Fine wine as an effective wealth store? I’m not buying it

Will the fine wine investment market ever get over its image problem? The answer to that largely depends on whether or not you think it has an image problem in the first place.

The question is provocative but important. Stories of wine investment scams and fraudulent brokers make headlines on what seems like a weekly basis, while at the same time our inboxes are flooded with research reports, news articles and marketing literature that tout the benefits of wine investment for the everyday investor. Never mind that the Financial Conduct Authority has clamped down on the promotion of alternative investments to retail investors — fine wine as an investment is not regulated by the FCA anyway.

A recent fine wine investment report published by Intelligent Partnership and sponsored by Cult Wines has made for some interesting reading, although the bulk of its contents are not particularly groundbreaking. Nevertheless, the report makes several claims about the investment potential of fine wine that I believe need to be challenged.

The first entry that gave me cause for concern was a rather bizarre pull-quote that made the report read more like an article out of a tabloid newspaper than a serious research outfit. Is this the image that they really want to portray?

“The funny thing is, wine is turning out to be a great investment. I couldn’t believe what happened with the value of my wine futures. I pinched myself and asked, ‘Did I just make more money on wine barrel futures than I did on the stock market?”

Suze Orman,
Financial adviser and CNBC presenter

Market corrections

Aside from the odd quote from Suze Orman, my biggest concern is how the report continues to promote wine as an ideal asset class that helps to add diversification to an investment portfolio, has low correlations to other investments and generates unmatched returns. Of fine wine’s correlation to global financial markets, the report states:

The crash in 2008 gave many investors an unpleasant shock in that investments which had been considered as good diversifiers were actually highly correlated and sharp negative price movements were mirrored across developed and emerging equities, bonds and property. This meant that the search was on for assets that are not correlated with the mainstream public markets in any conditions; wine, with its inverse supply and demand curve and only a 15% correlation with the mainstream financial markets, is a good candidate and its performance during 2008/2009 proved it does not follow the mainstream markets volatility
or acute downward movements.

Accompanying this statement in the report is a chart that plots the performance of global equities and government bonds against the Coutts Objects of Desire Index, which includes not only fine wine but also classic cars, stamps, coins, rugs, rare musical instruments and so on. The problem with this is that the Coutts index, as shown in the chart below, does not reflect the pure performance of wine because it contains so many other assets. Therefore, its behaviour in 2008 seems almost benign in 2008 when compared against other major asset classes (the precise make-up of which is not divulged in the report).

CouttsSource: Intelligent Partnership

A glance at the historic performance of any of the major Liv-ex indices (Liv-ex Fine Wine 50, Liv-ex Fine Wine 100, Liv-ex Fine Wine Investables) will show that fine wine prices actually went through a correction in late 2008 just like many other global stock markets (see chart below).

For example, the Lix-ex Fine Wine Investables Index saw a correction in the region of 20% in the second half of 2008 as it fell to a reading of 198 on 21 December 2008 from a peak of 248 on 30 June 2008. That is a fairly standard market correction. Moreover, the index started a multi-year bull run beginning in early 2009 just like many other global stock markets. This bull run lasted until 2011 when the market entered a major structural downturn that saw prices for Bordeaux wines fall across the board for several years. The below chart from the Intelligent Partnership report shows not only the 2008 correction that fine wine exhibited (thick red line), but also the slump that began in 2011.

indicesSource: Intelligent Partnership

The reasons for the 2011 downturn are various and widely documented. Unfortunately, the report only makes a brief mention of some of the causes for this and for the most part excluded a proper analysis of why the market for investment-grade wine began to slump in 2011. There is no mention of recession, volatile stock markets, the eurozone sovereign debt crisis, correlations with market and economic events (more of which later), a revolt against ever-higher en primeur prices, and so on. This is valuable information for any potential investor.

Lower correlations?

Wine might appear to be an attractive investment right now as a result of the prolonged downturn in the Liv-Ex 100 over the past five years, but that does not necessarily make it a perfect buying opportunity either. Yet this always seems to be the primary message coming from newspaper articles and research reports into the fine wine investment market.

One positive thing to extra from this report is that it does appreciate that the market has exposure to China, although it continues to trot out the argument that fine wine has a ‘very low correlation’ with financial markets and economies:

Although fine wine investing shows a very low correlation to mainstream financial markets, it is heavily exposed to emerging markets and China, “which many will regard as being a risk as well as an opportunity”. The key is to ensure that a portfolio is correctly balanced in terms of the markets invested in.

True, this can create an opportunity. Lower prices make a great entry point for investors. But for those who want to be fully aware of the risks, let’s look at some worrying levels of correlation that suggest that wine has anything but a ‘very low correlation’ to global markets.

As a luxury product, wine is geared into global growth and rising wealth levels. That explains why it boomed when Japan was booming, it boomed when the US was booming and it boomed again when China was booming. It also explains why there was a slump following the global financial crisis in 2008 and again in 2011 when China’s government began cracking down on corruption.

Oh, and then there was the time it was almost perfectly correlated with the Shanghai Stock Exchange. And yet the report makes this rather brave claim:

The right fine wine investment can be a very defensive holding as it has the capacity to remain stable under difficult economic conditions. Additionally, it has the advantage of not necessarily following the general trend of lagging behind the rest of the market during economic expansion because demand is consistently strong.

Consistently strong? During economic expansion, yes. But investors want to know about what happens when the opposite is true. What happens during an economic recession? What happens when the economy isn’t doing so well and conditions deteriorate? In the case of China, the buyers stop buying.

And then there is the market correlation everyone seems to have forgotten. Crude oil. Two economists at the International Monetary Fund were studying the factors that drive commodity prices upward and found that fine wine has a strong correlation with the price of oil.

Our results suggest that although fine wine can be considered as an investable asset, its behaviour is not significantly different than other commodities and therefore may fail to enhance portfolio diversification.

Fine wine prices are sensitive to macroeconomic shocks, just like crude oil and other commodity prices.

Serhan Cevik and Tahsin Saadi Sedik
International Monetary Fund


Not all is bad about this report, despite my critical statements. It does highlight the risks associated with investing in wine and it makes mention of the costs and expertise required to make informed decisions and ensure correct storage. I applaud the authors for discussing the downside to wine investment. My concern, however, is that it has not paid enough attention to the risks associated with fine wine and has downplayed the effect that global market and economic events can have on consumption and pricing. In the past, the small and relatively closed world of wine investment was sheltered somewhat from global events. This is no longer the case as more investors enter the market and globalisation takes hold.

Fine wine and pensions: A dangerous cocktail

wpid-dsc_0638.jpgThese are interesting times to be discussing investment advice. For those who invest in wine (without even discussing the rigours of the en primeur market), there has been nothing short of a deluge of stories about fly-by-night wine investment firms using high-pressure sales tactics on stock that never existed. For those who are simply investing for retirement, a new regulatory landscape that was introduced on 6 April has opened up incredible opportunities — and a great deal of uncertainty as well.

Right now you are probably wondering how these two topics are related. With interest rates and bond yields at low levels, investors have been clamouring for yield wherever they can find it, particularly those nearing retirement. Given how alternative investments — such as fine wine — have received a great deal of press over recent years for the returns they have achieved, it stands to reason that they have attracted many an amateur investor.

But as someone who used to be a financial journalist and today works somewhere in asset management, these are areas of investing that are best left for the experts and those who can afford them. So when I noticed that the Q&A column in the May 2015 issue of Decanter magazine featured advice on how best to supplement a pension income by using an inheritance to invest in wine, my curiosity was immediately piqued.

In this advice column, a reader asked this specific question:

I’m looking to invest in wine using an inheritance to supplement a pension — so looking at mid- to long-term returns. Should I buy Bordeaux or Burgundy, or both?

Ultimately, what someone does with their inheritance is their business. If they want to splash out on a case of Le Pin 1982 or even a whale tanker of rough-and-ready Vin de Pays, that’s their decision. But where I start to grow concerned is when that flight of fancy transforms into something more serious, such as an appeal for genuine financial advice.

Perhaps only a financial wonk such as me would pick up on the distinction between wine investment advice and pensions advice, but there we go. For safety’s sake, the mere mention of the words ‘pension’ and ‘wine investment’ must be approached with caution. In fact, anyone asked to advise on a scheme where the two could be combined is faced with a minefield. Better to retreat to safety than to risk a fatal misstep.

Sadly, this issue wasn’t addressed in Decanter’s response, in which the first two paragraphs were probably the most crucial:

Historically, fine wine has proved a lucrative investment over the long term, although it is subject to corrections like any other asset class. We’ve seen this with first-growth Bordeaux — the traditional investment staple — losing about 40% since mid-2011 while over the same period, top Burgundies gained about 10%.

My advice is to hedge your bets by diversifying, in two key ways. First, you are right to treat wine as a supplement rather than a primary investment. Wine is a useful addition to a wider portfolio thanks to its lack of correlation to more traditional asset classes, such as the stocks and bonds making up most pension funds.

The central issue I am highlighting here is that, in the highly regulated world of financial advice, fine wine is an unregulated asset class so symbolic of the wild frontier of the investment world that it has attracted disapproval from the Financial Conduct Authority. Ask your financial planner to include wine investment in your retirement funding arrangements and the answer will be simple: No. If professional advisers won’t touch it, then it’s probably a good idea that the amateur financial advisers not do it either.

This doesn’t mean wine investment is a bad thing. Nearly every wine enthusiast I know has bought at least a case or two for investment purposes over the years. But there is wine investment and then there is pensions investment. And my bone here is related specifically to the fact Decanter ignored the pensions aspect of this reader’s query and trundled straight on to the wine investment advice aspect. For my purposes, the most crucial part of Lister’s reply came in the first two paragraphs:

To her credit, Lister made clear that wine should be seen as a supplement to a portfolio rather than a primary investment. She also made sure to point out that fine wine, like any asset class, can fall in value as well as go up. But my gripe with the advice given is as follows:

  1. There was no statement at the outset that, above all, the reader should seek professional financial advice before making any major investment decision relating to inheritance and a pension (we don’t know how much money this person wants to invest, but there is some suggestion it is more than a few thousand pounds).
  2. Fine wine is touted as providing lucrative returns over the long term without any specific reference to actual performance figures.
  3. While the suggestion that fine wine has a “lack of correlation” to other asset classes is not necessarily incorrect and, indeed, there are no clear indicators for fine wine prices. There is, however, evidence to suggest wine is correlated with major global economic events, such as the 2008 global financial crisis or growth in the emerging markets. While it might not move in lock step with stocks and bonds, wine as a luxury product will be affected by the vagaries of the economy in one way or another, particularly during a recession or a decline in spending.

While Paul Lewis, host of BBC’s Moneybox, rightfully wrote that anyone can given financial advice, not just qualified financial advisers, there are times when it’s best left for the experts. I do not dispute the wine investment expertise that Decanter provided to this reader. I just believe that it should have been more careful given this person’s clear need for pensions advice.


Alcohol monopolies: Friend or foe?


Alcohol monopolies are in the news again in Canada.

A recent piece in the Montreal Gazette has argued that it is time to end the alcohol monopoly in Quebec. Why? Because consumers are being gouged while the government-run monopoly lines its pockets.

For those of us from the Great White North, the alcohol monopoly is something that we love to hate. We love it because it’s like an old friend; familiar, always there, and always reliable. This is ignoring the fact, of course, that to at least a certain degree, prices are tightly controlled, access to product is limited and regulations are much tighter and more restrictive.

And this is what makes it a foe. Even though Canada is one country sharing a single constitution and national identity, there are strict rules about shipping wine over provincial borders. Moreover, because liquor laws vary from province to province, there is the belief that some people get a bad deal.

Then there is the service side of things. Consumers get limited access to the market (in British Columbia, consumers often can only buy a bottle or two of their favourite Bordeaux because BC Liquour Stores work to tight allocations), staff knowledge can be pretty poor in the stores and much of what is sold on the shelves can be viewed as generic dreck.

The Montreal Gazette article reads:

As Quebec’s only buyer and vendor of most alcoholic products, the Crown corporation brings in over a billion dollars to the province annually, about 1 per cent of its revenue. It’s the government’s most profitable venture, with margins over 48 per cent. As a comparison, Liquor Stores N.A. — a company that owns liquor stores in Canada and the U.S. — only had a profit margin of 1.9 per cent.

The argument, however, is not that the entire system should be privatised and the government distribution department be scrapped. Instead, it argues that the buying power of the government corporation be retained and the market opened up to private retailers.

In ending the monopoly, the SAQ would retain its duties as the sole distributor of alcohol in the province. There is a cost advantage of buying alcohol in bulk and the SAQ is one of the world’s largest buyers of wine and alcohol. This could be made to work in favour of consumers and businesses. Privately owned retail outlets would purchase their products from the state at a low cost and sell the alcohol at a price determined by supply and demand.

Such a plan could be a decent solution, but is the alcohol  monopoly necessarily a bad thing?

Ending the monopoly, sacking the employees at all the stores and opening the market to private competitors, as the Montreal Gazette piece recommends, might result in good things for consumers. But it seems to gloss over an important issue: it could put 8,000 people out of work and, very likely, result in lower wages for those who end up working in a privatised alcohol retail sector. This would need to be managed to ensure that unemployment and underemployment as a result of the process are kept to a minimum.

All of this makes me think back to a piece I wrote earlier this year about alcohol monopolies.

In it, I concluded that alcohol monopolies help to keep sales low and therefore the negative problems associated with consumption. But I also concluded that it was detrimental to consumers in terms of offering choice of product and value for money.

I used to be firmly in the ‘government alcohol monopolies are good’ camp simply because they offered a good shopping experience, seemed to have low prices and tended to maintain a clean image.

But the evidence, coupled with my experience living in the UK, has made me change my mind. These days it seems to be that the best thing…would be a free and open market for alcohol retailers.

My argument remains the same. But I’m not entirely sure the argument put forth in the Montreal Gazette piece is entirely realistic. And I’m not in favour of closing a retail system that would result in 8,000 job losses. That end of things would need to be managed carefully.

Most of all, though, I’m not sure having private retailers buy directly from the sole, state-run distributor makes any sense over the long term. One of the best things about the UK wine market is the competition in the distribution market, with small and large players striking deals with producers around the world.

In addition to the importers who handle the large brands and the prestigious estates, there is a litany of small wine merchants who travel far and wide to find undiscovered producers that have never before been available on these shores. Could a single, giant, government distribution branch achieve that? Probably not.

Are the days numbered for alcohol monopolies? Thoughts and facts on the Canadian experience


Wine enthusiasts in the UK have it much better than they think. As a competitive retail market populated by an array of vibrant independent merchants, convenient mail-order outfits and supermarkets with a wave of wine sloshing on their shelves, we are provided with more than enough wine to quench our thirst.

Sure, higher taxes have made it increasingly difficult to find anything drinkable for £5 or less these days, but I challenge anyone to bring a bottle of €2 wine back from France and prove that it is useful for any purpose other than clearing the brake lines on a Citroen 2CV.

I started thinking about this recently when I came across the story of Arthur Goldman, a lawyer living in Pennsylvania, who fell into trouble with the law after he set up an underground wine-retailing network that was in contravention of his state’s alcohol monopoly laws. It was the newspaper headline that caught my eye, because it made Mr Goldman sound like a small-time Rudy Kurniawan: PLCB seizes $150,000 in rare wines from Chesco attorney.

It turns out Mr Goldman, 49, was allegedly selling rare wines out of his home – the sort that weren’t available for sale by the state-controlled board. Not happy with the state’s strict control of alcohol sales, he operated an underground sales network for fine wines that weren’t available under the state monopoly. This led to the PLCB, or the Pennsylvania Liquor Control Board, raiding his home and seizing his goods.

For this Canadian, I am all too familiar with life under the watchful eye of a government-controlled alcohol retailing system. In my home province everything is overseen by the BC Liquor Distribution Branch. For the first 24 years of my life, it seemed like the best system in the world. Only after I moved to the UK did I begin to realise that this was not the case.

For those who don’t want to go underground in their quest for better access to more of the world’s wine, things could soon be changing in the world of alcohol monopolies, albeit slowly. Last year, the government of British Columbia undertook a review of its liquor laws and it is expected to implement these reforms with legislation this year. A few changes have already been announced, but it appears that it will fall short of creating a completely liberalised market. Of the proposals released so far, there is an eagerness for alcohol sales in grocery stores, which could be good for consumers, but already we have seen opposition from the small number of existing private retailers (perhaps the government should encourage more specialist retailers as opposed to volume sales through large supermarkets).

Life under the monopoly

Anyone who has ever lived in a jurisdiction under a tightly controlled  alcohol monopoly will understand Mr Goldman’s plight. Each day you walk into the liquor store hoping to find something interesting, something new, but instead you’re confronted by a wall of Barefoot Chardonnay and Hardy’s Shiraz. This is no bad thing if this is all you aspire to drink, but clearly Mr Goldman was after something a little bit more profound. Illegal alcohol sales and production are a serious problem, but this case is different.

If anything, Mr Goldman’s case reveals more about the problems with government-controlled monopolies over alcohol sales than anything else. In the US, Pennsylvania is one of 18 control states where there is a state monopoly over the wholesaling and retailing of alcohol to one degree or another. In Canada, it is even more extreme; Alberta is the only province to have gone through the process of privatising liquor sales, which it did in late 1993.

Government monopolies over alcohol sales are, for the most part, a holdover from the prohibition era. For some, they are the next best thing to prohibition, keeping strict control of alcohol sales and, theoretically, reducing consumption and abuse. But there are two immediate problems with this model. The first is that they result in less choice and fewer freedoms for consumers. The second is that, given all of the international trade agreements in place today, their absolute power has been diminished somewhat and they are under constant pressure to liberalise.

Prior to the Albertan government opening its market to private liquor retailers, it had 803 alcohol retailers, 595 of which included hotel off-sales and private retailers and 208 of which were government stores, offering 2,200 products in total. As of November 2013, there are 1,987 retailers selling 19,341 products. Looking at this figures, it is almost impossible to deny that it increased in increased options for consumers.

Alcohol abuse: public vs private

There is plenty of evidence that suggests alcohol monopolies keep alcohol sales low, which in turn is believed to keep consumption down and minimise abuse. Back in 1996, in a letter to the Journal of Studies on Alcohol and Drugs, Alexander Wagenaar of the University of Minnesota and Harold Holder of the Prevention Research Center in Berkeley, California, wrote:

Our research on this issue began in 1989 with a study of Iowa. We found very large (93%) increases in wine sales following the 1985 policy which permitted wine to be sold by private alcohol outlets, rather than only by state-owned stores. The effect was much larger than we expected. As a result, before publishing the Iowa results, we replicated the study using West Virginia, which had implemented a similar policy change back in 1981. We found a 48% increase in wine sales.

They concluded:

It is clear that privatization policies have typically resulted in substantial long-term increases in alcohol sales. Because previous research has shown that aggregate levels of alcohol sales and consumption are related to the burden of alcohol-related problems that a society bears, policymakers should carefully consider these results before enacting a privatization policy that, once implemented, cannot be reversed.

Similarly, research by Dave Snow at the University of Calgary in 2009 found that government control didn’t necessarily result in better outcomes. He wrote:

In 2004, in spite of some of the lowest overall sales and consumption rates in the country, respondents in Saskatchewan reported the highest, second-highest or third-highest rates of alcohol-related harm with respect to friendships, marriage, work, studies, employment, finances, legal problems and physical violence.

Value for money

The above is just a snippet of the research into the level of alcohol sales and how they are believed to relate to problems stemming from abuse or over-consumption. The issue I am most interested in discussing, however, is whether alcohol monopolies offer choice in the market and value for money.

Reading an article by Mark Milke of the right-wing think tank Fraser Institute, it appears that monopolies are a bad thing. In fact, the topic of alcohol monopolies appear to be one of Mr Milke’s favourite bugbears, which is more than likely related to his disdain for taxes, unions and government-operated industries than a genuine interest in wine and beer.

Mr Milke, being in favour of free enterprise, concluded that the private system offers the most options and the best value for money when it comes to alcohol. His methodology for comparing prices between Alberta’s privatised system and British Columbia’s government monopoly differed from that undertaken by the Consumers’ Association, taking the lowest possible price rather than the median price. The argument could go either way, but the fact remains: under a monopoly, the price is strictly controlled, whereas under a private system there is the chance for an element of competition among retailers, at least to a point.

And there’s more. Mr Snow at the University of Calgary suggested that privatisation resulted in more options and generally lower prices. On the abuse front, he concluded that privatisation was not correlated with consumption and alcohol-related problems, at least not in the Canadian markets that he examined.

He wrote:

Several studies comparing Alberta and other provinces show that prices were generally lower in Alberta following privatization. However, the price of beverage alcohol is heavily dependent upon government markups and taxes at the wholesale level. These markups and taxes, which are in place regardless of whether retail is monopolized or open to competition, are much better indicators of pricing than whether the outlet is private or public. Regardless of distribution, public or private, a tax increase will make alcohol more expensive, and a tax cut will make it cheaper.

I used to be firmly in the ‘government alcohol monopolies are good’ camp simply because they offered a good shopping experience, seemed to have low prices and tended to maintain a clean image.

But the evidence, coupled with my experience living in the UK, has made me change my mind. These days it seems to be that the best thing for British Columbia, and Pennsylvania as well, would be a free and open market for alcohol retailers.