Liv-ex Fine Wine Market Blog

Glass half full: Wealth creation and wine

Capgemini and Merrill Lynch Global Wealth Management recently released their 2011 World Wealth Report. According to the report, the number of high net worth individuals (HNWIs) grew 8.3 per cent to 10.9 million in 2010, whilst their financial wealth rose 9.7 per cent to US$42.7 trillion. Although this represents more moderate growth than that seen in 2009, 2010 gains have propelled financial wealth beyond pre-crisis highs.

As we have pointed out in earlier posts, there is a strong correlation between the global population of HNWIs and fine wine prices as demand for blue-chip wines is closely linked to wealth creation. The World Wealth Report reaffirms this point and indicates that demand for "investments of passion" (including fine wine) grew in 2010:

"As wealth levels rebounded in 2010, interest in all forms of investments of passion also revived."

"The amount of money flowing into this category tends to rise and fall with overall levels of wealth. However, many investments of passion are also solid financial investments and will continue to play a role in HNW portfolios, especially for HNWIs seeking investments with a low correlation to global financial markets."

The report also suggests that the rising number of emerging-market HNWIs is "expanding the global market for investments of passion". This is particularly true of Chinese investors (and buyers), who have been the driving force behind the fine wine market's growth in recent years. 

Of course, much has changed in 2011, with the stock market, housing market and fine wine market all experiencing a downturn. Nonetheless, in the November Cellar Watch Market Report we suggested that, despite the current fine wine market correction, there are many reasons to remain optimistic. With emerging economies - and Asia-Pacific in particular - still driving the global economy, there would appear to be room for both recovery, and further growth.

WSTA publishes wine investment guide

The Wine and Spirits Trade Association - a prominent UK industry body - has published a wine investment guide. Incidences of wine fraud have made the headlines numerous times this year, and the WSTA guide aims to prevent collectors and investors from falling prey to rogue traders.

As well as advising collectors to choose "a reputable merchant", the WSTA encourages buyers to do their own price research and to use Liv-ex.com for independent valuations. The full guide is available here.

Cellar Watch is an invaluable online tool for collectors and investors as it provides professional-level access to Liv-ex price data and Cellar Watch valuations. To find out more about Cellar Watch, or to sign up for a free Price Watch subscription, please click here.

Fine wine's online revolution

 

Liv-ex Director James Miles took part in the Winefuture summit in Hong Kong on Sunday, where he discussed the theme: "Market Transparency and Efficiency - Fine Wine's Online Revolution". View his presentation above or click here for the Chinese version.

Download the transcript

Download the presentation

Market Transparency and Efficiency: Fine Wine’s Online Revolution

James Miles, Wine Future, Hong Kong, November 6th 2011.

Slide 1: Title

For most of us, broadband internet is less than 10 years old. In that short period, the internet has proved disruptive for many industries. The fine wine trade is no exception. Our industry has undergone an online revolution.

Our sense is that this period of disruptive change is only just getting started.

Slide 2: Liv-ex

I co-founded Liv-ex, together with Justin Gibbs, in 1999. The vision was to provide a global (B2B) trading exchange for fine wine merchants. Twelve years on, we have over 400 members in 33 countries. In the last year, we have matched US$160m of buy and sell orders on the platform. We have three core business areas: the trading platform itself; data and research; and storage and transport.

It is fair to say that without the internet, Liv-ex wouldn’t exist.

Slide 3: Ripe for change

To fully understand the disruptions that the internet has set in motion for the fine wine trade, we should highlight the characteristics that made the sector so ripe for change.

By fine wine, I am referring to wines that are actively traded on the secondary market, are internationally recognised and have the ability to improve (and gain value) in bottle. This is a relatively small universe of wines and is concentrated in the top Bordeaux estates.

The fine wine trade has traditionally been incredibly opaque – only insiders really had access to the key information.

There was a lack of trading liquidity and it was highly fragmented, both in terms of players and products.

All of these factors made the flow of information slow and inefficient.

Slide 4: Market transparency

The arrival of the internet has brought numerous benefits to the fine wine trade, but by far the most important is transparency. This transparency falls into three key areas:

Quality: There are now a huge number of tasting note databases, peer-to-peer platforms (like Cellar Tracker) and other online forums to frequent. Finding an independent verdict on the pros and cons of any wine has never been easier, helping to demystify wine knowledge.

Availability: Most merchants now publish their catalogues online. Moreover, price comparison sites, such as Wine Searcher, allow consumers to quickly find the wine they want at the best price.

And if you are a professional trader or a serious collector and you want to know the price at which merchants are actually trading, you come to Liv-ex. This information isn’t available anywhere else.

Slide 5: Market transparency

Just ten years ago, price discovery was time-consuming and imperfect. The only way to accurately gauge market pricing was to thumb through catalogues, hit the phones and send out faxes. And that was for insiders. Consumers and collectors had no chance. Realistically, only a handful of merchants knew what was really going on.

Slide 6:Market transparency

This is the chart for Lafite 2008 as represented on Liv-ex.com – each of those dots represents an actual transaction. In the past, gathering together this sort of detailed data simply wasn’t possible. Today it is available in an instant. And anyone who signs up to Liv-ex can view it.

Slide 7: The result

So what has been the result of this increased transparency? Clearly, the barriers to entry in the sector have fallen dramatically. With equal access to market data and easy distribution, anyone with the will and the capital can set up a reasonably competitive business.

Similarly, confidence in the integrity of the market has brought a huge amount of new money into the industry, helping to open up new frontiers and opportunities. The most obvious amongst these are new emerging markets like China.

Yes, the transparency has had an impact on margins, but it has also precipitated rapid growth.

Slide 8: Market expansion

Between 2004 and 2010, fine wine turnover quadrupled from US$1bn to US$4bn.

Slide 9: Higher prices

Over the same period, prices – as represented by our leading benchmark, The Liv-ex Fine Wine 100 Index – have risen threefold.

Slide 10: What next?

So where next?

In our view, we are still only scratching the surface as far as the internet’s potential is concerned. The next ten years are likely to be even more disruptive. But our sense is that the main changes will take place behind the scenes. It will be all about restructuring – what we call “post trade” –the supply chain and other back-office functions.

Granted this is not quite as glamorous as selling more wine, but it is where much of the residual inefficiency resides in the fine wine market and could unlock considerable future growth.

Slide 11: A post-trade revolution

We feel that there are two key issues with post-trade logistics and settlement that need addressing.

First, accounting and logistics functions in fine wine remain little changed in 20 years, despite the massive changes that we have already highlighted. In many cases, they are no longer fit for purpose and rely on expensive and unnecessary duplication of manual data entry. (We have customers who can only confirm an order after checking three different systems.) In a world in which we are all connected by the internet, this is completely ridiculous.

Second, fine wine continues to piggy-back on the commercial wine logistics infrastructure. Commercial wine is a fast-moving, low-value good, with a short, uncomplicated supply chain. Fine wine shares none of these characteristics. The internet offers the opportunity for fine wine to develop its own platform.

Slide 12: Improving systems

Tackling the systems question first, we envisage a future where there is increased data interchange between customers and suppliers.  APIs running along industry-wide messaging standards will enable the automation and simplification of long-winded and expensive processes.

Transactions, invoices, warehousing instructions and accounts entries will be handled electronically via integrated systems, allowing for straight-through processing. This will improve accuracy and lower costs dramatically.

We believe L-WIN – our new Universal Wine Code – is a key part of this process. It provides a common language for the trade: one wine, one code. This may seem like a small initiative, but it could have an enormous impact on the ease of data exchange. We are greatly encouraged by its enthusiastic initial take-up. It is a free resource and available online, so if you think it might be helpful, please use it.

Slide 13: A new supply chain

As far as the supply chain is concerned, the key point to understand is that – from a business perspective – fine wine and commercial wine share nothing in common...

Slide 14: Commercial wine

Commercial wine is:

Fast moving: Wines generally intended to be drunk within eighteen months of release.

Low value: The average bottle price in the UK (before tax and distributors’ margin) was just $2 in 2010.

Short and Simple: It has a logistics infrastructure designed to get the wine from producer to consumer in the most efficient way possible.

Slide 15: Fine wine

Fine wine is the exact opposite:

Slow moving: Fine wine has a long life span of up to 50 years in some cases, like the Latour 1961 we have pictured here.

High value: The average trading price for a bottle of wine on Liv-ex in 2010 was $400 - 200 times higher than in the commercial sector.

Long and complex: Fine wine has a complicated supply chain and is mostly bought and sold many times before it gets drunk.

Slide 16: Eliminate movements

Eighty per cent of the trade on Liv-ex is in wines from the last ten vintages; more than half is in wines that are less than five years old. As such, the vast majority are not being purchased for immediate consumption. They are moving from one storage account to another.

This is unbelievably expensive, risky and detrimental to the provenance and condition of the wine.
So unless the wine is going to be consumed, why move it?

Eliminating excessive movement of stock provides huge upside for the trade.

Slide 17:  What is the answer?

We believe that the best way forward is to reorganise the supply chain along central depository lines.

Put simply, a central depository is a mechanism for storing and managing ownership records in multiple locations.

It allows for ownership to be transferred via database transfer – rather than having to actually move the wine from country to country or warehouse to warehouse. This offers huge upside.

Slide 18: The benefits

Cost and risks (of damage, loss and theft) would be reduced.

Transactions could be completed faster, improving working capital cycle time.

And by keeping an electronic record of the storage and transport history, provenance would be improved.

This would be a win-win-win for producers, the trade and consumers.

Slide 19: To conclude

So in summary, the revolution in transparency is well advanced, but the potential gains from reorganising the post-trade infrastructure could be even more important. Thank you.

The Fine Wine Investment Market - An Inside View

 

Liv-ex Director James Miles will be giving a presentation at the Hong Kong International Wine and Spirits Fair today (as part of the Wine Auction and Investment Forum). His presentation, "The Fine Wine Investment Market - An Inside View", is available above. Click here to view the presentation in Chinese.  

The Fine Wine Investment Market – An Inside View

Hong Kong International Wine & Spirits Fair
Saturday 5th November

Slide 1: Intro

My role today is to set the scene. First I will provide some background on the market – what is fine wine investment and what makes fine wine investable? Then I will outline the current market situation and ask where the potential opportunities exist today.

Slide 2: What is Liv-ex?

Liv-ex operates a global trading platform for fine wine merchants. Our members come to us to check prices and find trading opportunities.

We also have a logistics business, called Vine, and sell price data and research to merchants and collectors.

Slide 3: A potted history

Fine wine has a long and distinguished history. Wine production dates back some 6,500 years. Bordeaux has been producing wine for two millennia and the UK has been Bordeaux’s largest export market for at least 900 years.

Indeed, the famous chateaux – the brands – of Bordeaux have been around for centuries. The first recorded mention was by Samuel Pepys in his famous diaries 350 years ago. Here he eulogised about a bottle of Chateau Haut Brion that he had tasted for the first time.

More recent landmarks include the publication of Robert Parker’s Wine Advocate, 33 years ago, which helped demystify wine and bring it to a larger audience. And of course, in the last ten years, the internet and sites like Liv-ex.com, which have introduced transparency to a traditionally opaque market.

Crucially, for as long as wine has been produced, traded and consumed, it has also been invested in.

Slide 4: The role of speculation

Fundamentally, wine is for pleasure. I have met very few collectors who were only interested in investment. But investment and speculation have always played a crucial role.

As in all markets, speculation adds to liquidity and is vital to the process of price discovery, helping to moderate imbalances in demand and supply.

It also allows growers to finance their crop, which for fine wine is often not ready for drinking for a decade or more.

The prospect of profit motivates merchants, collectors and wine funds to buy fine wine long before it is ready to drink. This in turn allows producers the luxury of making wines with the capacity to age.

In the last 20 years, fine wine investment has moved forward considerably – most notably with the increase in transparency – and is well on the way to becoming a credible asset class.

Slide 5: Today’s market

Today, the market is worth approximately US$4 billion per year. This represents a fourfold increase since 2004.

Globally, merchants dominate, accounting for 90 per cent of this trade. The balance is auctions.
The rise of new markets – such as Hong Kong and China – has driven growth in recent years. Of the US$400 million of wine sold at auction in 2010, for example, some US$180 million, or 40 per cent, was accounted for by Hong Kong alone. Many international merchants now do a similar portion of their business here.

Slide 6: How to define fine wine

What truly separates fine wine from commercial wine is strong demand on the secondary market.
Also important, is the ability to improve in bottle and a long track record of excellence. Critical opinion also plays a part. Traditionally, only wines that scored more than 90 points (from Robert Parker or his peers) were deemed to be worth buying.

From an investment perspective, we are talking about a surprisingly narrow universe of wines. The top 25 chateaux in Bordeaux and a handful of properties from other regions dominate. Indeed, our research suggests that just eight wines – the five First Growths, plus Petrus, Cheval Blanc and Ausone – account for more than 80 per cent of a typical wine fund’s portfolio by value.

Moreover, Bordeaux accounted for 95 per cent of Liv-ex exchange turnover in 2010, with the five First Growths taking 52 per cent of trade by value.

Slide 7: Factors that influence price

As supply of fine wine is tightly controlled in France, production in the great estates has been flat to down over the last 20 years. This has been compounded by the fact that the chateaux have become more quality conscious. As such, changes in demand have been the main determinant of price.

The most important of these in recent years has been new markets, most notably China and Hong Kong. As such, it has been brands that are followed in these rapidly growing markets, like Lafite, that have seen the fastest price increases.

Also worth considering are:

Vintage quality – Historically, but not exclusively, it has been the best wines from the best vintages that have provided the best returns.

Critical opinion – particularly that of Robert Parker, has also been important.

And finally, economic conditions – A recent paper by the IMF demonstrated a close correlation between fine wine prices and emerging market industrial production.

Slide 8: Emerging market influence

This correlation can be clearly seen in this chart.

Slide 9: The investment case

This demand/ supply dynamic makes for a compelling investment case. The Liv-ex Fine Wine Investables Index has achieved a compound annual return of almost 15 per cent over the last 20 years – better than any of the other so-called SWAGs, which stands for Silver, Wine, Art and Gold. (All of these collectibles have done well since 2008.)

Wine is also a useful tool for portfolio diversification, with a history of high returns and low volatility.

Slide 10: Best in class

You can see here that fine wine is best in class when compared to the SWAG group on measures of both volatility and return over 20 years, enjoying the lowest volatility and highest returns.

Slide 11: No panacea

Fine wine, however, is no investment panacea. Investors should never lose sight of the fact that somebody has to drink the wine if current prices are to be justified or increase. Moreover, one shouldn’t discount both the storage and opportunity costs of holding a commodity that generates no income.

Structural weaknesses in the supply chain and settlement infrastructure also contribute to low liquidity, high transaction costs and slow working capital cycle times.

Moreover, the market isn’t regulated, so investors should approach fine wine investment with their eyes wide open and do their own research.

As we have shown, fine wine is also heavily exposed to emerging markets, which many will regard as being a risk as well as an opportunity.

Slide 12: A correction underway

So what’s happening in the marketplace today? Let’s have a look at some data.

As you can see, after three years of strong price increases the market is currently experiencing a correction and is down 15 per cent in just four months.

This correction has many interconnected causes, such as sovereign debt worries, continued weakness in the global economy and, perhaps, a feeling that the fine wine market – particularly Lafite – was over extended.

Slide 13: Lafite drives the market up

Up until April of this year, the market rode on the back of China’s insatiable appetite for Lafite Rothschild.  In the five years to mid-2011, the price of Lafite increased more than twice as fast as its First Growth peers.

Slide 14: And down

But Lafite has also led the market down. Some vintages have lost 25 per cent of their value since July.

Slide 15: A buying opportunity?

With the market now down 15 per cent from its peak, are we approaching an attractive entry point? Studies of fine wine prices looking back 50 years have shown that, on average, fine wine has returned 12.5 per cent per annum. On this basis, the chart shows that we are not far off this long-run average, although it did overshoot this level in 2008.

While timing is always difficult, we remain optimistic about the market for many of the reasons we have highlighted. Nevertheless, we suspect that the next bull run is unlikely to be led by Lafite. Indeed, as the Chinese market becomes more sophisticated it seems inevitable that it will experiment with a broader range of wines.

Slide 16: Where next: The Magical 20

Next week Robert Parker is leading a tasting in Hong Kong, which he has dubbed “The Magical 20”. In his own words: “I have chosen estates that produce wines of ‘First Growth quality’ although technically not First Growths...and because of that are under-valued and very smart acquisitions."

Many of these so-called Magical 20 wines– such as Leoville Las Cases, Lynch Bages and Pontet Canet – have seen a significant uptick in demand in 2011 and it is possible that this trend could continue.

Here we have created an index of the these 20 wines and compared their performance to the Liv-ex Fine Wine 50, which is exclusively composed of First Growths. As you can see, the Fine Wine 50 has vastly outperformed the Magical 20 over a five-year period, but this gap has narrowed recently. Indeed, given that the Magical 20 wines trade at an average 85 per cent discount to the First Growths, Parker seems to be right in suggesting that there is plenty of relative value in these wines. A narrowing of the discount to say 70 per cent could see these wines double in price.

Slide 17: A further broadening: DRC

This chart of the wines of Domaine Romanee Conti (DRC) – Burgundy’s most famous estate – is further evidence that the market may be getting deeper. As you can see from the chart, weakness in Bordeaux has had no impact on DRC prices so far.

Slide 18: Conclusion

So in summary, fine wine is fast establishing itself as a credible alternative asset class.The fate of the market seems likely to remain closely aligned to changing tastes in China and other emerging markets. As such, Lafite may not lead the recovery, when it arrives, but wines such as the Magical 20 and those from outside Bordeaux do seem likely to benefit as demand deepens and the market becomes more sophisticated. Thank you.

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Liv-ex Fine Wine 100 falls 4.5 per cent in October

First Growth price falls led the Liv-ex Indices lower last month. The Liv-ex Fine Wine 100 Index - the fine wine industry's leading benchmark - dropped 4.53 per cent to 308.03, bringing its year-to-date performance to -8.40 per cent and its year-on-year performance to -2.41 per cent.

The Liv-ex Claret Chip Index recorded the most notable monthly losses, having fallen 5.90 per cent to 363.28. The index is currently down 12.19 per cent year to date and -5.89 per cent year on year.

The Liv-ex Fine Wine 50 Index also failed to move out of the red last month. The First Growth index ended October at 363.94, having descended 5.83 per cent. It has fallen 9.27 per cent this year and -1.05 per cent over the last 12 months.

The Liv-ex Fine Wine Investables Index closed at 319.92. Although it has fared slightly better than its peers, it is down 4.23 per cent for the month and -4.16 per cent for the year so far. Nonetheless, it has gained 2.20 per cent over the last 12 months.

The Liv-ex Fine Wine 500 Index is the broadest based of the Liv-ex Indices and is designed to reflect price trends in the wider fine wine market. The index fell 3.61 per cent to 276.10, but has maintained positive growth this year. It has climbed 7.36 per cent since January and 13.23 per cent since October 2010.

For all October index levels, please visit the Liv-ex Indices page on Liv-ex.com.

Please note that Liv-ex will be at the Hong Kong International Wine and Spirits Fair this week (3-5 November). You can find us at booth 3D-B26 in the Wine Investment Zone. If you would like to make an appointment with a member of our team, please contact info@liv-ex.com.

"Everyone needs some SWAG"

Against the current backdrop of underperforming equities and bonds, Joe Roseman, former economist at Moore Capital Management, argues that investors should prop up their portfolios with a new style of asset class: SWAG. This latest financial acronym stands for silver, wine, art and gold - assets which have all outshone equities over the last decade. (Read his Investment Week feature here.)

According to Roseman, the SWAGs' success can be attributed to several common characteristics. These have been listed below.

1) They are all physical assets.
2) They all have longevity – Lafite will last for 50 to 100 years.
3) There is no incumbent debt associated with the asset.
4) They are transportable and relatively easy to store/hold.
5) There is scarcity – a finite supply.
6) There is no income stream – so no income tax liability.
7) Asset performance seems relatively uncorrelated to equity markets.
8) A sovereign default would not alter any of the above traits.

An ideal investment is one that combines low risk with high return. Our analysis of the SWAGs' individual fortunes over the last decade reveals that fine wine (as represented by the Liv-ex Fine Wine Investables Index) has performed well on both counts. The Liv-ex Fine Wine Investables Index recorded the lowest volatility - a broad measure of risk - and the second-highest return in the ten years to August 2011, making it one of the group's strongest performers.

The chart below shows the annualised standard deviation (risk) and the compound annual growth rate (return) of each asset class. Art prices are based on the Art Price Global Index and all benchmarks have been converted to GBP to remove the effects of currency movements.

      

DRC leads in 2011

Friday's close saw the Liv-ex Claret Chip Index move 1.5 per cent lower for the week. The Liv-ex Fine Wine 50 also lost ground, finishing  down 1.2 per cent. Both indices are now up little more than 7% for the year to date. 

In  contrast, the wines from Burgundy's top producer, DRC, are gaining increasing market momentum. Indeed, the six Grand Crus produced by the legendary estate have significantly outperformed their Bordeaux equivalents since the start of the year, showing a price uplift of almost 30%. (See below.)

We will be releasing an in-depth look at DRC -  as well as all the latest market information and analysis - in tomorrow's Cellar Watch Market Report. 

 

Lafite enters negative territory for 2011

Though Lafite continues to see strong trade on Liv-ex, prices for the First Growth have started to drift. The chart below shows the individual paths of the First Growths in the year to date. As you can see, Lafite has recorded the weakest price movement this year and is now marginally cheaper than it was in December 2010. By contrast, over the same period last year the brand recorded a year-to-date move of 46 per cent.

 
 

Storing value

One of the more interesting data points that emerged following the recent sale of Lascombes was that the €200 million purchase price included €50 million of library stock.

Using the price data that we gathered to calculate the values of the top Bordeaux estates, we can surmise that this means that Lascombes was holding  approximately 125,000 cases of wine. (This assumes that all of the back vintages held are of the grand vin.)

If we extrapolate this out to the other 56 wines in our valuation (presuming that all of them hold a similar stock ratio), we can roughly calculate that the top chateaux are holding just over 3 million cases of wine, worth just over €5 billion. Or enough wine to keep the whole show on the road for almost four years, even if not another drop was produced. 

First-Growth release prices: When less is more

Over the past few weeks, numerous comparisons have been made between the 2010 ex-negociant release prices of the five First Growths, both with each other and with previous vintages. In most cases, however, commentators have only considered first-tranche prices, despite the fact that first-tranche volumes were extremely thin this year and subsequent tranches were significantly more expensive. Indeed, Decanter reported that the First Growths held back two-thirds of their stock in their first releases. With this in mind, we have collated the first, second and third-tranche prices of the Premiers Crus to paint a more accurate picture of 2010 pricing.

 

As you can see from the chart above, the first tranche of Lafite was released at €600 per bottle (ex-negociant) this year. If we were to ignore the prices of ensuing tranches, we might conclude that the wine was nine per cent cheaper than Haut Brion (released at €660) and priced on a par with Mouton and Margaux (both of which were released at €600). In reality, however, first-tranche volumes of Lafite were tiny and most merchants paid a great deal more for the majority of their stock.

Similarly, despite what first-tranche prices might suggest, Latour was not the most expensive of the First Growths this year, though the chateau seems to have released the least amount of stock. This is a complicating factor as we do not know exactly how much wine has been released, nor at what prices the chateaux will drip more stock into the market in future. Nonetheless, if we use the average price across all tranches as our benchmark for each wine's 2010 release price, Lafite clearly carried the highest premium, with the vintage costing merchants an average of €900 (assuming that the volume of each tranche was equal), compared with €780 for Latour.

Given the vast price differences between the tranches, first-tranche prices are, at best, misleading.  At worst, they are irrelevant.