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:
- Medoc Premiers Crus Classes (Class A) – First
Growths
- Medoc Deuxiemes Crus Classes (Class B) – Second
Growth
- Medoc Deuxiemes Crus Classes (Class C) – Third
Growths
- Medoc Deuxiemes Crus Classes (Class D) – Fourth
Growths
- 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
2nd, 3rd, 4th and 5th 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 2nd – 5th 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.