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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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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.

 

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Special report – 2023’s big investment themes: fine wine and beyond

Our latest report, 2023’s big investment themes: fine wine and beyond, has now been released. The report looks at the key themes that defined markets this year, from interest rates to sustainability. It positions fine wine within a broader investment context and analyses the key events that influenced its performance.

Report highlights:

  • Tech, interest, and sustainability came to define markets in 2023.
  • The stock market bounced back, and technology stocks rallied as the world became fascinated with generative AI.
  • In a bid to cool down the red-hot inflation levels, the Bank of England cranked up interest rates 14 times.
  • As central banks increased interest rates, they also began to stockpile gold.
  • In the UK, interest rates reached the highest point since 1998. This signalled an end to the era of cheap borrowing, which could limit growth for some economies.
  • 2023 saw the rush of demand for green bonds – borrowing money to finance sustainable projects.
  • Sustainability drove fine wine demand among investors and led to other positive developments in the wine industry.

 

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How to include fine wine in your investment portfolio

A version of this article by WineCap’s CEO Alexander Westgarth was first published by Forbes.

  • Fine wine can serve as a stable, alternative asset in a diversified investment portfolio.
  • Investing in fine wine offers both economic resilience and long-term growth potential.
  • Proper storage and understanding of the asset are crucial for maximizing investment returns.

Fine wine, often associated with luxurious dining and celebratory events, has also gained recognition as a viable investment opportunity. This article explores how to strategically include fine wine in your investment portfolio, while highlighting its unique advantages and potential risks.

Positioning in the portfolio

In a well-diversified investment portfolio, asset allocation usually comprises a mix of stocks, bonds, and alternative investments. Stocks usually dominate, occupying roughly 50% of the total funds due to their potential for high returns. Bonds, typically accounting for 30% of allocations, offer a balance against the volatility of stocks. The remaining 20% is reserved for assets like real estate, hedge funds, cash, and alternatives. These offer a niche yet valuable opportunity for diversification. Industry experts typically recommend allocating a modest percentage of a portfolio to alternative investments, including fine wine. This provides enough room for additional returns without exposing the investor to excessive risk.

Fine wine as a recession buffer

One of the most striking attributes of fine wine as an investment is its resilience during economic downturns. Fine wine indices offer compelling evidence of how fine wine can act as a hedge during challenging economic times. For instance, in the first nine months of 2022, the stock market wobbled. The S&P 500 dwindled downward, losing 23.7% in value by the end of September. However, in perfect contrast, the value of fine wine (according to Liv-ex 1000) rose 14.1% in the same time frame. While it might be tempting to sell off when the markets are doing well, fine wine can be extraordinarily helpful when downturns hit.

Long-term outlook

Investors should be aware that fine wine is an investment that rewards patience, and longer-term commitment. For instance, some fine wines, as shown on Wine Track, have seen four-digit returns in the last decade. On average, a bottle of Rene Engel Vosne-Romanee is up nearly 3,390% in value. The stellar growth can be attributed to the scarcity of the wine; the leading Burgundy winemaker Philippe Engel passed away in 2005 and the domaine was later sold to Francois Pinault and renamed to Domaine Eugenie. But this is not a single example. Leading fine wine indices show that the average value of a fine wine has increased by close to 70% in the last decade, and 340% in the last 20 years.

Patience is most definitely a virtue when it comes to investing in fine wine. The most long-term investors tend to get the highest returns. It is also crucial to note that fine wine is not as liquid an asset as stocks or bonds. Selling a wine may take weeks or even months, emphasising the need for a long-term investment strategy.

Proper storage

Preserving the quality of fine wine is crucial for realising its investment potential. Proper storage conditions, including a controlled environment with consistent temperature and humidity, are non-negotiable. The wine should ideally be stored horizontally to maintain cork moisture. Those unfamiliar with the intricacies of wine storage should consider hiring professional services. These specialised storage facilities not only offer optimal conditions but also provide insurance options to protect your valuable investment.

Understanding the asset

Fine wine is more than just a potential source of revenue; it is a tangible link to history and culture. Understanding the various factors contributing to a wine’s value, such as the region, vintage, and rarity, can offer more than just economic benefits. This multifaceted understanding can enrich an investor’s appreciation for the asset, making it a unique and satisfying component of a diverse investment portfolio.

In conclusion, incorporating fine wine into an investment portfolio requires careful planning, due diligence, and a long-term perspective to realise its full potential as a unique and rewarding asset.

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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Diversifying retirement portfolios: Why pension fund managers are turning to fine wine

pension funds
  • Pension funds have increased investment in alternative assets like fine wine by 25% over the past two decades.
  • Fine wine provides stability and intrinsic value for pension planners, as it is unaffected by geopolitical events or high inflation levels.
  • Fine wine has delivered impressive returns of 40.3% over the past five years, making it an ideal asset for retirement planning and diversification.

Change is in the air. As both the bond and equity markets get shaken by turbulence, pension fund managers are increasingly turning to alternative assets, to hedge against economic shocks. According to one report, pension funds around the world have increased their exposure by 25% over the past two decades. The New York Teachers Retirement System, for example, is plunging a whooping 35% of money into alternative investments.

Private equity, property, hedge funds and commodities are among the most enduring alternative assets. However, little by little, institutional investors are dipping into collectibles like fine wine too. One of Canada’s mightiest pension funds, The Public Sector Pension Investment Board, recently acquired 35 iconic vineyards. Goldman Sachs has also been investing heavily in wineries, with a focus on medium and longer-term returns.

In this article, we’ll unveil what’s making wine so appealing to managers today, and how investors could use this unique asset to bolster their own retirement funds.

Fine wine’s intrinsic value is reassuring for pension planners

Unlike most other investments, wine’s world-famous flavors are not impacted by geo-political events or high inflation levels. Instead, they are affected by storage and temperature.

This gives investors – including fund managers – a welcome sense of reassurance. While they may have no control over the stock market, they can ensure that the wine is well cared for.

Over the decades, retirement planners can rest assured that their wealth is not subject to the twists and turns of the stock market. Instead, it comes from the intrinsic value and exquisite quality within the bottle. This can help to mitigate risk and offer valuable diversification.

Investors can find a bottle to match their retirement timeframe

One of the greatest appeals of fine wine is how it improves over time. Naturally, it’s an asset that complements decades-long investment strategies, like retirement plans.

As our CEO, Alex Westgarth, recently commented for Forbes, ‘Fine wine pairs well with younger investors with long-term horizons. A good Bordeaux, for example, can age up to 50 years. This can add a certain stability to your portfolios’.

An excellent wine will always be in high demand as it reaches maturity. And there will almost always be a passionate buyer willing to pay premium prices.

A great advantage for pension planners is that they can probably find a bottle on the market to match their retirement timeframe. While some wines might be best opened in fifty years, others may need just five. Finding the right wine for your unique timeframe can help you to hedge against market losses and meet your investment goals.

With time, premium bottles become rarer

As poet, playwright and novelist, Johann Wolfgang von Goethe famously quipped, ‘Life is too short to drink bad wine’. Ultimately, the asset is made to be enjoyed. People open investment grade wine to celebrate occasions or present as gifts. And, with time, certain vintages will become harder and harder to find.

When demand outstrips supply, prices increase. That’s another reason why long-term investments in wine can be a sensible alternative asset for pension planning.

As the climate crisis continues to impact vineyards, the scarcity factor is likely to further increase prices. The delicate and unique flavors in already-bottled wine could be the last of their kind within just a few years. This will further reduce supply.

Meanwhile, demand is growing by the day. The past decades have seen an impressive rise in Millennial and Gen-Z buyers. Sotheby’s have even noticed the average purveyor’s age shrink from over 60 to under 40.

What’s more, the vast surge of digital advancements are also bringing in new generations and groups of wine buyers.

If demand continues to grow, the tightening supply should lead to a continued increase in value.

Fine wine has an impressive record of beating inflation

There are several reasons why most pension funds begin by investing in equities. It’s partly because managers can afford to take on more risk with longer timeframes. But it’s also to avoid the devastating effects of inflation. Unlike cash, bonds or other debt instruments, equity is generally more inflation-resistant.

Fortunately, fine wine shares this same inflation-resisting quality. This could make it a strong contender for a pension investment plan.

Fine wine has a history of beating inflation. Since 2021, for example, while the UK has endured inflation rates of over 10%, the Liv-ex 1000 index has risen 33%.

During the middle and final investment years – when the pension pot is most at risk of inflation erosion – a healthy allocation to wine could help mitigate the risk.

Fine wine has a history of strong returns

Over the past five years, the fine wine has delivered returns of 40.3%, according to the Liv-ex 1000 index. What’s more, despite the incredibly erratic market, overall performance has been smooth and steady.

This makes fine wine a strong contender retirement planning. Fine wine has both growth and value characteristics, making it well suited for most pension plans.

How can fine wine be incorporated into a pension?

Usually the best way to add wine into private pensions – like workplace and Self-Invested Private Pensions (SIPPs) – is to speak to a financial advisor. This is because they can help you structure the fund in the most tax-efficient way.

When it comes to taxes, fine wine already has a head start. Fine wine is exempt from Capital Gains Tax. Because of this, your advisor may prefer to leave it out of a SIPP altogether and use the tax perks on other assets instead. But probably they would seek to allocate a proportion of fine wine into your overall retirement plan as a hedging asset or long-term growth generator. As an inflation-resistant and illiquid asset, wine generally lends itself to retirement planning well.

If you’d like to find out more about which wines could best suit your pension goals, we’d love to talk to you.

 

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Fine Wine Investment | Guide

Fine wine investment

A renaissance in the market over the last two decades has let the secret of fine wine out, and the mainstream investment community has responded in kind. The word on fine wine is that it’s not just for the privileged few: it is an ideal choice for everyday investors looking to diversify their portfolios.

By choosing fine wine, you benefit from a proven market that is stable, relatively detached from the mainstream, and consistent in its double-digit returns. What’s more, fine wine offers you a great hedge against inflation.

Discover in our Fine Wine Investment Guide:

  • How to invest successfully in fine wine
  • What WineCap will do for you
  • The beauty of fine wine as an investment
  • The long-term returns of fine wine
  • The influence of wine critics
  • How to create the perfect portfolio

Click the button below to download our Fine Wine Investment Guide and learn more about our proven strategy for investment success.

Do not hesitate to get in touch and speak to one of our wine investment advisors for further information and to reserve your allocations.