Oxstones Investment Club™People have invested in fine wines for more than 150 years, but wine grew into a more standardized investment class with the establishment of the Liv-ex in 1999. This is the London International Vintner’s Exchange, and it provides the most reliable, independent source of wine price information in the world. The Liv-ex 100 is an index of the top 100 investment grade wines, and it was created in 2001. For the first time, enough reliable pricing information became available that wine investments could be tracked reliably and compared against other asset classes.
What is an investment grade wine?
Most wine in the world is not suitable for investors. Much of it is of low or questionable quality, or has a short lifespan that will not support using it for investments. A lot of wine never has any significant price appreciation. “Investment grade” wines account for less than one percent of all the wine produced worldwide.
Most of the wines classified as investment grade are from specific chateaux in Bordeaux. A much smaller set of wines from Burgundy, Champagne, the Rhone Valley, Piedmont, and Tuscany, can also be considered investment grade, but in general people are referring to Bordeaux wine when they use this term.
Investment grade wines must be from designated top-quality producers. The wines must have the ability to age at least 25 years, and they must have shown a history of price appreciation which is consistent and documented. There must be sufficient quantities to enable liquidity in the market. The final criteria is a high-quality wine. To be investment grade, wine must have scored at least 95 points out of a hundred, as rated by the top wine critics in the world.
Fine wine compared to other asset classes
The Liv-ex 100 was tracked for the period from 2001 (when it was established) through the end of 2011. Its performance for this period was compared to other asset classes. Here are some results.
High capital growth – The Liv-ex 100 had an annualized return of about 11.3%. In comparison, the S&P 500 had a return of only 0.4% during this period, and the Dow Jones Hedge Fund Index was at 6.4%. One of the only asset classes to fare better than wine was gold, which had an annualized return of 18.3%.
Low volatility – The standard deviation was measured for annualized monthly returns for major asset classes, and compared to show volatility. The Liv-ex 100 had the second lowest figures for volatility, with a 10.6% standard deviation. This compares to 15.1% for the S&P 500. Only the DJ Hedge Fund index did better than wine, coming in with a standard deviation of 5.7%.
Better risk-adjusted returns – The Sharpe Ratio provides a measurement of risk-adjusted returns. This was compared among all of the major asset classes. The Liv-ex 100 came in with the second best number, a Sharpe Ratio of 1.07. The S&P 500 had only a 0.10 Sharpe Ratio. The only class that beat fine wine was the DJ Hedge Fund index, which scored a Sharpe Ratio of 1.11.
Pros and cons of investing in fine wine
Just any other type of investment, buying and trading fine wine comes with some sort of risk. To begin with, this market is both challenging and interesting. For some investors, it’s a risk they’re willing to take for the sake of good wine. We’re talking about a tangible asset that can be rather easy to trade. Considering that some wines are perishable assets, trading wine as a hobby is not subject to capital gain taxes. Note that some vintages may last up to 50 years, in which case you will be forced to pay taxes.
The fine wine market is directly influenced by market volatility, the recession, and so on. It’s not an indestructible type of investment; yet, it can be more profitable than other asset classes. Prior to spending a dime, you should get to know the industry a little bit better. Choose your product and settle on some ground rules: Will you trade on a platform, in bonds, or through a merchant? Check reputable websites before getting started, analyze main wine sites, check a wine investment guide, and get advice from professionals in order to see great returns.
Tags: 95 point rating by wine critics, advice on wine investing, alternative asset class, alternative asset classes, buying and trading fine wine, chateaux in Bordeaux. wines from Burgundy, comparing wine to other alternative assets, criteria for investment graded wines, fine wine investing tips, fine wine is tax-free investment, fine wine market, independent source of wine price information, investment, investment grade fine wine performance, investment-grade wines, Liv-ex, Liv-ex 100 annualized return of 11.3%, Liv-ex 100 had the second lowest figures for volatility, Liv-ex 100 index, Liv-ex 100 Sharpe Ratio of 1.07, London International Vintners Exchange, Piedmont wine, trading wine as a hobby is not subject to capital gain taxes, valuable liquid assets, wine, wine exchange, wine investment, wine investments, wine pricing information, wines from Champagne, wines from the Rhone Valley, wines from these regions are most valued, wines from Tuscany