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Our Investment Methodology

A common misconception by those new to fine wine as an asset class is assuming that all wine of a certain price point and calibre is worthy of investment. This could not be further from the truth. In the same way that different equities can be starkly different, carrying varying levels of risk, liquidity and volatility, wine is a malleable investment tool with a variety of characteristics. These need to be understood to invest successfully.

We want to offer some insight into how we at JF Tobias undertake this analysis and ultimately pick investment wines for our investors. This article will highlight a number of the intricacies of the wine industry, how it has evolved, and the volume of data we now incorporate in analysis. Hopefully this will give you some ideas on how to begin undertaking your own investigation.

 

Wine Investment Historically

Wine investment at the turn of the millennium was a very straightforward undertaking. The West was awash with cash and this new wealth wished to accompany their success with one of the oldest symbols of western luxury, fine wine. This reinvigorated taste for the product created an unprecedented level of demand that completely outstripped the finite supply. The scale of the imbalance rendered details that we now consider vital to investment strategy largely redundant. Vectors like vintage reputation, critic scores, and production volumes, were simply inconsequential details. Wine was cheap and the world was buying.

The subsequent decade saw the entire wine market charge upwards, fuelled by a lack of education amongst traders of a cheap commodity in an opaque and immature market. Further turbocharged with the introduction of foreign markets and the globalisation of demand, the bull kept running. Wine investment was simple; the only question was how big would your win be?

During this period investment was as simple as picking from one of the 10 or so reputable UK merchants, one that could help you access cases of classified French wine En Primeur (purchasing ‘wine futures’, whilst still in the barrel). After securely storing your cases in a bonded facility for 7+ years, you could then happily sell for astronomic gains.

If you had bought a case of Lafite Rothschild 2000 on release it would have cost you £183 per bottle. By the end of the decade the bottle would be worth £1083. A 491% increase. You might recognise that we now know this to be a very high-quality wine, but the same applied for off vintages. The same Lafite Rothschild, but made in 2001, would have cost £77 per bottle if you had bought on release. At the end of the decade the bottle would be worth £391. A 407% change from one of the worst wines Lafite produced this side of the millennium. I think we can all agree that there isn’t an investor in the world that would turn his nose up at that sort of performance.

 

Wine Investment Today

Today’s wine market is an entirely different space. There is a greatly increased number of educated global participants in the market, one flush with price sensitive data points scattered in an entirely decentralised distribution. Despite the lack of coordination this evolution in the market has had the effect of reducing spreads, increasing transparency, and made finding an edge a tougher challenge.

At JF Tobias we have embraced this challenge and believe we have created a methodology that ensures our investors sit ahead of the curve. Our approach is founded in technology and centres around the total absorption and centralisation of data. This core function allows us to undertake large scale objective analysis and utilise our value investing methodology effectively.

Without giving away our secrets to the special recipe, we wanted to show you some of the early processes involved. Many of which that you will be able to fact check and review yourself, to help create your own approach and analytical view.

 

Our Investment Methodology

The first stage is creating a profile for each wine and is arguably the most important, as it creates a platform for comparative analysis. To do so we have created a proprietary system that constantly pulls every price sensitive data point from around the market space for each of the key price vectors. These are then distilled into a single figure and attributed to the wines profile.

While all the vectors combine to give an overall image of the wine, we can separate them into two categories: Quality and Financial.

Quality Vectors:

  • Critic Score – One of the stranger nuances of the wine world is critic evaluation. There are a small number of critics that taste every wine and score them (typically) out of 100. Each critic has particular regions where they are more respected and each has their own style. So not only should a score be recognised but also weighted according to the critic. This process carries an enormous amount of sway over pricing and is therefore a fundamental vector. One final twist—most critics will retaste wines as they develop and subsequently rescores can have a huge impact on price trajectory.

Our system constantly pulls each critics reviews from the various data sources and pushing them through a process to account for weighting leaving us with a constant, accurate figure.

  • Vintage Score – As the above demonstrates, all wines are not made equal and this is largely because of the natural fluctuations in weather each vintage. The eventual quality and style of wine is influenced heavily by the climate due to the suns impact on grape development. A year bathed in sun will produce a wine that is fruit forward and whose tannins are instantly integrated creating an approachable and early drinking wine. A cold year will create an austere wine that will require time for the tannins to settle and become smooth enough to drink. The vintage score and details of the weather are therefore key to understanding a wines future price performance. An early drinking wine from a sunny vintage is going to enjoy the benefits of a shrinking supply far sooner than a tannic wine that requires 10 years in bottle to settle down.
  • Drinking Window – These are the years within which a critic believes the wine to be drinking at its best. It is therefore a good indicator on when the driving forces of supply and demand will begin to take effect on the wine. You should consider a wines proximity to the start and end of the drinking window at all times and infer how this may affect price activity. Much like critic scores the suggested windows can change during a rescore so an awareness of this as a fluid vector is key.
  • Production Volume – The total production of a wine each year is vital to understanding the level of consumption required to move the wine from abundant to rare. This directly interacts with the price momentum during the drinking window but also has a bearing over the liquidity and volatility of the wine.

Financial:

  • Brand Power – This is the most qualitative of the Financial vectors as there is no fixed number or source. As a result JF Tobias has created a unique ranking system to measure all the variables that construct a brands strength around the world. Examples of this would be the brands pull within each of the major markets. While it may appear more akin to the previous category brand power has wide ranging associations with liquidity and volatility, and therefore risk.
  • Liquidity – This is a vector that must be closely accounted for when constructing portfolios. A client’s goals, risk tolerance, and exit timelines should be mirrored in the liquidity levels held by the wines chosen. To manage this our system pulls through data on the frequency of transactions and the depth of availability on the market of each wine creating an insight into live liquidity.
  • Volatility – Another key risk vector that should mirror a client’s designs for their investment. There is a full spectrum of volatility available when stock picking. From the highly volatile micro productions of Burgundy, to the very predictable and stable wines of Bordeaux. To monitor this we continually calculate the inter-trade deviations.

 

The variations in these vectors range from the obvious to the subtle. However, once you have created profiles for each investment grade wine and its many vintages (over 6,000 wines), trends become apparent. From here we are able to make reasonable inferences on desired learning outcomes, such as risk and price trajectory, which drives the creation of hypotheses for further investigation.

The key point we wish to impart is that each case of investment grade wine is different. Understanding the individual characteristics of your stock pick is vital to ensuring it is right for the role you want it to play within your investment portfolio.

If you wish to see this in action, our investment manager, Mr Jake Leighton, writes a weekly investment newsletter focussed on the profile. Each week he discusses a different wine, reviewing their vectors and discussing their importance and what role it could play within a portfolio. If you would like to sign up to receive this newsletter, please click below now.

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The Author

JF Tobias

JF Tobias