliable. Aranca may not have verified all of this information with third parties. Neither Aranca nor its advisors, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither Aranca nor its advisors, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. Further, this document is not an offer to buy or sell any security, commodity or currency. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment or currency will depend on an investor’s individual circumstances and objectives. The investments referred to in this document may not be suitable for all investors. This document is not to be relied upon and should not be used in substitution for the exercise of independent judgment. This document may contain certain statements, estimates, and projections with respect to the anticipated future performance of securities, commodities or currencies suggested. Such statements, estimates, and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates, and projections or as to its fitness for the purpose intended and it should not be relied upon as such. Opinions expressed are our current opinions as of the date appearing on this material only and may change without notice. © 2015, Aranca. All rights reserved.