The wine market is constantly evolving… More information is available to collectors than ever before — including a wealth of statistical data — upon which to base investing decisions.
As fine wine matures and improves with age, it becomes more desirable — and therefore valuable — over time. The consumption of fine wines increases the rarity of certain vintages, pushing the price up as more investors seek out fewer bottles.
Stabilize Your Portfolio
To investors, alternatives may be perceived as a stand-alone group of asset classes that share common features and are more volatile than stocks and bonds.
True, alternatives’ illiquidity in nature and the generally long-term capital commitment needed have made them difficult to access and to exit.
But the historical performance of these alternatives may not suggest the same conclusions as many investors think, and different alternatives display different risk/return profiles.
As most alternatives performed negatively in 2018, fine wine remained strong and delivered a return of 9.2%. In contrast with -13.8% and -4.8% for commodity and hedge funds respectively.
Our findings confirm that fine wine is a leading alternative asset class, governed by a unique set of market fundamentals and risk factors. Exposure to this market provides stability in market downturns and low levels of correlation during periods of “normal” market performance.
- In a world where the performance of financial assets has been historically volatile, we have demonstrated investing in fine wine offers low volatility in addition to capital growth
- History shows that fine wine has displayed consistently lower volatility in returns over both the short and long terms, compared with equities of emerging and global markets
- Fine wine returns have consistently displayed a weak response to swings in global equity markets, indicating a lack of correlation to the traditional financial markets
- During a deteriorating economy, fine wine has proven to be a defensive asset class, providing protection to investors who hold equity-dominated portfolios
- Rising wealth and a continued interest in fine wine within China and other nontraditional wine markets will continue to strengthen growing demand for wines with strictly limited supply
- The outlook for the fine wine investment market is positive, with broadening interest into regions outside of Bordeaux (e.g. Burgundy, Italy and the USA) and fundamental limited supply contributing to continued growth.
In fact, our research shows that although there is a degree of positive correlation between the traditional financial markets and wine, the level of correlation is limited.
This big difference in volatility supports the case for incorporating fine wine in a diversified portfolio, providing access to greater consistency and more stable returns — especially during periods when traditional markets are volatile.
Twenty years ago, investing in fine wines would often have generated greater capital growth than equities. For an investor today, who may not have such a long investment horizon — can the same performance be achieved? How has the wine market performed in recent times?
The chart below provides some insights on how the performance of fine wine compares with other investment indexes and asset categories in recent times. As recently reported by Liv-ex, the 2017 performance of Liv-ex 1000 was above the FTSE.
The extent to which diversification is beneficial depends on the degree to which the asset classes are correlated. Put simply — the lower the degree of correlation, the more diversified, the more beneficial.
During 2010–17, our research shows that investment in fine wine would not be significantly affected by the performance of traditional financial markets, further establishing the role of fine wine as a credible alternative asset.
Reasons for Future Optimism
Our research clearly indicates that fine wine continues to provide a viable opportunity for investors looking to diversify and expand their portfolios into alternative assets.
From our studies, we can see how fine wine can act as a defensive asset class in times of economic crisis but at the same time will benefit from the economic upside due to the creation of wealth, fueling spending on luxury assets.
Furthermore, demand for fine wine does not tend to fluctuate too much during periods of economic deterioration — wine consumers will always consume wine.
The case for investing in wine as a strategic alternative asset class has strong merits and the outlook for the market remains promising with broadening interest from emerging markets such as China, Mexico and Africa.
- As long as the fundamental supply and demand dynamics behind fine wine remain unchanged, we believe the fine wine markets will continue to perform well in absolute terms and relative to other types of tangible assets
- How much the diversification benefits add to a portfolio can change depending on the economic conditions
- History shows that adding fine wine to a portfolio should significantly reduce the total risk of an equity-based portfolio and protect investors from suffering greater loss during periods of economic distress
- Although the diversification benefits aren’t as pronounced during a financial crisis due to the positively correlated relationship between the economy and fine wine market, adding fine wine to the portfolio is expected to protect investors from suffering greater loss, acting as a key preserver of wealth
- The rising wealth and continued interest in fine wine from China and other nontraditional markets will help amplify the positive trend in the fine wine investment market
- Cumulative performance for fine wine since 2003 shows positive signs and is expected to have more room to grow, supported by consistently lower correlation with traditional financial assets and lower volatility of return
- During an improving economy covering 2015–17, we found that the performance of fine wine improved with the economy to a lesser degree but the return was still attractive compared with gold.
Nowadays, the performance of marketable securities is considered volatile. But we believe investing in alternative assets — like fine wine — can offer some stability in both the short and long terms.
P.S. If you’d like to learn more about investing in fine wine — or you’re ready to jump right in and start building out your collection — visit Cult Wines to get started today.