A Taste for Investment

There are a number of characteristics of wine as an asset class that make it perform differently from other alternative assets, which makes it an interesting topic to explore. As I have mentioned in previous blogs, the investment grade wines that offer the most consistent returns are those from the French region of Bordeaux. The reason for the superiority of the Bordeaux wines dates back to 1855 when Napoleon requested a classification be drawn up detailing the all of the best wines in France.

The Expoisition Universalle de Paris classified the red wines of Medoc and the wines of Sauternes as quality products. The 1855 classification came to dominate Bordeaux wine and now remains with us to this day. There is no regular review of the list and today there remain 61 chateaux listed, all in Medoc except for Haut-Brion which is the sole Graves estate.

The region is broken down into five categories:

1. Medoc Premiers Crus Classes (Class A) – First Growths
2. Medoc Deuxiemes Crus Classes (Class B) – Second Growth
3. Medoc Deuxiemes Crus Classes (Class C) – Third Growths    
4.  Medoc Deuxiemes Crus Classes (Class D) – Fourth Growths
5. Medoc Deuxiemes Crus Classes (Class E) – Fifth Growths

In 1855, classifying 61 wineries as ‘quality’ probably would have covered a significant proportion of the wines available in France. However, 157 years later we have a global population of 6,840,507,003 (World Bank 2010) and 26,216,967 tonnes of wine being produced by the top ten wine producing countries in the world (Food and Argiculture Organisation, 2012). All of a sudden it appears that the 61 humble Chateaux in Bordeaux may not be able to produce enough wine to keep up with the demand. It is this simple supply and demand phenomenon that causes many wines to be destined to an inflationary future.

Peter Lunzer, CEO and CIO of Lunzer Wine Investment recalls that “During the past 30 years I have been involved in the wine industry, it has become evident that one factor which regularly caused wine prices to rise was limited supply against a backdrop of sustained demand”.  He says that from an investment perspective Lunzer Wine Investments have always steered their clients toward the famed five famous Chateaux in the Premier Crus classification, and also the 2^nd, 3^rd, 4^th and 5^th growths. Although diminishing in prestige numerically, the most interesting thing about investment grade wine is that as the best wines of the best vintages become scarcer, prices rise in value.

The rising middle class in China will affect this scenario greatly, with an estimated $1.3Bn middle class consumers predicted by 2030 (Forbes, 2011). While many investors take the business of wine seriously and get their hands on cases of premium wine ‘en primeur’ (before they have been harvested and bottled), there are many more who want simply one or two bottles to represent their status in society. In 1855 this would not have really been a problem, however today with our growing population, the pool of desired stock seems to be getting smaller and smaller every day.

Despite all this talk of the doom of supply of the historical greats, Peter Lunzar says that investors can still make money, you just have to be smart. For a consistent pathway with steady growth he suggests a generous helping of 2^nd – 5^th Growths, with a carefully selected pinch of right bank wines (St Emilion and Pomerol). As a novice wine investor myself I asked him to explain this is greater detail to which he replied “There are many wines costing $200 today which we believe will be $400 in five years time. However, if they cost $3000 today, will there be someone willing to pay $6000 for them in the future? While there will always be rare gems who fetch a ravishing price, they will be few and far between. Why run the risk when you can make consistent returns from wines which start at $200 and sail well past $400.”

Investing in wine today, compared to previous decades or centuries, we can see a greater correlation being established between the returns and major economic themes. Wine, however remains the only commodity with an inverse supply curve – the further you get from the harvest, the less wine there is available for the market. This is a particularly good reason to argue that wines will continue to create great investment returns.

Until next time, have a glass for me. Alex Mac.