Category: Guest Articles

By Alastair Hunter, Hottinger Capital Partners

On Saturday 28th July England took on the United States in the prestigious Westchester Cup. The event, also known as the International Day, was hosted by the Hurlingham Polo Association, the UK’s governing body for polo, at the Royal County of Berkshire Polo Club. The day was very well supported, with Hottinger guests joining Ally Hunter. They and the assembled spectators saw England, whose line-up included three of the winners of the 2018 Gold Cup El Remanso, retain the cup with a 12-6 win over the United States.

The game pitted evenly matched teams in a contest that was bound to be a close encounter, but in the end a stellar performance from Ollie Cudmore, who scored seven goals, proved the difference in what was a game of ebbs and flows, but England prevailed.

“I’d like to congratulate the English team on an amazing win today,” said Robert Puetz, CEO of the United States Polo Association, the body responsible for the game in the United States. “They played solid polo, were strategic, well-organized and well prepared. Additionally, I would like to thank the Hurlingham Polo Association, who provided amazing and welcoming hospitality to our team.” The Hottinger Group was delighted to represent the England team as an official shirt sponsor along with Flannels; other event partners include De Vere, Globe-Trotter and the Financial Times’ How to Spend It.

Plans are already in place for the next match to take place in the United States during 2019, the first time that the Westchester Cup will be played in consecutive years since the outbreak of the First World War.  It’s interesting to consider the parallels with golf and the Ryder Cup in the late 70’s. We see the opportunity for the Westchester Cup to develop and become a fixture in the polo calendar.

It’s worth dwelling for a second on the trophy itself which is well over 100 years old and is a magnificent prize for such a great fixture. Tiffany & Co were entrusted with the production and as you can see from the picture below it is a beautiful trophy which has a few stories to tell!

We expect the match will be just our first major involvement with the game of polo. At the time of writing, we are preparing a deal for new investments that will support the launch of a range of branded sports apparel products for sale in the UK and abroad. The company plans to license the Hurlingham Polo Association brand as its standard bearer for a new range of products.

With incomes and wealth rising around the world, there has been a rise in interest in elite sports and luxury consumer goods, a trend first exploited by Ralph Lauren in the 1970s. The Hurlingham Polo Association is the oldest such body in the game with an illustrious history and an esteemed reputation. The business case is compelling and we look forward to inviting interested parties to take part in what promises to be an exciting venture.

The Hurlingham Polo Association is a natural partner for the Hottinger Group. Both organisations share a culture that promotes sustainable activities and relationships that provide enduring value to a range of stakeholders in society. Soon after British tea planters discovered the game of polo on the Indian-Myanmar border in the 1850s, Hurlingham began to shape all aspects of the game, from the rule book to the handicap system. Today it boasts close to 3,000 members, and is involved with coaching and development, as well as providing scholarships to promising young players. That shared belief in nurturing a legacy is what makes Hurlingham and Hottinger a natural fit.

We hope that this is just the start and we look forward to updating you with further developments in the coming months as the relationship evolves.

By Rodney Birrell, Founding Director of The Wine Investment Fund

The dramatic return of market volatility to equity markets in February 2018 was felt across the world. The VIX index (Wall Street’s “fear gauge”) had its greatest percentage jump on record, as stock markets in the US, Europe and Asia suddenly dropped. Concerns over returning inflation is putting pressure on interest rates and as a result, investors are turning to alternative assets as a means of financial diversification.

The fine wine market is characterised by relatively low volatility (annualised volatility of 10.2% – see chart, Liv-ex Investables), and even though precious metals such as gold (15.9%) have traditionally been considered safe haven assets, volatility within this asset class limits its ability to be considered as a store-of-value. Other commodities such as oil have also shown high volatility. The FTSE has an annualised volatility of 14.1%.

Stability of fine wine is a result of the unique features of this physical asset. Using The Wine Investment Fund’s definition of investment grade wine, the total market size is some £6bn with annual inflows (new production) and outflows (consumption) of around £1 billion. Therefore, the stock of fine wine is not only relatively constant, but is appreciated all over the world and sought after by a growing number of consumers regardless of economic and social conditions – a truly global market.

As a physical asset, wine has a defined inherent value and may therefore be used as a hedge against inflation. Similarly, to gold, fine wine is also an incredibly stable asset, with quality improving rather than depreciating over time as it matures, unlike other alternative investments. Uniquely, the quantity of any vintage decreases naturally, through consumption, as its quality improves as the wine matures and demand therefore increases.

Fine wine is also uncorrelated with other mainstream investment markets such as equities. Shocks in these markets have relatively small – if any – impact on fine wine prices in normal market conditions. For example, with the volatility seen in equities at the start of February 2018, the daily Liv-ex 50 index has remained within a 0.5% range (currently down 0.1% (at 27/02/2018) since the end of January), while the FTSE is currently down 3.04% since the start of the month (at 27/02/2018). This low volatility can also be seen historically using the longest available reliable index, the Liv-ex Investables – see graph.

Long term low volatility and high returns in the fine wine market can also be seen in the market’s risk-adjusted returns (see Sharpe ratio chart).

The introduction of centralised exchanges (such as Liv-ex in 2000) and the use of technology has markedly improved market liquidity and transparency. This has created a sophisticated space for fine wine as an alternative investable asset. Enhanced price discovery and security has allowed the market to develop an infrastructure similar to that of mainstream investment markets such as equities, with a success not yet seen in other collectibles such as art, cars and jewellrey. This has led to dramatic improvements in liquidity (the average market spread of the Liv-ex 50 index – Bordeaux First Growths – is approximately 3.5%) and a stable market environment.

As a store of value fine wine is also much more accessible than other alternative investments/collectibles such as classic cars. There is a wide range of investment grade wines available in the market. The Wine Investment Fund’s universe from which it stock picks the wines held in its portfolios (and which satisfies the Fund’s strict liquidity and quality criteria), amounts to 350 individual wines, with an average price per case of £3,000 per 12x75cl. In contrast, the average price of the 50 classic car models which comprise the HAGI Top index is £619,000 – not exactly within the range of most investors. Furthermore, investors may efficiently gain access to the wine market (i.e. invest in a well-diversified portfolio) through funds such as The Wine Investment Fund, the oldest publicly available wine fund launched in 2003, where the minimum subscription is £10,000.

Given the low volatility, the low correlation, the high liquidity and the high returns, all on a relative basis compared to other asset classes, an investment in wine becomes a must have for investors looking to establish or to maintain a well-balanced investment portfolio.

By Rodney Birrell, Founding Director of The Wine Investment Fund

The fine wine market ended 2017 in positive territory for the third consecutive year with the Liv-ex 100 index, the industry leading benchmark, closing +5.66% and the Liv-ex Investables index gaining a similar 5.68%. It was also a year of records on Liv-ex, the fine wine exchange. Market exposure, the value of all live bids and offers, reached £48m and the bid-to-offer ratio remained above 1 throughout the year; for Bordeaux wines the ratio now stands at 1.8 with almost twice as much value on the buy-side (a bid:offer ratio of 0.5 or higher has historically indicated an upward trend in the market or at least acted as a signal for price stability). Trade on Liv-ex also broadened in 2017 with over 8000 active markets and more merchants than ever before trading on the exchange. The returning demand of traditional markets such as the USA and Asia has continued to be driven by weakness of GBP Sterling relative to the US Dollar and Euro (important because the secondary market for investment grade wines is GBP denominated) and the ever-growing demand for the world’s best wines. UK merchant BI Wines and Spirits “have seen a continued increase in volume sales of physical vintages, especially of Bordeaux, particularly to Asia” in 2017.

Increased attendance (up 2.3% on 2016) at the 2017 Hong Kong International Wine & Spirits Fair and the newly introduced preferential measures for wine imports from Hong Kong into mainland China (an increase in the number of ports available, expediting clearance improvements and developments in the accounting of duty, recognising the growth in wine imports to China) are positive signs of stable demand in the Far-East. In addition, the European Union and Japan have reached agreement on a free-trade deal which will eliminate tariffs on imports of EU goods, including wine, to Japan. The country is already one of the top 5 markets for EU wine in general and Bordeaux in particular and any increase in demand could have significant positive effects on prices. Demand from the Far-East has not just been for the purchase of fine wines, but also for the purchase of chateaux, with over 100 properties in Bordeaux now under Asian ownership, suggesting a continuing commitment to the region.

Results from the main auction houses throughout 2017 (Sotheby’s, Christie’s and Bonham’s) have repeatedly been above the high estimates and global demand has been a prominent feature: the Sotheby’s (sales of $64m in 2017) sale in New York in December reported strong bidding from North American (50% of sales) and Asian buyers (45%) and First Growth Bordeaux were sold at 20% over the high estimate. Luxury goods group LVMH (owners of chateaux Cheval Blanc and d’Yquem) reported growth in revenue and profits in its Wines & Spirits division, including “very strong” sales in the US and China. This suggests that demand for the most prestigious drinks brands continues to grow amongst the world’s wealthiest. These are also strong indicators of traditional collectors having returned to the market in 2017.

The Knight Frank Luxury Investment index, which tracks the price growth in the major categories of collectables found that wine has replaced cars as the top collectables, thanks to the performance of French wines. Compiled by Wine Owners, a business and collector trading platform, it reported “Wine’s performance was driven by exceptionally strong growth in key areas across the world and in particular the resurgence of the top Bordeaux chateaux, which form the backbone of most investment cellars”.

Despite a successful en-primeur (the top 20 merchants sold approximately £85m – up 46% on 2016 – with US wine merchant JJ Buckley reporting their largest ever campaign), Bordeaux producers have continually been reported to be holding back the majority of production and tightened supply of new vintages. For example, the 2016 vintage was larger in volume than 2015, but only a similar number of cases have ended up in the UK. This has driven demand across a range of physical vintages. Paul Pong of Hong Kong based merchant Altaya Wines found difficulties sourcing volume and believes “chateaux are releasing little to no supply for their first tranche”. The tightening of supply and rejuvenated demand emphasises the markets low volatility and we believe this will continue to put upward pressure on pricing. Optimism surrounding the 2015/16 vintages and a broadening market make it an attractive time to invest in fine wine and it offers an important opportunity to diversify into an asset-backed market and a hedge against returning inflation.

By Seb Beloe, Partner, Head of Research at WHEB Asset Management

‘Give me a child until he is seven and I will give you the man’. So said Saint Ignatius of Loyola the principal founder of the Jesuit order, underlining that much of our character is formed at an early age and once formed is difficult to change.  Today psychologists call this ‘cultural cognition’; a tendency of individuals to conform their beliefs to values that define their cultural identifies.  People don’t change their minds much because what they believe is often connected to who they think they are.

How people think about ethical investment also tends to be rigidly set. For most financial professionals who normally pride themselves on their objectivity, ethical investment is a synonym for under performance. For them, the mere act of introducing moral considerations into investment decisions mean that you would be inevitably accepting that your portfolio as a whole will underperform.

This may or may not be true when such decisions are taken on a purely moral basis. But the key point is that for certain issues, including many environmental issues, decisions are no longer primarily about morality. Addressing issues like climate change, water scarcity and air pollution, are today much less about ethics, and much more about commercial, regulatory and technological considerations. Investing in a company that makes cleaner powertrain technology for cars clearly has a positive impact in helping to reduce air pollution. But the investment rationale for investing in such a business is that demand for these technologies is growing rapidly as regulators around the world force the car industry to clean up its act.

WHEB Sustainable Investment Themes

WHEB is an investment firm focused on investing in ‘positive impact’ businesses. We have found that companies that are exposed to key sustainability themes such as resource efficiency, sustainable transport, health and education have enjoyed much higher rates of growth than the market as a whole. Over the last five years, our research shows historical sales growth has been between 8-9% per annum for companies that fit these themes, while the rest of the market (as measured by the MSCI World) has delivered less than 5% sales growth.  In a world that isn’t growing very much, this is a part of the market that is enjoying substantial and sustained growth.

So where does this leave ethical investment? Ethical investment emerged in response to specific moral concerns about certain industries. It was defined by what it didn’t invest in. But the world has moved on. The critical problems that society faces are around ageing, urbanisation and environmental issues. Free markets have responded with businesses developing new technologies and new business models that help solve these issues.  Is this ethical investment? You could call it that. But it is also just good investment.

John Longworth sits on the Hottinger Group’s Advisory Board, was Director-General of the British Chambers of Commerce, and is a leading Brexiteer. Here, John writes in a personal capacity, and all views expressed in this piece are his alone.

If the latest reports from Berlin are to be believed the Germans are insisting on substantial payments in order that the City banks have “access” to the EU market.

It is not clear whether “access” means equivalence, in which case UK based banks are being discriminated against versus US or Japanese banks, which is outrageous; or something better, in which case it would be unprecedented for the EU and completely undermine Barnier’s position. It is clear that Barnier is being instructed to take a hard line in order that the Germans can mug us, if the reports are true.

We should bear in mind that while financial services contribute to the treasury they represent 8% of the economy, less than manufacturing. In addition to this, only 9% of financial services is subject to passporting; there is a Single Market of sorts in these services which represents just 0.7% of GDP. Of course there are additional professional services supporting this activity but we should not let the tail wag the dog and it is only worth so much. As for the rest of financial services or indeed Services in general, there is no single market in the EU do why should we expect to have “access”?

The government need to wake up to what is in the country’s interests and start to bat for Britain.

Meeting with Barnier.

It may have come as a surprise to some of my colleagues at the meeting with Barnier, but not to me, that the EU is determined to put the “EU project” ahead of the employment prospects and wealth of its citizens and, as a consequence, take a very hard line with the UK in the upcoming negotiations. The Gaullist Mr Barnier accepted my compliment that he had successfully won the first round of negotiations, albeit against a weak adversary in the form of the UK government. It was clear that he and his EPP (European Peoples Party) colleagues, who control all the major EU institutions, are determined that the UK should be shackled as much as possible in respect of our newly won economic freedoms in order that we may not compete with the EU.

The position of the Chief Negotiator is entirely rational and internally consistent if the “project” is key to the interests of the EU (and certainly to the chief EU paymaster, Germany) and it is vital that our government grasps this.

Britain has the prospect of prospering with or without an EU trade deal, provided we retain our newly won freedoms and are prepared to leverage these. The chances of a special arrangement for the UK are limited, so an early resolution of the likely outcome is essential if business on both sides of the channel is to have time to plan and implement necessary measures. Certainty on the direction of travel is more important than the outcome itself. I made these things clear to Mr Barnier and also that there is an increasing majority in the UK in favour of getting on and leaving the EU. Brexit is happening and Britain is determined to see it through.

Crucially, the meeting made it clear to me that the British government needs to adopt an equally tough line in the interests of our country, equal to that of the EU 27, and that will include an early view on whether a trade deal is likely to be forthcoming, with serious preparation for a no trade deal scenario. In any event the government must be prepared to leverage our economic freedoms to boost business and the economy, with or without a trade deal, rather than trying to preserve a poorer version of what we have now. which can only result in our being worse off. Preparations for this must start now.

If you are feeling disillusioned with modern capitalism and would like to influence how corporations behave there are, essentially, four ways in which you can make a difference:

1. Vote for political representatives who will create and maintain adequate regulatory environments and boundaries for companies to operate within.
2. Vote with your wallet and consume only products and services that do not have unmitigated negative impacts on the environment or society.
3. Control the flow of your excess capital through the banking system to fund only companies who behave appropriately.
4. Invest only in companies that have positive impact and avoid investing in companies that have negative impact.

The influence of voting decisions and consumer choice is well understood, but investment is probably the most overlooked method of influencing a firm and may have the potential to be the most powerful.

Each time an investor decides to buy a share in a company, she is deciding to provide capital to that company. Companies thrive when their ‘access to capital’ is unconstrained and boards often focus more on this than anything else. From their perspective, while politicians are a nuisance and customers a necessary evil, capital is the king that can make their day.

In a wider context, every company has an impact on its stakeholders and surroundings. Some can be large. Most people are aware of the negative impacts. Large companies use significant chunks of the world’s natural resources and create massive amounts of waste. They use ‘tax minimisation strategies’, mislead their stakeholders with disingenuous PR, and use their capital to sway political processes in their favour. Companies that have a negative impact on society and the environment also create long-term legal, regulatory and financial risk for themselves, their shareholders, employees, partners, neighbours and others.

But companies can act as tremendous forces for good. They employ tens of millions of people, buy billions of dollars of local produce and provide basic services for the poorest people on the planet. They build infrastructure and develop innovative solutions that have the world-changing potential that we so desperately need. This potentially positive impact of large companies materialises only with flows of capital, which are influenced by each investment decision. These decisions may have a small impact individually but, when many investors act together, great changes can be achieved.

In recent times, many fund managers have ‘branded’ their funds as responsible, sustainable or ethical, without much external assessment or oversight. This has led to confusion amongst investors and a lack of consistency across peer groups. Impact-Cubed recently conducted an internal assessment of the ‘impact’ of 30 well known sustainable portfolios in UK using a proprietary methodology based on publicly available environment, social and governance data. Disturbingly, for the three poorest performers, the ‘impact’ score was actually negative. About 60% showed quite dismal results. Only ten funds were really delivering the impact they promise in their marketing.

In order for your own investments to have a more positive impact, we recommend focusing on three simple things:

• Consider the current impact of your investments.
  

The way you invest your wealth and assets that you control impacts the flow of capital to companies. Your long-term investment plan will not only influence the risk and return of your portfolio but your decisions impact on the wider stakeholder group affected by these companies.

• Ask your wealth manager to measure the impact of your portfolio
  

Look at your existing portfolio of funds and listed equities. Is it aligned to your view of the world? Are you knowledgeable of and comfortable with the impact it has? Do you feel sufficiently compensated for the additional risk that negative impact potentially has if you own companies which may be causing harm, such as tobacco or fast food companies? Could you perhaps set some targets together with your wealth manager to ensure you reduce that risk over time?

• Adjust accordingly
  

If you decided to reduce ‘sustainability’ risk in your current portfolio and it is not sufficiently aligned, some positions in your portfolio may need to be adjusted. While this might seem difficult and tiresome, after the adjustment you can rest assured. It is possible that you will have ‘future-proofed’ your investments’ risk and return. Furthermore, you did the right thing. Every investment decision towards positive impact makes the world a better place, even when you are seeking returns through listed equities and funds alone.

Guest contributors Larry Abele, Arleta Majoch and Antti Savilaakso are hedge fund managers who have been investing with impact for over 10 years. They recently launched an Investment Impact Measurement tool, Impact-Cubed, which enables investors to measure and manage the impact of their investment portfolios. An account manager can use the tool to help you understand the role of impact in your investment portfolio and to set targets for the future, if you desire. Details of costs can be found out on request.

By Anthony Russell, Managing Director at Quantum Vintners

When looking at high-performing wines from an investment perspective, there is a strong leaning to Bordeaux, followed by Burgundy and Champagne, more recently Tuscany and lastly to certain ‘trophy’ wines of the New World. But when and why did these wines become an asset class of their own, with their own performance charts and pricing indices?

To answer this question it is firstly important to review the history of the most prestigious wine-producing regions in France right back to the 12^th century. This insight gives us a greater understanding of how they are defined, and the factors which have and will continue to influence their impact on the global wine market.

Bordeaux has a long trading history with England. Its wines were given ‘royal approval’ when Eleanor of Aquitaine married Henry Plantagenet in 1152. The wine producers benefitted from proximity to Bordeaux as a key port and nexus for international trade for many centuries. Tradesmen were attracted to the cosmopolitan city and its wines became well known on a global platform. Over time, the region benefited from significant foreign investment and many of the chateaux founders have English, Irish and Dutch origins. The area became closely associated with success and entrepreneurialism.

During this period, although Bordeaux wines became increasingly popular in England, a preference for burgundies was maintained amongst the French aristocracy. Up until the French Revolution it was Burgundy, known as ‘the wine of kings’ that graced the royal courts at Paris and Versailles. The region was thrown into turmoil with the execution of Louis XVI in 1793 and the withdrawal of the Church from France. When the Church sold off its land to peasants as its members fled, the nobility saw right to do the same.

To understand the development of wine as an asset class it is also worth remembering that investing in wine has always been more to do with the enjoyment of continued consumption of quality than straight financial gain. The landed gentry would buy ten cases from a leading chateau, keep them for ten years, sell five and buy another ten with the profits. In this way, the family would constantly improve their cellar. This practice of ‘laying down’ and selling off continued well into the 1980s.

Thirty years ago, Bordeaux was not the mighty financial force it is today. Its winemakers lacked cash, the infrastructure found in the chateaux was old and, in many cases, broken. The sea change towards wine as an asset class came about primarily because the chateaux required funds for renovations. Viniculture relied heavily on signals from the weather and growers had none of the expertise that now allows them to protect their vineyards and produce very drinkable wine, even when they are regarded as poor vintages. Today the true value for money is to be found in these ‘off vintages’. The top chateaux hardly produce any poor wine these days so investing in the wines from 2002 or 2007 will yield not only some great drinking wines but, hopefully, profit as well.

A further reason for the development of the investable wine market has been the introduction of buying wine ‘en primeur’, the opportunity to buy wines still in barrel. This trend began in the 1970s, providing the chateaux with healthier cash flows and offered the consumer an opportunity to buy at a price that would increase considerably once the wines were bottled and available in the market. This process, whilst still in place, no longer offers investment benefits to the consumer. If anything it has been reversed and wines are often cheaper when available for delivery than when produced.

Why should this be? As the Bordelaise turned a financial corner and found new markets, they started to invest in upgrading their infrastructure and, more recently, in technology. Quality and prices quickly increased, especially for top vintages. There was a general belief that the chateaux could sell as much wine as they liked, due to popularity of consumption. This was, of course, wishful thinking and many ‘negociants’ in Bordeaux still have cellars crammed full of unsold wine.

The golden rule of wine investment is simple; buy a great wine with limited production, ensure that your investment is stored in a reputable bond and watch the price appreciate as others consume it and thus reduce the supply. Buying Bordeaux no longer affords us this luxury. Burgundy, however, is a different story. Production levels are considerably lower and the finest Grand Crus such as Romanée-Conti, Musigny, Richebourg and Clos Vougeot produce as little as 450 cases compared to over 25,000 cases of Chateau Latour each year. For some white wine in Burgundy, such as Montrachet, a single grower’s production can be as little as two barrels – just fifty cases for the global market!

We hope you will be lucky enough to secure something this special for your own cellar.

Buying wine as an investment: Our advice

• Buy from a reputable merchant
• Purchase Burgundy at opening offer prices. Prices vary considerably; opening offers are usually made around December and January for the most recently released vintage
• Buy finest growers Grand Cru and Premier Cru wines from Burgundy
  • Domaine Romanée-Conti, Armand Rousseau, Domaine Leflaive, Domaine Dujac
  • Clos du Tart, Domaine Ponsot, Domaine des Lambrays
• Store wines in bond
  • London City Bond, Octavian, Vinothèque