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Understanding Wine as an Investment, and a Defensive Asset

To many wine investment is a rather alien idea. The concept that wine can be used as a tool for investment, rather than something to simply accent a Sunday roast, can, and should, create a certain amount of cognitive dissonance. At JF Tobias we recognise that not everyone works in finance, and not everyone has the time to pore over literature to see past a bamboozling sales pitch. So to the majority who are new to this, we wanted to create a cheat sheet. A document that simplifies the buzzword bingo used in our industry and put wine investment into real world terms. Over the next ten years what role will wine play in a portfolio, and should you be interested?

 

Understanding Wine as an Asset

Anyone wishing to educate themselves about wine as an asset class, and attempt to understand why they would include it in their own financial portfolio will have undoubtedly come across glossy guides, including our own, that extol the many financial virtues of wine. Traits like the beneficial lack of volatility and correlation to other financial markets, high levels of liquidity, and resistance to inflation, result in an asset class perfect to provide a defensive quality to your portfolio. These all sound like the right phrases and whilst that is all well and good, what does that mean and why is it important?

To answer this question, we need to think about what is happening in the world right now. To simplify the convoluted matrix that is world financial markets and understand the current state of play. Only then can we decide which assets are best placed to combat the economic environment and whether wine is suitable for you.

 

Understanding Quantitative Easing, and “Black Swan” Events

The recent COVID-19 pandemic has caused a collapse in global financial markets with indices capitulating in vicious style. These sorts of dramatic collapses are known as “black swan” events. Unusual occurrences that create volatility and impact far beyond the normal operating parameters of the market. The designation “black swan” is a term inferring infrequency and rarity and until recently that label has been true. Throughout history whenever a collapse of this nature and size has threatened, governments and central banks have taken measures to nullify the impact. That is until 2008, when excessive abuses of credit and debt markets culminated in the violent collapse now known as the 2008 Financial Crisis.

Due to the size and scale of the Financial Crisis central banks were forced to turn to Quantitative Easing. QE had always been viewed as a controversial and risky tool, avoided by central banks and reserved as a last resort to mitigate genuinely dangerous economic circumstances. Economists have always warned that while it is a very effective measure for lessening the effects of a depression, it carries with it the very real threat of creating a deep and lasting recession if used excessively.

Simply put, QE is when Central banks, like the Bank of England, buy Government debt and lower interest rates to stimulate the economy and increase the amount of money in circulation. By allowing governments to run at a deficit, and by putting money back into the hand of the borrower, it stimulates the economy to collectively spend our way out of the problem.

After 2008, the fragility of the global recovery meant that QE slowly moved from a risky short-term measure feared by central banks, to a normalised and central part of modern monetary theory and policy. No longer just a short term source of relief, QE became the new default method and safety net for governments to remedy poor economic performance. In the 12 years that have elapsed, central banks have been left with no other option but to steadily deplete QE reserves by cutting rates lower and lower. Ultimately edging closer and closer to our current position just above 0% interest rates.

As a consequence central banks are now left without traditional economic means to stimulate the economy; raising the question, how does the government bump start the recovery? The answer could be negative interest rates, it has been seen before and is arguably the ultimate way to mobilise saver capital. If you as a saver begin to lose money simply by keeping it in a bank account it wont be long before you wise up and put that money to work buying assets.

A further question that should be raised is about the frequency of black swan events. The time between these once extremely rare seismic shifts in the economy appears to be shortening, and frequency increasing. With traditional economic defensive measures exhausted, could we be entering a period of severe austerity coupled with a vastly increased level of volatility within conventional markets? Whatever the government and central banks decide is the best method to drive us out of this economic slump, it is more than likely going to be drawn out over the next decade and to be an extremely tough journey.

 

Understanding Wine as a Defensive Investment

With this is mind we can now consider why wine might be useful for you during this period of economic uncertainty. If future policy is to include such measures as raised taxes and negative interest rates, investors will be forced to put their money to work. So what is the best way to do it?

When testing economic times appear on the horizon, seasoned investors will begin to shift a larger proportion of their capital into more conservative asset classes, also known as defensive investments. This conservative method is designed to ensure that the underlying capital is kept safe during the ensuing volatile market conditions. The purpose of this is capital preservation, with capital growth becoming a secondary priority. Even in times of prosperity, those experienced in investment and finance will always have a portion of their worth stored in something defensive, in case of black swan moments much like 2008 or COVID-19. Historically, examples of these assets have been fixed interest products, bonds,
cash, real estate, art and gold.

A defensive asset typically lacks in volatility, meaning prices remain stable. Even in times of great economic stress negative price changes are gradual and predictable. Defensive assets also show very little correlation to central financial markets. Due to their vastly different composition, the markets surrounding the assets are driven by different forces to those of the central financial markets. Consequently they do not move in a similar or correlated way.

A physical asset tends to move with inflation and is therefore resistant to it. As a good, when the pricing norms move, so too does the capital value of the asset protecting the owner. So why is wine suited to the defensive role and how does it compare to others in the class?

 


  • Scale – unlike real estate or art, wine does not require vast sums of money to enter into the market. Investment grade cases start at as little as £1,000.
  • Transaction costs – many defensive assets require expensive commissions and management fees. JF Tobias promises to ensure you are placed in under the UK market price and will commit to your exit to ensure correct alignment of incentives.
  • Taxation – wine sits in a bonded system removing VAT burden and enjoys a range of CGT exemptions (please see our guide for full details).
  • Liquidity – wine can be part sold rapidly as required to anywhere in the world. Whereas most defensive assets due to their scale are cumbersome to sell and require extended timelines.
  • Potential – while it is a secondary aim of the asset, if done correctly wine has an incredible propensity for gains. Not only will it out perform interest rates it can and has outperformed global indices. When markets turn upwards its status as a Veblen good ensures values track upward at an incredible rate.

 

Wine then would appear to be very suited to the role in many respects. It is an inexpensive and effective way to insulate yourself over the long term. In fact comparative data from the recent COVID-19 driven collapse demonstrates very clearly the effectiveness of wine as a hedge for disaster. While equities dropped by over 30%, wine indices tracked along losing an average of less than 5%.

It should be noted that wine is not without its nuances. It is an absolute must to find a trusted investment partner to guide you through the process. Wine investment like any other asset class requires extensive analysis and expert knowledge. The same level of due diligence and caution should be applied as you would to any investment.

 

Fine Wine Investment with JF Tobias

To summarise, the socio-economic environment will force investors to take measures to protect and preserve capital. As black swan events and volatility increase in frequency, investors should consider bolstering defensive strategy and prioritise preservation. Wine can provide an investment portfolio with the desired defensive element if utilised correctly.

Finally, while we believe heavily in wine, the point we want to make very clear is that wine should play only a part in your portfolio. It should not be your one basket, containing all your eggs. Much like those experienced investment individuals you should correctly diversify your portfolio to spread your risk, and manage your exposure to all market forces. By balancing your worth, holding something as stable as wine would, for example, allow you to chase returns in the more volatile equities market.

It would be easy to paint a one-sided picture of how wine as an asset could be better than anything else available. Indeed many companies do just that, manipulating statistics to fit desired outcomes. However, at JF Tobias we believe in radical transparency and social responsibility. So we intend to arm you with the facts necessary for you to make the best possible decision to protect your financial future.

The Author

JF Tobias

JF Tobias