Investors

WINE INVESTMENT OVERVIEW

Liv-ex 100 Fine Wine Index is the industry’s leading benchmark. It represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market and is calculated monthly

The Liv-ex Fine Wine Investables Index is designed to track the wines commonly found in a wine investment portfolio. The index consists of Bordeaux red wines from 24 leading chateaux. The component wines date back to the 1982 vintage and are chosen on the basis of their score from Robert Parker.

The Liv-ex Lafite Index consists of recent vintages (2000 to 2006) of both Lafite Rothschild and Carruades de Lafite.

Wine investment is not a recent activity. In the past, the English invariably bought more fine wine than they were able to consume and often sold off surplus wines at a profit.

As the world has become richer, the fine wine market has also changed considerably. During the 1990s, growing demand from the United States and then, more recently from Asia, increased prices and demand to unprecedented levels. As a result, the fine wine market has grown to such an extent that the world-wide auction market alone is estimated at circa £185,000,000 per annum

In addition to this, interest from professional investors, specialist investment funds and individual collectors has also pushed up demand. Supply however, is restrained (and, in recent years, has actually been reduced) by the limits of geography, restrictions imposed by the relevant authorities and reductions in yields caused by the on-going quest for ever greater quality.

Whilst a long-term view is essential, it is certainly a fact that the best wines from the best vintages have, over the past couple of decades, proven to be sound investments.

However, like other investments, wine is also not unaffected by global events and the recent financial crisis saw prices drop off from their recent peaks

Fine wines tend to show less volatility that the stock market though and generally have a low correlation with the financial markets. This is partly due to the limit of supply (stock of any top wine is constantly diminishing and was very limited to begin with) and partly because wine is a tangible asset, a luxury product that is sought after and aspired to by a growing number of people.

To illustrate this issue with supply, Chateau Margaux produces circa 13,000 cases per year which have to be allocated around the world. About 20% of this will be allocated to the UK, which makes a total of 2600 cases to go around the entirety of the UK market.

Despite the fall in wine prices last year, the last couple of months have seen a healthy recovery, to the extent that the market was recently commented upon by the FT’s influential Lex column...

The wine market – Lex @ The Financial Times

Published: September 4 2009 09:22 | Last updated: September 4 2009 20:33

Downing the lot must have seemed like the way to go at the time. But when Lehman Brothers collapsed last year, investors rushed to sell their quality plonk instead. As a result, the benchmark Liv-Ex 100 Fine Wine index tumbled by a fifth in just two months. Since then, however, it has been an explosive bouquet of spice, cherry and pepper all the way, with prices surging again. August’s jump of 5 per cent was the biggest since mid-2007. The index is now only 15 per cent off its peak last summer and certain Lafite Rothschild vintages are at all-time highs.

What is going on? After all, the price of other luxuries such as paintings are still in freefall. The blurb from one wine investment fund argues that the fine wine market benefits from inelastic supply. That is, irrespective of the price it fetches, once a particular vintage is made no more can be produced. Moreover, the number of available bottles falls every time a cork is popped.

But the fact that art masterpieces are also non-fungible does not stop their prices from falling. Neither does diminishing supply, as any landowner these days will tell you. What is more, these characteristics are well known and should be reflected in prices at auction. Therefore something else must be pushing prices higher.

It is no coincidence that fine wine started to recover at the beginning of the year, alongside the Chinese stock market. The marginal buyer is shifting from London and both coasts of America, where demand is flat, to Hong Kong, now the hub for the booming Asian wine trade, particularly in China. While there will always be price anomalies allowing investors to make money in wine, this bull-run is your classic demand story. Choose the shape you expect the economic recovery to take; then pick your poison

Wine investment is not foolproof and it is imperative to choose the right wines with a strong provenance. Purchasing highly regarded vintages at the correct price and time is essential, as is selling them at the optimum point to achieve maximum profit.

Bordeaux still remains the hub and apex of the investment market. The very top Châteaux - Latour, Margaux, Haut Brion, Lafite Rothschild, Mouton Rothschild, Le Pin, Ausone and Petrus are all blue-chip estates with excellent track records and can offer excellent returns for the investor

The practical advantages to wine investing are fairly straightforward. Wine is an easily transferable asset; there is an established fine wine market and a thriving auction market

If you are interested or would like more information, please contact Paul Jones at paul@nezzar.com

The graph on the right is based on an average price in the above vintages of the following wines:

Chateau Lafite Rothschild, Pauillac 1ere Cru Classe

Carruades de Lafite (the second wine of Chateau Lafite)

Chateau Mouton Rothschild, Pauillac 1ere Cru Classe

Chateau Margaux, Margaux 1ere Cru Classe

Chateau Haut Brion, Pessac-Leognan 1ere Cru Classe

Chateau Latour, Pauillac 1ere Cru Classe

Chateau Petrus, Pomerol

Chateau Le Pin, Pomerol

Chateau Ausone, 1er Grand Cru Classe A

The prices have been taken from the En Primeur release of the wine onto the market and at today’s market price.

The graph clearly demonstrates the growth in value between the first release of the wine and later prices. It is worth noting that the 2008 wines have yet to be physically released to the market in bottle – an event which often sees an increase in price

Tax Details & Disclaimer

Income Tax

Provided your wine portfolio is held in the name of ‘you’, the private individual or individuals, and you are not a wine trader/dealer, under current UK taxation rules, it is considered by the Inland Revenue that no income as such is derived from the holding of fine wine stocks.

Capital Gains Tax

Wine is normally considered to be a “wasting asset” by the Inland Revenue, which is not subject to Capital Gains Tax. However, the following points should be considered:

Again, it is essential that the wine is owned by a private individual, who does not trade in wine sector.

The definition of a “wasting asset” as defined by S.37 CGTA 1979, is “an asset with a predictable life not exceeding 50 years and, in relation to tangible movable property, life means useful life, having regard to the purpose for which the tangible assets were acquired”.

In our professional opinion, all the wines we offer will certainly have reached their peak of maturity within 25-40 years, and we believe it would be very difficult to argue that they have a “useful life” exceeding 50 years.

Inheritance Tax

Again, the “wasting asset” and “not having a predictable useful life exceeding 50 years” conditions apply. Therefore, as long as proof of the purchase price can be provided, the value of the wine will be based on its original cost for the purposes of Inheritance Tax, and not on any “appreciating value”.

Please note that all our statements concerning tax are based on our understanding of current tax law, and normal practices within the wine trade. For the avoidance of doubt, Nebuchadnezzar Wines cannot be held responsible for this information, which is given in good faith. We would recommend that you contact your accountant should you require further information.

Disclaimer

Please be aware that Nebuchadnezzar Wines are wine merchants and as such, cannot act as financial advisors. We therefore:

Do not give financial advice or advice on investments

Do not offer any guarantees on a particular wine's monetary appreciation potential.

For customers seeking advice on the above two issues we recommend you contact an I.F.A. (Independent Financial Adviser).

We do advise on quality of wine, on wine's potential longevity and consequently its suitability for inclusion in a cellar.

We can offer solid advice on current valuations of particular wines or vintages, since our opinion can be backed by concrete evidence of recent transactions of these wines, providing a definitive point of reference.

We can offer our opinion, based purely on our extensive experience and on demonstrable market history, on whether a particular wine will appreciate in value over a period of time, stressing that many factors can influence the price in that time, for good or bad.