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Passion investing: personal interest or financial opportunity?

passion investing
  • Passion investing refers to collecting items you love and want to keep for the long term.
  • Some of the most popular passion assets that can yield substantial returns are rare stamps and coins, art, classic cars, luxury watches and fine wine.
  • Passion investing offers a unique blend of personal fulfilment and financial opportunity, allowing investors to engage deeply with their interests while potentially earning returns.

Passion investing represents a unique and emotionally rewarding approach to building wealth, diverging from traditional investment avenues like stocks, bonds, or real estate. This investment strategy is grounded in the acquisition of tangible assets that spark personal joy and enthusiasm, ranging from art and vintage cars to rare stamps, luxury watches, and fine wines.

Such investments not only have the potential to appreciate in value over time but also provide intrinsic satisfaction and a deep sense of personal fulfilment. This article offers an overview of passion investing, highlighting the diverse assets involved and the unique benefits they offer, with a particular emphasis on the allure of fine wine.

The spectrum of passion assets

Some of the most common passion investments are art, classic cars, luxury watches and fine wine.

Rare stamps and coins

Collecting stamps and coins is one of the oldest forms of passion investing. Rare specimens, especially those with errors or historical importance, can fetch significant sums. Collectors revel in the history and stories behind their acquisitions, adding a layer of intellectual engagement to the financial investment.

Art

Investing in art involves purchasing pieces from emerging or established artists with the expectation that their value will increase over time. Art investors often enjoy the aesthetic and cultural significance of their collections, providing an emotional return that transcends monetary gains.

Classic cars

Classic car enthusiasts invest in rare and historic automobiles, driven by a passion for automotive design and engineering. These vehicles often appreciate in value, especially well-maintained models or those with historical significance, offering financial rewards alongside the thrill of ownership and driving.

Luxury watches

The market for luxury watches has seen substantial growth, with vintage and limited-edition timepieces appreciating significantly. Enthusiasts appreciate the craftsmanship, history, and prestige associated with high-end watches, making this a passion investment that combines personal enjoyment with potential financial returns.

Fine wine

Fine wine stands out as a particularly intriguing passion investment. Beyond the potential for appreciation in value, wine collectors derive pleasure from the nuances of wine tasting, the history of vineyards, and the art of winemaking. This section will delve deeper into fine wine as a case study in passion investing.

The unique appeal of fine wine investment

Fine wine embodies the essence of passion investing by offering both tangible and intangible returns. As a consumable asset, its value can appreciate due to factors like rarity, vintage quality, and global demand. Fine wine investment attracts those who are not only looking for financial gains but also for the enjoyment of collecting, tasting, and learning about wine.

Diversification and stability

Fine wine has demonstrated a relatively stable investment performance, often showing resilience in the face of economic downturns. Adding fine wine to an investment portfolio can provide diversification, reducing overall risk and smoothing out volatility.

Enjoyment and experience

Investing in fine wine is as much about the experience as it is about the potential financial returns. Collectors often take pride in hosting tastings, visiting vineyards, and immersing themselves in the rich culture and history of wine-making, which adds a deeply personal dimension to the investment.

Inflation hedge

Tangible assets like fine wine can serve as a hedge against inflation. As the value of money decreases, the value of physical goods can increase, protecting the purchasing power of the investor’s capital.

Passion investing offers a unique blend of personal fulfilment and financial opportunity, allowing investors to engage deeply with their interests while potentially earning returns. Successful fine wine investing requires knowledge and expertise. Investors should familiarize themselves with the wine market, including factors that affect wine prices and the best practices for buying, storing, and eventually selling wine for profit. Proper storage is crucial to maintain the quality and value of the wine, and provenance plays a significant role in its appreciation.

To find out how investment in fine wine works in practice, read our in-depth Fine Wine Investment Guide.

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How could 2024’s interest rates impact fine wine?

  • If interest rates increase or stay the same, there may be golden opportunities for savvy investors to fill their wine cellars for lower-than-average prices.
  • If the Bank of England starts to drop interest rates consecutively around May, we would expect the fine wine market to show signs of growth around autumn.
  • Rather than focus on short-term economic events, we encourage investors to buy high quality fine wines, and ideally hold them for at least a decade.

Today’s interest rates are 5.25% in the UK. That is a lot higher than most of us are used to. For example, in 2019 they were just 0.75%. But it is reassuring that they have not been cranked up even more over the past months. Consensus among most economists is that the rates will surely come down again in 2024. The question is, by how much?

Unlike the US Federal Reserve, the Bank of England is warning markets not to expect big cuts. As Reuter’s reports, its ‘policy stance assumes a slow fall in interest rates to 4.25% in three years’ time’. However, many economists think that the rates will fall sooner.

Contrary to the central bank, Goldman Sachs predict rates will dip below 4% by the end of the year, marking a drop of more than 1.25%. Experts at Deutsche Bank are almost aligned, anticipating a 1.0% dip in the same timeframe. Andrew Goodwin, chief UK economist at Oxford Economics consultancy, expects the bank to start lowering rates in May. However, other economists suggest that June is more realistic.

In this article, we consider what these different scenarios mean for fine wine investors. When to buy, when to sell and when to hold are all critical questions as we dive into 2024.

If interest rates increase or stay the same

Continued high rates would probably be unwelcome news for most fine wine investors. Dovish policies like this usually led to a stronger pound, making wine more expensive for international buyers if sourcing from the UK market.

Asian and American buyers are a significant part of the fine wine market and cutting them out would probably lead to a dip in prices, as supply outstrips demand.

High interest rates could also temper domestic demand. After all, when the economy shrinks, there is less money for luxury goods. Buyers may opt for better ‘value’ purchases.

The compelling interest rates of savings accounts could also tempt investors away from illiquid assets. Over the short-term, putting cash into a bank account could seem like a safer bet. Even though, of course, over the long-term, the inflation risk is severe.

Ongoing high interest rates would likely create a buyer’s market. For the first few months of the year, until May, we could expect this to continue happening. Around this time, there may be golden opportunities for savvy investors to fill their cellars for lower-than-average prices.

If interest rates decrease by 0.25% – 2%

The most likely scenario is that the Bank of England will gradually reduce rates, starting from late spring or early summer. Most analysts (including Deutsche Bank, Goldman Sachs and Fidelity) seem to be anticipating a drop of at least 1.0%, and the markets have already priced this into products and forecasts. As seen in the news recently, inflation seems to be cooling, creating the right environment for interest rate cuts. For fine wine investors, this makes for reassuring reading.

Shrinking interest rates will make other low-risk investments like gold or savings accounts less compelling. Investors will probably start to feel the pull of more assets with more generous risk premiums. During the second half of the year, if interest goes down, fine wine prices might slowly increase.

A growing economy usually comes with more money to pop Champagne and see the year through in style. We’d expect the fine wine market to perk up in this environment.

Lower interest rates would probably be welcome news for international investors, as this usually signals better exchange rates. In 2021 and 2022, the weak pound and strong dollar stimulated Asian and American markets, boosting fine wine prices.

If the Bank of England starts to drop interest rates consecutively around May, we would expect the fine wine market to show signs of growth by around autumn. Prices would probably begin to creep up and continue rising with each rate cut. This would balance out the market, likely creating more demand and opportunities for sellers.

If interest rates plunge by 2% or more

It seems unlikely that interest rates will ever return to their pre-pandemic lows. Some experts, like those at Fidelity, argue that the previous rates were even kept ‘artificially low’, and overdue a correction. However, as recent years have taught us, unexpected things can happen.

If interest rates nosedive by more than 2% over 2024, it would probably be exceptionally good for fine wine investors. Both global and local demand would likely increase, as we saw in 2021. With the cost of borrowing plunging, we could expect to see more budgets allocated to luxury products like fine wine, creating more of a sellers’ market.

Fine wine investors in 2021 already enjoyed the rewards that come with a weak pound and low interest rates. International buyers leap into the market, creating a surge in demand.

If the interest rates cascade down to 3% or less by the end of the year, we would expect to see demand outstrip supply, leading to a hike in fine wine prices. This would be welcome news for sellers looking to cash-in their returns.

In the long-term, does it matter?

These predictions cover interest rate hikes over the next twelve months. But the real returns of fine wine tend to come in the longer run. As the Liv-ex 1000 index shows, fine wine prices on average have nearly doubled since 2014.

Rather than focus on short-term economic events, we encourage investors to buy high quality fine wines, care for them properly, and ideally hold them for at least a decade. For us, this is the true beauty of wine; its value is mostly intrinsic.

If you’d like to talk to an expert about buying or selling fine wine, we are just a call or an email away.

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Four years since Brexit: is the UK still an investment hub?

  • British businesses have suffered declines in EU trade.
  • Billions-worth of investment assets have left the UK, opting for EU states.
  • Bucking the trend, fine wine prices soared to heights of 43%.

By the end of 2019, 70% of Brits were already nauseous of the word ‘Brexit’. But behind the fatigue, there was real fear in the air too. As the customs rules came into effect in 2021, gridlocked lorries clogged the roads to Dover, paperwork mounted, and supermarkets shelves began to look increasingly bare. The end of the single market had begun. The past years have been sobering time. According to the latest poll in January 2024, 61% of Brits would vote to rejoin the EU, up from 55% in summer 2023.

But what about the investment markets, and the performance of fine wine? In this article, we are diving into some of the main impacts of Brexit so far.

Added complexity dampened profitability

81% of UK businesses are still struggling with Brexit admin. For wine traders, the paperwork for a single bottle can stretch to over 90 pages, adding significant workloads. UK manufacturers are particularly suffering, with 96% reporting that the new rules have ‘badly disrupted trade with the EU’.

More compliance means more costs. It is estimated that businesses have spent an average of £100,000 each just trying to export goods over the border in the past years.

The complications have also led to once-loyal European customers jumping ship, with the average enterprise missing out on £96,281 since 2020. Two in five UK manufacturers have experienced declines in export volumes.

‘Brexodus’ carried talent (and investment) out of the UK

It is little surprise therefore that busloads of businesses, staff and operations decided to relocate. Welsh wine exporter Daniel Lambert, for example, moved his company to France in 2022. Lambert supplies some of the biggest British supermarkets, including Waitrose and Marks & Spencer.

Dublin has been one of the major hotspots for financial services, snatching-up the UK’s crown as the English-speaking bridge to the EU. This ‘Brexodus’ as it came to be known was great news for European cities. Germany, for example, enjoyed a 21% increase in direct foreign investment in May 2023.

However, it did not bode well for the UK. By March 2022, 7,000 jobs within financial services moved to the EU. Investment funds left too, with 24 firms planning to transfer £1.3 trillion of assets. Funding for British markets faltered.

As a biproduct of Brexit, the supply of skilled EU workers dwindled too. Today, recruiting European talent is 44% more difficult for UK companies. December 2023 saw the launch of even stricter measures designed to curb the flow of foreigners, although it also introduced higher minimum wages for skilled workers.

Slow growth turns off investors

Brexit was accompanied by the Covid-19 pandemic, political instability, and war overseas. While it is difficult to untangle the impact of Brexit, the UK has been notably slow to recover compared to peers. The Eurozone, for example, has grown at more than double the UK pace.

Increasingly, data suggests Brexit threw a wet towel on the UK’s growth prospects. As Jonathan Portes, Professor of Economics and Public Policy at King’s College London, highlights, ‘both aggregate data and survey evidence strongly suggest that Brexit is at least in part responsible for the particularly poor performance since 2016, with investment perhaps 10% lower than it would otherwise have been’.

2024 analysis by the National Institute of Economic and Social Research corroborates, stating, ‘UK real GDP is some 2-3 per cent lower due to Brexit’. Each household is now £850 worse-off following Brexit, rising to £2,300 by 2035.

The retail wine market has suffered but not fine wine

Since Brexit, supermarket wine has had an estimated price increase of £3.50 per bottle. Perhaps in response, the government recently announced measures to ‘cut red tape’. The definition of wine will change to allow for wine mixing, lower alcohol volumes, and even pint-sized measurements.

The prices of fine wine went up too. Investment grade bottles, such as those traded on WineCap, performed exceptionally well during the turbulent Brexit periods. Many investors found fine wine hedged their portfolios against losses elsewhere.

The graph below shows the performance of the broadest fine wine market measure (Liv-ex 1000) over the past five years.

Fine wine vs FTSE 100

In the run-up to the customs changes, fine wine prices rose during mid-2020. Over the following two years, they saw an increase of 43%. This is in stark contrast to the performance of the FTSE100.

The returns didn’t end there. Because of fine wine’s unique tax status as a ‘wasting chattel’ in the UK, nearly all bottles are exempt from costly capital gains taxes. For those earning over £50,271 a year, this means savings of up to 28%.

To invest or not to invest?

Despite taking hits from Brexit, the UK is still an investment hub. Tourists are returning to London, businesses are battling through the headwinds, and gradually it is becoming clear that there needs to be more cooperation with the EU.

Throughout this turbulent time, fine wine has reached new heights. The (potentially Brexit-induced) combination of the weak pound and high dollar opened the floodgates for foreign fine wine investments. And the UK’s thriving tech scene also created inroads for savvy digital investors to trade fine wine. Investors have made the most of these glimmering opportunities to batten-down the hatches and shield their portfolios against some of the other Brexit difficulties.

If you are looking for a smooth way to invest in fine wine, our experts at WineCap are happy to guide you through the journey. Unlike Brexit admin, we are just a call away.

 

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Changes to Capital Gains Tax: what does this mean for fine wine investors?

  • Capital Gains Tax is a tax on the profit when you sell an asset that has increased in value.
  • From 6 April 2024, investors will pay up to 28% tax on profit over £3,000.
  • As a ‘wasting asset’, fine wine is exempt from Capital Gains Tax.

When should you start paying tax should you pay on profit? Apparently, it depends on the year you’re in. Pre-2022, investors paid tax on anything above £12,300. However, the past few years have seen the threshold slashed in half twice. In a bid to plug the “fiscal black hole“, Chancellor Jeremy Hunt announced limit cuts in the 2022 Autumn Budget. From 6 April 2024, investors will pay up to 28% on profit over £3,000.

However, there are some exceptions. Those who take advantage of Individual Savings Account (ISA) tax wrappers, for example, can invest up to £20,000 without paying Capital Gains Tax (CGT). Another exception is fine wine with a shelf life of less than 50 years.

Why is fine wine exempt from CGT?

Fine wine is usually classed as a ‘wasting asset’ or ‘wasting chattel’. This unflattering name is a blessing in disguise. It means that the HMRC do not consider it to be an investment where the profit should be taxed.

Other assets in this same category include personal machines. If you collect classic cars, vintage watches or antique clocks, you could also benefit from CGT-free returns. An added benefit is that these passion investments are inflation busters that tend to ride high despite economic worries.

How much profit can fine wine investors keep?

Provided the fine wine has a shelf life of less than fifty years – which is almost every fine wine – investors can keep all the profit. As we touched on in the section above, this can amount to significant sums. Some of last year’s top-performers, for instance, rose as much as 88% in a year. On average, fine wine prices have risen 14.1% in the last five years, and 62.7% in the last decade.

For other investments, which do attract CGT, such as buy-to-let property, gold, shares, bonds, art or commodities, investors must pay tax after £3,000. If they are basic taxpayers, the CGT comes to 18%. And for higher tax bands, it’s 28%.

How to tax-exempt assets like fine wine impact investment portfolios?

As the expression goes, investors should never put all their eggs in one basket. Spreading wealth across a variety of different assets, known as diversification, is at the heart of modern portfolio theory.

Investing in wasting assets like fine wine, alongside stocks, bonds, property, commodities and cash adds some advantages. One of these is that the tax savings can help balance out the increased taxes and fees from elsewhere. Buy-to-let properties for example are facing a double-whammy of increased taxation and hiked mortgage rates. Off-setting some of these expenses against the profits of wine can help to keep the whole portfolio in check.

Another benefit is that wasting assets generally tend to be inflation resistant, as their value comes from within. This can help to smooth out the inflation erosion of bonds and cash over the long-term.

Finally, wasting assets like fine wine tend to move slowly. While the market ebbs and flows, changes take months. This couldn’t be more different from high-risk stocks or crypto assets, which can soar and plummet in moments. Investing in fine wine can have a calming effect on the overall performance of a portfolio. This could be welcome news for investors who may not relish turbulent performances.

Where can you find out more?

Get a full picture of how fine wine taxation works with our complimentary guide. You can also speak to one our experts completely for free. Simply book a thirty-minute consultation with no strings attached, for a personalised conversation.

 

 

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How to use fine wine as a hedge against inflation

fine wine hedge against inflation
  • Fine wine can effectively hedge against inflation, often outperforming traditional assets like gold and stocks.
  • Investment in fine wine requires consideration of personal ethics, liquidity needs, and a long-term strategy.
  • Strategic timing in fine wine investment, such as early purchases, can lead to significant profit taking.

Since 1914, the price of bread has seen inflation of around 11,000%. In the roaring 20s, a loaf cost under a penny. Fast forward to today, the average bread costs around £1.35. This price rise is not due to an increase in the quality of bread but rather a reflection of the decreasing purchasing power of money over time. In the words of the French writer and Burgundy lover, Hugo Voltaire, ‘Paper money eventually returns to its intrinsic value – zero’.

As well as playing havoc with our savings, inflation can be the undoing of fixed-income investment portfolios too. Unless the interest rates outpace the loss of purchasing power, repayments will be worth less and less each year. In these tense economic times, investors may be tempted by hedge funds and hedging assets like derivatives. While these can offer reassurance, they’re also complicated and expensive. So-called ‘safe haven’ assets like gold and property are also effective inflation-hedges. But right now, they are trading at a premium. This article explores an alternative option: fine wine as a hedge against inflation risk.

Assess your inflation exposure in your investment strategy

If you invest in liquid and fixed-income investments like cash or bonds, your wealth is probably exposed to inflation. This tends to be more typical for those closer to retirement, as they may need access to regular funds. Start by identifying these assets in your portfolio. Pay close attention to bonds which last more than five years, as the interest payments (or coupons) could be more at risk of losing value over time.

Once you’ve identified the riskiest assets, refer to your strategy. There may already be a plan for how to deal with periods of high inflation. Most managers will build-in hedging assets from the beginning. But many will also deviate from the strategy tactically from time to time. For example, in high inflation environments, they might sell some bonds and buy stocks – known as going ‘overweight’ or ‘underweight’ from the original allocations. This is what you may need to do if you have too much inflation risk in your portfolio. Depending on your financial needs, fine wine could be a sensible alternative investment for you.

Consider if fine wine is right for you

Fine wine is a truly excellent hedge against inflation. However, it may not be suitable for everyone. If you do not want to invest in fine wine because of religion or personal reasons, you should follow your ethics. Wine is not the only inflation-resistant asset, and you may be better suited to art, luxury watches and collectible cars.

You should also consider your liquidity needs. Fine wine is a long-term asset with intrinsic value. Investors can only collect returns after the bottles have been sold. And for the best results, that could take upwards of five years.

Investors should also be aware that fine wine is traded on the private market. Nowadays, this is much easier than it used to be. Instead of attending physical auctions and joining exclusive clubs, you can find fine wine investment platforms online.

Find a wine to suit your time horizon

The value of fine wine typically increases with age. Investors often buy fine wine at least five years in advance, with some opting for En Primeur purchases.

In this world, timing is everything. And if you can get it right, you stand to make a handsome profit. Over ten years, Domaine Arnoux-Lachaux Nuits-Saint-Georges Rouge, for example, has delivered returns of 525% and counting.

Before you begin, consider carefully what type of time horizon you are comfortable with. Ideally, you’re looking to plug the inflation gaps in your portfolio, without landing yourself into an illiquidity issue. For example, if you’re concerned about the inflation risk of some five-year bonds, you could look into ‘brands on the move’ that have historically delivered faster returns.

Understand the fine wine market

Fine wine attracts a diverse range of buyers, from enthusiasts to those purchasing for business or personal milestones. Understanding buyer motivations and regional preferences is key to strategic investing. Seasonal trends, like the heightened demand for Champagne towards the end of the year, also play a role in maximising returns.

A precious and depleting asset with intrinsic value

If you’re looking to shield your wealth from the erosive effects of inflation, fine wine could be the answer. It is a precious and depleting asset, with intrinsic value. As one academic paper recently found, ‘fine wine has outperformed almost every other major financial index over the past two decades’. However, to get the best results, you’d probably need to buy, hold and think long-term.

WineCap’s independent market analysis showcases the value of portfolio diversification and the stability offered by investing in wine. Speak to one of our wine investment experts and start building your portfolio. Schedule your free consultation today.

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Can fine wine investment balance crypto volatility?

Cryptocurrency
  • 31% of Brits are setting resolutions to organise their finances in the new year.
  • One of the most talked-about investments – cryptocurrency – attracts with the potential for high returns but also carries high risk.
  • Offering smoothness and stability, fine wine can balance crypto volatility.

As we welcome in the new year, 31% of Brits are setting resolutions to organise their finances. For many this will mean investing. But where should they invest? And how risky is too risky?

In this article, we dive into one of the most talked-about high-risk investments – cryptocurrency. We explore the pitfalls and what investors can do to mitigate them. We also look at how fine wine – our favourite asset – can complement volatile investments like crypto to help smooth overall performances.

11,000 cryptocurrencies… and counting

Most people are familiar with Bitcoin and Ethereum, the two most popular digital coins. However, there are nearly 11,000 cryptocurrencies, with more issued every day. Some are eye-wateringly volatile. At the time of writing, for example, KILT-USD has jumped nearly 25% in just three months. Meanwhile, others are much steadier.

StableCoins are considered the sturdiest as their market value is pegged to mainstream fiat currencies like the US dollar. This means that their worth should – in theory – be the same as the everyday money in our wallets. But the reality can be different.

StableCoins and de-pegging events

Even the most trusted StableCoins – Tether, USD Coin, Multi-Collateral Dai, Binance and USDP dollar – stray away from the dollar value from time to time, known as ‘de-pegging’.

SPGlobal identified 13 core triggers: market volatility, liquidity stress, reserve impairments, mismanagement, demand and supply imbalances, loss of investor confidence, competitor performance, design flaws, hacking, operational risk, limited adoption, regulatory uncertainty and market events can all de-peg StableCoins, leading to erratic and volatile performances.

Risk and return profile of StableCoins

StableCoins are full of promise, but they are also incredibly young. The oldest StableCoin, Tether, is just nine years old. Although regulators are scrambling to offer investors more security, they are still some way off.

Buying asset classes before they have matured presents both risks and opportunities. Higher risk opens the door for higher rewards, but when things go wrong, the fall-out can be fatal. Famously, in May 2022, Terra’s StableCoin crashed dramatically, costing investors $450+ billion. Shortly after came FTX fall, plummeting a further $200+ billion. The aftermath left thousands of investors badly out of pocket with little to no regulatory protection.

For years, regulators like the FCA have been warning investors not to invest too much in crypto, as worrying surges of people lose their entire life savings to this digital asset.

A dire need for diversification

To avoid losing everything in one sweep, investors should spread their money across assets with distinctive characteristics and revenue streams. This process, known as diversification, means the gains from some investments cancel out the loses from others.

Without personal financial advice, it is impossible to say how much of a portfolio should be invested in crypto. However, as a rule, experts have warned against investing more than 5% of wealth. Some even cap the limit at 2%.

Similarly, investors should probably limit other risky assets too. Meme stocks, commodities, derivatives or trending collectibles can all derail a portfolio if they make up more than 10%.

Pairing fine wine and crypto

Unlike digital assets, fine wine moves slowly but surely. Since the end of 2003, the performance of the top 1000 fine wines (according to the Liv-ex 1000 index) has crept little-by-little up by a whopping 315%. But since the rise is smooth and gradual, it does not feel volatile or erratic.

Month-on-month the average fine wine index value rarely changes by more than 5%. By contrast, between the 25th of September and the 25th of October alone, Bitcoin fluctuated by over 30%.

These properties could make fine wine an excellent partner for crypto assets, like StableCoin. The steadfastness of fine wine can help to slow and flatten the rollercoaster effect of crypto has on a portfolio.

Contrasting sources of value

Aside from smoothing volatility, there are other reasons why fine wine could pair well with crypto. One of the strongest is the value source.

Crypto is not backed by a real asset. Some experts argue that the energy used to create a coin is its value. But it is generally agreed that the value of crypto comes from the wider market and the potential that others see in it. So, when the market is in turmoil, prices plummet.

By contrast, fine wine gains its value intrinsically. Put simply, the premise of wine investment is that as fine wine ages, its quality improves, and prices rise. The market operates with its own dynamics based on vintage quality, scarcity and global demand. Whether it’s bullish, bearish or something else, fine wine is still treasured and sought-after.

In this respect, crypto and fine wine investments could pair beautifully. Fine wine offers smoothness and stability. Meanwhile, crypto offers investors higher risk-reward potential and quick liquidity.

Investing responsibly

StableCoins are surging in popularity. Governments, institutional investors and regulators all dipped their toes into crypto over the past months, indicating that further expansion could be around the corner.

This might lead to more growing pains and continued volatility. For those who chose to invest in this young asset, diversification is crucial. Examples of assets which are less affected by the stock market include property, gold or fine wine. We feel that the characteristics of fine wine pair especially well with crypto, helping investors to hedge against volatility risk and smoothen their overall performances.

If you would like to talk to us about investing in fine wine, we’re just a few clicks away.

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Fine wine sustainability report (Part III): profiling the sustainable investor

  • There is an overlap between sustainable and fine wine investors as both share a long-term vision and increasingly similar demographics.
  • 56% of investors are attracted to fine wine because it is a sustainable asset class with a low carbon footprint.
  • Environmental, social and financial sustainability is one of the five characteristics that distinguishes fine wine from other beverages.

This is the third part of our ‘Fine wine sustainability report’. See also part I – how is fine wine sustainable and part II – how can fine wine mitigate risk in a sustainable portfolio. 

There is already some cross-over between sustainable and fine wine investors. The demographics are getting closer all the time.

The most active sustainable investors today are millennials (the group currently aged between 27 and 42). More specifically, the majority of them are entrepreneurs and legacy builders. Likewise, within the world of fine wine, research from Sotheby’s in 2022 found that 35% of new buyers are under the age of forty. This is the second consecutive year of millennials betting on fine wine as the figure hit 37% in 2021.

Fine wine investments can take around ten years to mature, but often take longer to reach scarcity returns. This means that most investors are collecting long-term legacy assets, just like many sustainable investors. The overlap that already exists between ambitious sustainable and fine wine investors is promising. We believe it will continue to grow for the future.

There is already a burgeoning movement of sustainable investors buying fine wine. Our 2023 survey found that 56% of investors are attracted to fine wine because it is a sustainable asset class with a low carbon footprint. Although fine wine has many investment qualities, we believe that the best-suited sustainable investors are those who are looking to hedge against volatility or inflation risks over the long-term. Some investors have religious or personal barriers to investing in fine wine, and in this situation, the asset may not be suitable.

An insatiable passion for change

Is there any industry more determined to adapt and mitigate against the climate crisis than fine wine? The dogged and ruthless determination of winemakers is as inspirational as it is impressive. With floods, forest fires and droughts ripping through the planet, we need every innovation from every industry. Nothing should be discounted. And sustainable investors should be given every possible opportunity to mitigate against risks.

The fine wine industry is rapidly evolving its stance on the planet, with biodiversity, climate adaption and mitigation taking centre stage. Environmental, social and financial sustainability is one of the five characteristics that distinguishes fine wine from other beverages. It is now a defining feature at the heart of every vineyard, nestled in every bottle. What’s more, the Sustainable Wine Roundtable launched a framework for identifying and categorising sustainability in wine in 2023. Now investors have more layers of security than ever before that their investment matches their ethics.

Depriving investors of fine wine would not just leave inflation and stability gaps in portfolios, it would undermine the vital work of an evolving industry. As powerful as it is passionate, this is an asset that packs a seriously low-carbon punch in sustainable portfolios.

“A fine wine is complex, balance, with a potential to age – though highly drinkable at every state of its development. It has the capacity to provoke emotions and wonder in the one drinking it, while reflecting the expression of truth intended by its maker. It is widely recognized, while being environmentally, socially and financially sustainable.”

Areni

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Fine wine sustainability report (Part II): how can fine wine mitigate risk in a sustainable portfolio?

  • The second part of our report focuses on how fine wine can mitigate risk for sustainable investors.
  • By blending sustainability-linked bonds with fine wine, investors can shield some of their wealth from inflation while having access to a regular income stream.
  • The steadiness of fine wine can help to smooth out the overall performance of sustainable portfolios, hedging against the volatility risks of impact investments.

Fine wine has many qualities that make it an environmentally and socially sustainable asset, as discussed in the first part of this report. And we believe that it can offer even more value as a hedge for sustainable portfolios. Just as with traditional investing, each investor is different. However, there will be some common themes and risks. In this section, we analyse how fine wine interacts with some of the most popular sustainable investments, and where the assets can become greater than the sum of their parts.

Sustainability-linked bonds

For businesses to become sustainable, they will usually need to pay for new infrastructure. This is where bonds come in. Investors finance the projects and receive a regular income from the repayments and interest (known as coupons) over a set period of time. There are many examples of corporate and sovereign green bonds, but probably the most impactful is Orsted.

In 2017, Orsted raised 1.25 billion euros from investors to successfully transition from brown to green energy. The bonds last until 2029. Since then, Orsted has been named the world’s most sustainable company. Today 91% of the energy it creates comes from renewable sources. The aim is to be at 99% by 2025. For context, worldwide this accounts for just 13% of energy. Orsted has also just released a blue bond, which focuses on marine life and oceans.

Sustainability-linked bonds can be built around society as well as the environment. Research by Goldman Sachs found 65% of investors are interested in social bonds, with 29% already invested.

Bonds are a good and relatively low-risk way for investors to generate an income while doing good. But there are some downsides. The main issue is that as bonds set a fixed repayment schedule years – sometimes decades – in advance, inflation can reduce the purchasing power of the income over time. In a usual market environment, central banks aim to keep inflation levels to around 2% or under, which is priced into the bond. However, in recent years, it has shot up to double digits. This can slash real returns for investors, and potentially put them off green bonds.

We believe that fine wine can help to hedge against the inflation risk of sustainability-linked bonds. The two assets complement each other well, as fine wine is less liquid but inflation resistant. By blending bonds with fine wine, investors can shield some of their wealth from inflation while having access to a regular income stream.

Impact investments

There are some businesses and organisations that make a clear and measurable change, while delivering returns for investors. Some environmental examples include investments in sustainable waste management, building renewable energy plants or businesses producing meat alternatives. There are also social movements; for example, venture capitalist firms investing in women and people of colour, affordable housing developers or accessible childcare services. When investments make tangible improvements, they are usually known as impact investments (because they make an impact).

While impact investments can be almost any asset class or risk level, in general they tend to be on the riskier side. By their nature, they are usually fairly new ventures, and can also be subject to incoming regulations. This could mean that the stocks spring and plunge, making sustainable investors nervous.

Fine wine, by contrast, is a low-risk asset with little volatility. We feel that the steadiness of fine wine can help to smooth out the overall performance of sustainable portfolios, hedging against the volatility risks of impact investments.

Overall positioning in a portfolio

Fine wine should not be the star of the show, but more of a supporting act. It is often best placed as a hedge against other sustainable or impactful assets, especially those with inflation or volatility risks. Generally, wealth managers and investors keep fine wine allocations under 10% of the total portfolio.

Stay tuned for Part III – profiling the sustainable investor.

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Fine wine sustainability report (Part I): how is fine wine sustainable?

  • Fine wine offers a sustainable investment option, which is increasingly recognised by wealth managers.
  • The industry is proactively adapting to climate change, with practices like regenerative farming and reducing bottle weight. 
  • Fine wine’s focus on social sustainability, including worker welfare and community support, boosts its appeal as a sustainable investment choice, aligning with modern ESG criteria.

Floods, fires and famine are no longer on our doorstep, they have already crossed the threshold into normality. In the first eight months of 2023 alone, the USA suffered 23 separate billion-dollar climate disasters. Research shows that by 2050, floods in Europe will increase five-fold.

Alongside climate disaster comes human suffering, ever-growing wealth gaps and loss of livelihoods. The homes of indigenous tribes are deforested to clear space for oil drilling. The most vulnerable find their communities and businesses flooded. Meanwhile, social inequality rachets up with poor climate policies.

Investors are all too aware of the damage. A 2023 study by Harvard found 85% ask their advisors about sustainable investments. While some groups – particularly millennials – have become activists themselves, using their shareholder votes to force change. So where does fine wine come into this?

Although ethical investing has been around for centuries, climate-focused sustainable investing is strikingly new. The insatiable demand we see today is less than a decade old. Between 2016 and 2020 alone, sustainable investing in Europe, USA, Canada, Australasia, and Japan swelled by 55%. Even though it is a multi-trillion industry, ‘Sustainable Investment’ still doesn’t even have a definition in most parts of the world. Because of this, the movement has borrowed a lot from pre-existing rules, which were mostly religious.

For centuries, our sustainable investment has been built on the foundations of Quaker and Methodist beliefs. This explains why alcohol, or to quote John Wesley ‘that liquid fire’ has been prohibited from almost all ESG (environmental, social, governance) funds – even when fossil fuel producers, fast fashion and plastic polluters made it on the list.

However, we believe this is a mistake. Fine wine offers extraordinary sustainable benefits to investors, especially when it comes to balancing out the risks of green bonds and risky impact investments. Not only does fine wine contribute to a greener future (it is a natural product after all), but this asset class can also plug vital strategic gaps, giving sustainable investors even more confidence. The time has come to give fine wine the credit it deserves.

How is fine wine sustainable?

While there is no universal definition of a ‘Sustainable Investment’, the European Union has made significant headway. According to the EU taxonomy, an environmentally sustainable investment must contribute significantly to one of the following, without jeopardising the others;

  • Climate change mitigation
  • Climate change adaption
  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity

We believe that fine wine not only meets this criterion but exceeds it. Vineyards rely on a stable climate, fertile soil and regenerative farming. From using free range ducks and sheep instead of pesticides to replacing heavy glass with lighter alternatives, the environmental innovations in the wine industry are never-ending.

Climate change mitigation and circular economies

To secure a safer future, every efficiency counts. The most carbon-intensive part of fine wine production is making and transporting the heavy glass bottles that contain the wine. According to one Sustainable Wine Roundtable report, this accounts for over half of the total environmental impact of wine. Simply by reducing the bottles from 550g to 420g would cut 25% of carbon emissions.

Although dense packaging has long-been associated with quality, European fine wine producers are throwing themselves into this trend. Burgundy producer, Albert Bichot, for example has reduced the bottle weight from 700-750g to 450g. According to one interview, the producer also uses only recycled glass and biodegradable labels. Even Champagne – which typically uses thicker glass – is experimenting. Bollinger, for example, is committed to a 7% reduction in bottle weight by 2029, as well as to use only recycled and recyclable materials.

Another area for improvement is energy efficiency throughout the manufacturing process. Here, fine wine has achieved far more than other industries. Almost every fine wine producer we could find has taken significant steps to reduce emissions dramatically. One of our favourite examples is Ornellaia. 2022 saw this winery slash liquefied petroleum gases usage by 98% with biomass heat. Today the entire firm uses the equivalent of 5% of the average family of four household over a year. Ornellaia has also blended nature with technology by installing a Building Management System to ensure that the temperature is efficiently set.

Climate change adaption, sustainable use of water and protection of biodiversity

World-famous flavours are at risk from climate change. As Comité Champagne report, temperatures are now 1.8 degrees higher than in the 1980s, meaning grapes are at risk of bursting prematurely or drying out. They now need to be picked thirty days earlier, potentially cutting the characteristic tastes short. Fine wine producers have been rigorousness and brave, proactively innovating in the face of the climate crisis. Not only do these innovations help cool down and protect the precious vines, but they also offer investors significant environmental benefits too.

One of the most widespread practices in fine wine vineyards now is the use of regenerative farming. Rather than using typical organic practices, which can still harm pollinators, producers are leaning into nature. Sheep roam around some vineyards picking off bugs organically, and often, horses are put to work instead of tractors.

Sustainability at Pontet Canet

Significantly, many fine wine producers such as Château Cheval Blanc plant diverse fruit and forestry trees between the vines. This helps to shade the grapes, sequester carbon and provide homes for vital pollinators. The fungus which grows around the roots of the trees also soaks up water, acting as a pump, pushing nutrients into the vines.

Water irrigation is one of the hottest topics for today’s fine wine producers, with many now working with their natural landscapes to find the best solutions. Vineyards are increasingly planting or shifting vines along the contours of the land, to prevent run-off during heavy rainfalls. They are also adding ground covers to prevent evaporation, keeping the soil damper and more nutritious.

The adaptions are coming thick and fast, as vineyards experiment with new grapes, and alternative locations. Northern France, the UK and Germany are fast becoming viable options for fine wine in this new climate, with producers are always one step ahead of the curve.

Social sustainability

Sustainability is about more than preserving the environment. It is also about protecting workers and supporting local communities. Although the fine wine industry is not as advanced in this area as it is with environmental sustainability, frameworks and strong voices are beginning to emerge. As one wine producer puts it:

‘Do we farm organically because it’s better for the environment? Certainly. Do we farm organically because it makes better-tasting wine? Without question. But the most important reason to farm organically is because the lives of the people who work in the vineyards, and the people who live downstream, matter.’

Caring for the environment and biodiversity also has far-reaching effects on local life. Vineyards continue to play a vital role in the culture and traditions of their local communities. Recently the Comité Champagne proposed a series of tangible solutions to improve the lives of the region’s 120,000 harvest workers. We are also seeing a general trend of permanent contracts for employees, as well as a sharp focus on improving diversity at board levels. While there is certainly work to be done in this space, the general trajectory looks promising.

Stay tuned for Part II of our Fine Wine Sustainability Report, in which we discuss how fine wine can mitigate risk in sustainable portfolios – coming next week.

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Navigating the 2023 fine wine market: the rise of Bordeaux amid global risk aversion

  • 2023 marks a notable slowdown in the fine wine market, with price corrections shadowing the bullish trends of previous years.
  • Burgundy and Champagne which led the market to its peak in 2022 are suffering the most.
  • Bordeaux has become a beacon for investors, gaining renewed interest due to its stability and reliability.

As the 2023 Liv-ex Power 100 unveils, a significant shift is evident in the fine wine market. This year marks a notable slowdown, with price corrections shadowing the bullish trends of previous years. Amidst this changing landscape, Bordeaux emerges as a beacon for investors, gaining renewed interest due to its stability and reliability. This article delves into the dynamics of the 2023 fine wine market, highlighting the rise of Bordeaux against a backdrop of global risk aversion.

Understanding the 2023 market slowdown

The fine wine market in 2023 has departed from the spirited activity of past years. After prices across many regions reached stellar levels in 2022, 2023 was a year of corrections. Trade by value and volume also fell, according to the 2023 Liv-ex Power 100 report. Despite more wine labels being traded, the overall number of individual wines traded (on a vintage level) has seen a decrease. This trend points towards a strategic shift towards higher quality wine investments, reflecting a more discerning market behaviour.

The softening of the fine wine market in 2023 can be attributed to a range of factors. Economic uncertainties and global financial market fluctuations have instilled a sense of risk aversion among investors. Inflationary pressures and rising interest rates have also played a role, impacting disposable incomes and investment capabilities. This economic climate has prompted a more cautious approach in luxury investments like fine wine. Additionally, changing consumer behaviours and preferences, along with geopolitical tensions and trade disputes, have further contributed to the market’s softening.

Regional patterns in 2023

In 2023, regional patterns in the wine market have become more pronounced. Burgundy and Champagne, which previously led the market to its peak, are now facing significant corrections. Burgundy has seen a reduction in its presence in the Power 100, while the Burgundy 150 index has fallen 15.4% year-on-year. Similarly, Champagne’s market has also softened, with the Champagne 50 index dipping 19.4%.

The rankings reveal a trend towards stability, liquidity, and relative value, which are prominently found in Bordeaux. This region has emerged as a beacon of resilience in the fine wine market, adding five wines to the Power 100 and benefiting from its reputation for consistent quality and reliable investment.

Conversely, California, while losing five wines in the ranking, managed to maintain its trade share, indicating a selective but sustained interest in its wines. This shift reflects a broader market inclination towards established regions and brands, suggesting a cautious approach by collectors and investors in a turbulent market.

As market dynamics evolve, regions like Italy and Spain are gaining traction, with brands like Vietti and Dominio de Pingus showing positive growth, further diversifying the landscape of investment-worthy wines. These regions are increasingly seen as offering valuable investment-worthy wines, attracting attention for their unique qualities and potential for growth.

The most powerful brands of 2023

In the realm of individual brands, certain names have demonstrated remarkable resilience and adaptability amidst the market downturn. Bordeaux’s Château Climens, for instance, has made an impressive leap in the rankings, rising from 353rd place in 2022 to 98th this year. This is a testament to its successful brand repositioning under new ownership.

Similarly, in California, brands like Opus One and Screaming Eagle continue to hold strong positions. Opus One, in particular, has risen dramatically, from 82nd in 2022 to 4th this year, signifying continued interest in top-tier wines from this region despite broader market challenges.

Despite facing a pullback Burgundy still has powerful players like Kei Shiogai, which took the top spot in terms of price performance, with its Market Price rising 185.7% year-on-year.

The strength of these brands lies not just in their historical significance or quality but also in their ability to retain high liquidity and trading volumes, essential in a market that is increasingly focusing on safer investments. This trend suggests that while the market is retracting in some areas, there remains a robust demand for wines that represent the pinnacle of their respective regions.

Adapting to the evolving wine market dynamics

As we navigate through the evolving dynamics of the fine wine market, it is clear that understanding and adapting to these changes is crucial for future investing. The trends of 2023, from the renewed interest in Bordeaux and the resilience of powerful brands, provide valuable insights into the market’s direction.

WineCap’s independent market analysis showcases the value of portfolio diversification and the stability offered by investing in wine. Speak to one of our wine investment experts and start building your portfolio. Schedule your free consultation today.