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Wine Investment Report

By James Fletcher
Albany Portfolio Management
6th Jan 2010

Albany Portfolio Management (APM) was established early in 2009 to enable private individuals to invest in fine wine and operates in association with Albany Vintners, a highly renowned and long established wholesale fine wine merchant. APM has one simple objective; to add wealth to its customers.

The premise for establishing APM was that a significant credit-crunch driven market fall in late 08 – in which the value of some wines fell by as much as 30% – created favourable market conditions and opportunities for investors. It was predicted that a market correction, fuelled by European and North American collectors & investors taking advantage of the value stock, would restore confidence in the all-important Chinese, Russian and Asian markets, and lead into positive market conditions.
 

This prophecy was accurate and the market entered into a major bull run in the Spring which has yet to falter.The value of the index as of 31st December 2009 was 237.17, a rise of 0.9% on the previous month. The index was up 15.7% in 2009.

Performance 

The chart below documents each of the twenty wines recommended by APM during the course of 2009. The ‘value now’ figure is the average price for the various wines as reported on Liv-ex at the time of composition. Liv-ex draws market feed information from dozens of leading merchants, brokers & auction houses.

Kindly note that this figure is for general guidance only and dependant on the method of sale the realised sum could be significantly lower.

 
The illiquid nature and ultra scarcity of some wines – notably Pétrus, Ausone & Le Pin – means that trading and availability is both narrow and sporadic. Indeed, at the time of composition, the market was devoid of Le Pin 2000. Consequently, these wines have a tendency to appear inactive for periods of time followed by sudden and dramatic ‘steps’ in their yield curves. This would go some way toward justifying the disproportionate (and unsustainable, certainly) growth of Le Pin 04 and the relative inactivity of the two offerings from Pétrus.

In general, APM commences promoting a specific wine as a consequence of a significant increase in interest and trading (particularly in the Far East), or perhaps as a reaction to a catalytic occurrence such as a re-grading. Through careful analysis and aggressive selection, significant growth may be experienced in the first month – often considerably higher than the market in general. We have therefore elected not to annualise the growth rate for wines recommended from November onwards as this would give an inflated and ultimately unrealistic impression.

 2009 Selection Policy

APM’s aim is to identify low risk, high capital appreciation opportunities. In consequence our portfolios are built generally from the top Châteaux of Bordeaux (currently 91%) and Burgundy (9%). We deal in well established, internationally renowned estates with a proven, demonstrable track record and ready secondary market. The wines will tend to fall into the following categories:

      1. Bottled vintages approaching optimum drinking: As wines approach this important juncture in their lifespan they become more desirable leading to an increase in demand. They also display a helpful characteristic not seen in any other asset class; a perfect inverse supply curve. Each bottle drunk can never be replaced.

      2. En Primeur (wine futures): This is where the wine is still in the barrel and generally at its cheapest price. Highest potential for gain but traditional volatility and higher risk necessitate caution. APM endeavor to keep En Primeur at around 20% in portfolios (currently 15% overall).

      3. Undervalued wines from recent vintages: We carefully track buying patterns, demand and fluctuations in taste (particularly from China) for wines from recent vintages to identify undervalued opportunities.

 

APM is risk averse when it comes to New World wines due to narrow exit markets and lack of clarity in pricing. To date APM has not promoted the wines of any New World estate.

 Market Summary

The wine market is exiting 2009 in rude health. Trading remains strong with November’s traded volume on Liv-ex up some 27% compared to this time last year and 6 % up over the previous month. The year, though, has very much belonged to Lafite-Rothschild which as a result of being the darling of the Chinese buyer has blazed the trail. Lafite was by a head & shoulders the most traded wine in the world this year – representing an astonishing 23% of trades on Liv-ex – and its wines have increased in value on average 26.6%. Many offerings have realised over 40%.

 However, we leave the year on a rather broader base of trading. In October Liv-ex reported that Lafite had been usurped from the number one spot by stable mate and near neighbour Mouton-Rothschild. Indeed many Chinese buyers have been noted switching their affections to the spirited underdog as prices for Lafite become prohibitive.

Latour moved to the number two spot, and mighty Pétrus (for which trading had previously been relatively quiet) leapt to third. Notably high trading in DRC meant that Burgundy showed double figure growth in November for the first time since 2005.

The major trend of the year has been the emergence of China as a dominant and significant force in fine wine. China is now the sixth largest consumer in the world (equating to 10% of the international market) with consumption continuing to increase at a staggering rate. The amount of imported wine being drunk is increasing at a rate of around 125% per annum. Just 15 years ago the amount of imported wine was virtually zero.

The scope for the future as China’s economy and her taste for wine continue to grow is mind boggling: Current consumption – whilst enormous on an international scale – is miniscule on a per capita basis at just 0.31 litres per adult per annum; about 2 large glasses. In the UK we consume on average 27 litres each, and yet even this pales against France’s 60 litres (interestingly the Vatican leads the international chart at some 62 litres!).

Of significance to the investor is that a disproportionate amount of the most expensive, exclusive wines from Bordeaux are being consumed in China. This is a direct result of staggering increases in wealth: In terms of the number of millionaires, China leap-frogged France in 2007, pipped the UK this year, and now sits only behind Germany, Japan and the US. In 2006 it didn’t even make the top ten.

According to the World Wealth Report compiled by Merrill Lynch and Cap Gemini, China & Asia will “take the lead in wealth growth, surpassing North America by 2013…. spurred by increasing US consumer spending and the extension of the autonomy of the Chinese economy, already sparking a new increase in consumer demand”.

Notably, your average Chinese millionaire is considerably younger than his Brit counterpart – 39 and 56 respectively – and even your average Chinese billionaire comes in at a tender 49. These young, cash rich men (for the most part) are splashing out on conspicuous, high end luxury goods like never before, and in such an image conscious society, the big names in fine wine are most favoured, thus creating unprecedented levels of demand. Yet, it seems as these wines get ever more expensive, their appeal in China increases further – bad for the consumer, perhaps, but very helpful for the investor.

 Looking forward to 2010

The key question is whether the tremendous growth seen in 2009 can be sustained next year. Certainly the ‘correction’ effect experienced after the market dropped so swiftly and dramatically in the panic of late 08 has run its course, and the significance of the exit of Diageo Chateaux & Estates (part of the largest drinks company in the world) from the Bordeaux market requires consideration.

D C&E are selling off their entire stock-pile of fine Bordeaux – allegedly worth as much as US$200m – and rumours abound of a negative impact on US retail prices. However, the ripples have yet to reach our side of the pond, and in a market now worth over $3 billion per annum internationally, the fall-out is unlikely to be significant or long lasting. Of greater importance is the key question as to why D C&E have taken this decision, and on closer inspection it would seem to be an individual strategic move in reaction to challenging conditions in the entry level drinks market.There is no evidence to suggest that D C&E takes a pessimistic view on the fine wine market.

Conversely there are many reasons to be optimistic about 2010. Demand from China (by a considerable margin the most influential factor on today’s wine market) continues to grow exponentially, and as the economies of Europe and North America move back into growth it is reasonable to expect increased demand from the traditional markets. It is only a short year since the market was in relative chaos, and despite the apparent challenge of a global recession, the market has demonstrated just how robust it is. In fact, Liv-ex experienced a record year with transactions up 20% on 2008.

At APM we have noticed investor confidence increasing now on a monthly basis. Sales for November – our most successful month by far – were up 36% on the previous month and some 900% from the same point six months ago. Our experience would indicate that we are not only looking at a healthy year in 2010, but perhaps a bumper one.

Finally, 2009 En Primeur; to buy or not to buy?

We have achieved tremendous results this year for our customers with 2008 En Primeur wines, so a hot topic of debate is whether such success may be repeated with 09s, which will be released next summer. Certainly prima facie things look good. Heralded as the finest vintage of the century (an overused statement we accept, but early indications suggest that this time the prediction is accurate), interest has rarely been more acute.

However, it is important to remember that the success (for investors, at least) of the 08 campaign was down to modest release prices from the Châteaux and a last minute surprise triumph for the quality of the vintage. There will be no such surprises for the 09s, and having kept prices low for 06, 07 and 08, and it unlikely that the Bordelaise will miss the opportunity to hike prices significantly. Many experts predict a return to the release price of the 05 campaign, and at this level investors would be wise to be cautious. In fact, with the basket cost of First Growths converted to GBP at today’s rather unhelpful exchange rate, only the 82, 00 & 05 vintages would be showing a profit. We are monitoring closely.

By James Fletcher
Albany Portfolio Management
16 Dec 2009

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