Buying & selling wine for investment is by no means a new phenomena. Enthusiastic drinkers with eyes bigger than their capacity, be it body or cellar, have always erred on the side of caution when a good vintage comes along. The dwindling availability of said year will of course make it even more desirable & push the price up. Throw in a few good years to age & things start to get interesting. So, it is easy to see how wine became an increasingly popular investment, even to the less thirsty amongst us.
In the volatile market of the late ‘90s, investors looked for more tangible assets. Wine ticked a lot of boxes: in finite supply, ever-increasing global demand AND as a perishable asset (or for something infinitely more raw & appealing, HMRC’s “wasting chattel”) exempt from Capital Gains Tax (CGT) provided you are not a regular trader (although this is inevitably a rather grey area, dependent on its ‘to drink’ date). Throw in a heady mix of the emotional & functional, it would seem rude not to. (And if all else fails, at least you’ll be well-watered & broke, rather than just the latter)
As Joe Roseman, author of SWAG (Silver Wine Art Gold) astutely surmises: in a time the “government keeps interest rates below inflation” investors naturally look to more physical assets as a store of value and “the prudent saver is called upon to bail out the reckless borrower”. On a macro level think the Eurozone, micro think opportunist investment companies.
This surge in demand for wine, both to buy & sell, was initially wonderful for the industry. Wine investment seemed easy to understand & no longer the preserve of an old boys’ network and/or family heirloomed cellars. Anyone could buy wine & anyone could sell it. AND it delivered good returns, sometimes in excess of 10% year on year. Sales of investment grade wines from Mouton Rothschild & Lynch Bages in Bordeaux, to Armand Rousseau in Burgundy, to Australia’s Penfolds Grange rocketed. Bordeaux, of course, led the way in the investment world: sales at en Primeur (where the vintage is sold whilst the wine is still ageing in the barrel) became market-floor bidding wars & prices soared, peaking from 2009 to mid-2011. However wine is, of course, not exempt from the trials & tribulations of a global market & the second half of 2011 saw prices drop dramatically. As shown in the Liv-ex Fine Wine 100, charting the prices of the 100 top/most desired wines here
Alongside traditional channels, people looked for new ways to buy & sell wine. Wine investment companies, complete with traders & brokers, sprung up, all chomping at the bit to beat the market. Wine Funds became commonplace & online trading platforms like Liv-ex gave wine it’s very own stock exchange. Part exchange, part index provider & with a logistical arm, Liv-ex provides a solid backbone for the industry, bringing a much-needed level of opacity to the wine valuation process in creating both an accessible & transparent marketplace. A well-executed contrast from the cloak & dagger opportunists.
As positive as this all was, wine is not a regulated industry. This lack of regulation left the door wide open for scam traders AND naïve investors. A preyed on B with unscrupulous aplomb, & before B knew it they were investing life-long savings into a commodity they knew little about. Wildly over-exaggerated returns were flung around left, right & centre; any profits immediately reinvested. It was increasingly difficult to get a grasp of what the actual value was of this “stock”. B’s fate lay at the hands of A’s wiley trading.
Dig a little deeper & the gulf between the Financial Conduct Authority (FCA) investment guidance & that of its unregulated counterparts become only too apparent. Wine investors have simply adopted a traditional wine merchant model, never meant for investment, that has neither evolved or adhered to standard best practice of the financial world. Inevitably the subversion of this model, where the wine is bought 20% below market value (or alleged market value) with brokers charging 10% commission on exit, or 35% up front, gave traders free pocket-lining reign. And it was thirsty work, of course.
There was no RDR (Retail Distribution Review, which filtered cowboy IFAs out of the equation with an advanced benchmark qualification) in unregulated wine. Perhaps if these brokers had been put a similar level of extraction, trusting investors would have been left with something altogether less bitter on the palate.
To pick at the most obvious seams: there is no aligning of objectives between manager & investor, meaning parties are mis-incentivised & mis-sold respectively. Instead of structured & performance related incentive fees, investors were locked into their portfolios by the brokers’ commission structure, which in the case of the 10% at exit option, necessitates double-digit wine price growth just to break even. The 35%ers had long since run for the hills, storage & insurance companies in hot pursuit. And when they ran/drove their very fast sports cars, the invested stock left behind was often in ‘umbrella’ accounts with no clear ring-fencing of their clients’ assets (& in many cases read life savings), leaving it extremely vulnerable upon company collapse.
So, when things started to level out late 2012, early 2013, the cracks started to show. Albeit crevices & there was nothing gradual about their discovered. Investors were locked into their tumbling portfolios & the resulting debris covered many a track. This flurry of frenzied trading saw many of these wine investment companies go into liquidation. In fact well over 50 over the past 4 years. Nedim Ailyan, Director of Abbot Fielding, leading insolvency practitioners with great experience in the wine world, cited “mismanagement on a colossal scale” in their clear up of Bordeaux UK in 2012. With creditor claims over £10.5 million & assets at £2.5 million, it doesn’t take an economist to disentangle a problem. And this was only 1 of 8 cases they were working on at that given time. Colossal suddenly feels rather diminutive. And more recently Bordeaux Fine Wines, European Fine Wines, Encarta Fine Wines, Worldwide Wealth Collections & 1855.com to name but a few. The list feels eerily familiar.
With an average of 15p returned per £1 invested in these liquidations, life-savings were not what they once were. Investors, even those who had been more resilient to the perpetual hard-sell approach were at a loss. Herein lies the next door that a lack of regulation rather sadistically opens wide. The traders walk out of the liquidation with their lists; previous investors see no way out & make an easy target. The inevitable reinvestment game commences as the traders set up again, going through their ‘To the Rescue!’ lists systematically.
There is hope, however. Earlier this year the court shut down 2 wine investment consultancies (set up specifically to help victims of previous investment scams) for their “cynical targeting” of vulnerable investors, forcing them to reinvest wine with vastly exaggerated returns. Again. The crack-down has commenced.
Prominent wine writer Jim Budd leads the way with his investdrinks blog, going to great lengths to publicly name & shame companies, like this latest post on Vinance here. He believes cold calling “and the associated sales have blighted wine investment”. With the FCA taking a strong stance against the use of “fraudulent” cold calls, he sees the Wine Investment Association’s (WIA) omission to follow suit as “perhaps a fatal flaw”. This of course leads into a bigger discussion as to whether self-regulation can actually work. “Quis custodiet ipsos custodies?” To quote Juvenal from his Satires “Who will guard the guardes themselves?” With many of the WIA directors actively involved in the wine investment market, can the bar really be set high enough?
An independent & wider-reaching body exists in the form of the Wine & Spirit Trade Association (WSTA) which offers sound support & advice, campaigning for transparent & fair industry practice. It is particularly well versed when tackling fraud (for a useful PDF & our corresponding comment follow link here) , but is not (& does not presume to be) a regulatory body, so is powerless to implement actual change. With a wealth of information availably online, it does, however, do a fantastic job in building public awareness, so we are at least moving in the right direction: pushes for greater regulation & higher professional standards in the industry feel like important milestones.
But what next? Faith needs to be restored in the industry – more regulation, more whistle-blowing & more transparency. But how? An INDEPENDENT regulatory body with power to control alternative asset classes (oh yes, wine does not stand alone.. rather predictably the same “investor managers” crop up across all of them) would provide a solid structure for the industry to pull around. And pull together it must. What would happen if merchants simply stopped selling to these companies? If change comes from within, then let the core of the industry fly its flag. Dress & support this change with greater transparency & simplified process, we could be on track to nurturing the stock, trade & passion that will keep it afloat.
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