Investing: Fine wine beats equities, gold during financial upheavals

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 18, 2018 - June 24, 2018.
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Fine wine performs favourably during global economic downturns, demonstrating that it is a defensive asset class for investors who hold equity-dominated portfolios, say analysts at fine wine investment company Cult Wines Ltd.

According to the firm’s Fine Wine vs Global Equities report, the Liv-ex 1000 index — which tracks the price movements of 1,000 leading fine wines on the secondary market — was one of the best performing indices last year, having risen 11.3%. Its performance was only surpassed by the Burgundy 150 Index, which only tracks the price of wines from the French region.

“Considering risk and volatility, holding a fine wine portfolio is expected to show lower volatility of returns compared with a 100% equity-based portfolio. Nowadays, the performance of marketable securities is considered volatile. We believe investing in alternative assets can offer some stability, both in the short and long term,” says the report.

According to the report, the forward five-year returns of the wines tracked by the Liv-ex 1000 had the highest forward rate of return at the end of 2008 and 2012 and the lowest return between 2010 and 2011. “Since then, the wine market had officially entered a correction stage, which ended in August 2012, with the Liv-ex 1000 closing at 242.75 points. As expected, the fine wine market has consistently delivered positive absolute returns over any next five-year period. More importantly, of the total 51 five-year periods that we have covered (2008 to 2018), only six have experienced negative returns,” it says.

The report points out that the Liv-ex 1000 has performed positively compared with the FTSE All Shares index and gold futures. The Liv-ex 1000 returned a little less than zero while the FTSE All Shares lost nearly 25% and gold futures fell about 5% during the depths of the global financial crisis between 2008 and 2010 and during the peak of the economic recovery in 2015 to 2017.

“As recently reported by Liv-ex, the 2017 performance of the Liv-ex 1000 was above that of the FTSE. Long considered comparable to fine wine, gold not only delivered unattractive returns but also displayed the greatest volatility among other representatives,” says the report.

From 2015 to 2017, the Liv-ex 1000 gained 10% while the FTSE All Shares returned roughly 9% and gold futures 8%. “It is widely reported that the correlation between fine wine and global equities is low. But when the type of risk and level of risk we could utilise are taken into account, this correlation requires further clarity,” says the report.

“Thus, it is important to understand how fine wine as an individual asset type responds to swings in the traditional financial market over time. In finance, a beta of 1 indicates that the security’s price moves with the market, whereas a beta of less than 1 means that the security’s price movement is theoretically less volatile than the market. We tend to interpret the beta of fine wine against global equities by using a similar way of thinking.”

The continual decline in five-year rolling beta spanning from 2010 to 2017 suggests that fine wine does not have the same level of market risk, says Cult Wines, stressing that investment in fine wine would not be significantly affected by the performance of traditional financial markets, hence establishing the role of fine wine as a credible alternative asset.

Some of the factors that contributed to the good performance of fine wine are limited supply of the wines; increasing demand from emerging markets, especially in Southeast Asia, China, Mexico and parts of Africa; and the weakening pound sterling following the UK’s referendum to leave the European Union.

“From our studies, we can see how fine wine can act as a defensive asset class in times of economic crisis but at the same time benefit from the economic upside due to the creation of wealth, fuelling spending on luxury assets. Furthermore, the demand for fine wine does not fluctuate too much during periods of economic deterioration — wine consumers will always consume wine. The niche characteristics and relative size of the fine wine market insulate the market from wider macro-economic factors and can therefore protect investors from greater losses,” says the report.

It reiterates that adding fine wine to a portfolio should significantly reduce the total risk of equity-based portfolios and protect investors from greater losses during periods of economic distress. “Although the diversification benefits are not as pronounced during a financial crisis due to the positively correlated relationship between the economy and fine wine market, adding fine wine to portfolios is expected to protect investors from greater losses and act as a key preserver of wealth.”

The report says as long as the fundamental supply and demand dynamics behind fine wine remain unchanged, the fine wine markets are expected to continue performing well in absolute terms and relative to other types of tangible assets.