loader image

Fine Wine, Low Volatility

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.

Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.

Our quarterly report presents our views on the world economic outlook and equity, fixed income and foreign exchange markets. Please click the link to download.