LUXURY INVESTMENT INDEX
Seeing Red
Why do fine wines excite the imagination of investors? In Vino Veritas - “In wine there is truth” First written by Pliny the Elder in Naturalis historia B Y S T EV E MA LLA CH
T 12 MONTHS
5 YEARS
10 YEARS
-19%
-15%
-19%
Watches
4%
33%
83%
Chinese Ceramics
3%
43%
83%
Jewellery
2%
51%
146%
Wine
3%
3%
182%
Art
-6%
12%
183%
Coins
9%
83%
225%
ISSUE 01
Antique furniture
www.investmentlifenews.com
38
Stamps
7%
60%
255%
Cars
28%
115%
430%
KFLII
7%
40%
174%
Gold
-23%
68%
273%
PCL*
7%
27%
135%
FTSE 100
12%
11%
55%
*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012
here are many cultures that laud the ability of wine to cloud judgement and thus prevent the utterance of lies. Today investment in the pressed and fermented grape is surrounded by what could charitably be called half-truths. The ability of fine wine to deliver exceptional returns for those investors willing to play in a volatile market is undoubted, as is the ability of the market to exhibit worryingly steep declines. So is an investment in fine and collectable wine one that can offer significant return on investment in the medium and long term? At Investment Life we look at the real story behind the recent prices that have been impressing those who would like to believe that the grape is the balm that soothes all investment worries. Fine wine investment has seen some astonishing returns in recent times. Investment class wines have significantly out performed many other investment indices – including the FTSE 100 – for as long as three decades. When the financial chips are down, such as when the credit crunch hit in 2008 the value of fine wine also dips – however it is noteworthy that the bear market for fine wine very rarely lasts for a significant amount of time, the good times roll around pretty quickly. Given the resiliency of wine this is yet another investment that will reward a long-term view, rather than a speculative approach. Wine is generally rather less volatile than stock market linked indices, and investors enjoy the security of owning a tangible asset. There is a strong argument to suggest that investment in wine has a low correlation to equity or fixed income indices, and therefore affords sensible diversification. Wine is certainly a very liquid market (if you’ll excuse the pun),
and realising one’s investment is much more straightforward than, say, property. Consequently, one might very reasonably take the view that investing in wine is less risky than other ‘alternative investments’. Generally, investment in wine is tax free as it regarded as a wasting asset so doesn’t attract Capital Gains Tax (However, seek profesisonal advice prior to taking this for granted) and if you keep the wine in bond, you also avoid paying VAT and Duty . “As collectors become more knowledgeable they are also driven more by their own expertise and tastes rather than the latest “trends”. From an investment point of view this is important as bubbles can arise – as seen in certain French wines and Chinese stamps – when too many people invest in a particular segment of a market.” Andrew Shirley Head of Rural Research & Wealth Report Editor, Knight Frank LLP. Wine occupies a strange place in a ‘through the looking glass’ economic landscape. This makes it perfectly suited to strange people with strange and unusual buying habits. Wine is what is known as a Veblen good. Some types of luxury goods, such as high-end wines, designer handbags, classic cars and art are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. In layman’s terms fine wine is one of those strange commodities whose demand is proportional to their price; a reversal of the law of demand. In other words the higher the price, the higher the demand.