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Investors increasing excitement about the opportunities in the wine industry is fueled by stunning returns on investments (ROIs) in recent years. It has outperformed traditional and alternative investments. Having said that, it has its own drawbacks. But even if you’re unwilling or unable to physically own and store wine yourself, you have another option for tapping into this investing trend.
Wine funds are similar in operation to private equity funds. For minimal capital investment, investors get access to a wine connoisseur and an investment management company, helping to relieve the stress investors might feel when purchasing and managing bottles on their own. These funds also offer some guidance, reduced risk, and exposure to different types of high-value investment grade wines.
Given the profitability, allure, and snob appeal of wine over the past few years, wine investments have become so popular that numerous wine funds have appeared in Europe and Asia, most notably Hong Kong and mainland China. Some of the more popular wine funds include:
- Watermark Fine Wine
- Cult Wine
- Investment Wine Fund (publicly traded in Australia)
- Orange Wine Fund (publicly traded in Australia)
- Challenger Wine Trust (publicly traded in Germany)
- Nobles Crus
Wine Funds: 5 Investor Concerns
Investors looking to invest in a wine fund should consider the size of the investment required to join a fund. Their investments may be tied up for up to five years, and a request for redemption from a wine fund may take weeks, so investors should only use the money they’re willing to tie up for a relatively long period.
It’s also difficult for the wine fund and its investors to estimate the value of a wine portfolio, because there are no international standards or indexes used to value wines or wine portfolios. The lack of a centralized wine market, limited distribution options, infrequent wine trades, coalesce to create a market that is still somewhat illiquid, despite the increasing popularity and value of wine globally.
In addition, wine funds have a limited ability to unload large quantities of wine in down and/or declining markets, or when investors ask for redemption. This means that it may take wine funds weeks to sell off portfolios or parts of portfolios in order to raise funds or buy out investors.
Furthermore, most wine funds invest primarily in Bordeaux, Burgundy, and select California wines, concentrating their investment on the best and most recent vintages.
Lastly, there are no publicly traded wine funds in the USA. Moreover, most wine funds are not regulated. Even more disturbingly, most wine funds are established in low-taxation and low-regulation countries (e.g., St. Kitts, Nevis, the Cayman Islands), so they’re subject to little or no government or industry oversight.
Benefits and Costs of Wine Funds
Wine funds have three major benefits: no direct transaction for the wine owners, no storage fees, and no transportation costs.
Initial capital investment in a wine fund may range from US$13,000 to US$330,000. Investors must also pay a management fee (1.5% – 2.5%), and a performance fee of (generally) 20% on wine sales. Wine funds do not pay annual dividends, nor do they offer any other pecuniary benefits outside of profits made from the sale of the wine.
Ultimately, wine funds are a toss-up. They increase the exchange of information about the industry and wine trades. However, they can also cause a market crash by having a fire sale on specific vintages.
Overall, wine funds have outperformed traditional markets and their indexes. However, that is not enough if you want to invest in them. Investors must look for wine funds that also outperform the wine indexes (e.g., Liv-ex). Note that there are other indexes besides Liv-ex, and there are innumerable ways for wine funds to value their portfolios, and no international standards, regulations, or securities insurance to back up those exchanges’ and indexes’ valuations. Thus, a lack of transparency, accountability, and regulation continue to plague this industry, creating a degree of risk that investors must be willing to accept and tolerate.
Liv-ex, London International Vintners Exchange, is the most well-known wine index in the world. Launched in 1999, Liv-ex has an Internet- and phone-based information and trading platform. Currently, 270 wine merchants from 22 countries trade wine via Liv-ex, the bulk of whom are private individuals and wine funds. The exchange is primarily made up of Bordeaux; red Bordeaux represents more than 91.33% of the index.
Liv-ex’s Fine Wine Indexes help wine investors track the top-performing wine, Burgundy, and Bordeaux around the globe. Skittish wine investors may prefer to invest in the most highbrow brands in hopes of securing the most predictable returns on investment, and watch how other less vaunted labels and years are doing on the market before they dive into riskier waters.
The Liv-ex Indexes are created by using the Liv-ex Mid-Price to rank the wines, Burgundies and Bordeaux. The Mid-Price is based on merchant transactions, which are believed to be the best and most comprehensive way to price wines in the market. The Mid-Price is determined by taking the midpoint between the highest and lowest bid prices on the Liv-ex
trading platform. The Mid-Price is then checked by a Liv-ex valuation committee to make sure that the price reflects all market information on the list items (e.g., merchant offer prices, and historical Liv-ex transaction prices).
There are six Liv-ex indexes, each representing daily price movements for a different group:
- Liv-ex Fine Wine 50: the Bordeaux First Growths
- Liv-ex Power 100 Index: the 100 most powerful wine brands around the globe
- Liv-ex Fine Wine 1000 Index: the top 1,000 wines around the globe
- The Burgundy 150 Index: the 150 most active Burgundy wines
- Liv-ex Bordeaux 500: the 500 leading wines from the Bordeaux region
- Liv-ex Fine Wine Investables: the most “investable” wines from 24 top Bordeaux chateaux (approx. 200 wines)
Unlike equity indexes, investors cannot invest in wine indexes, and there are no exchange-traded funds based on wine indexes.
Why Hong Kong is the right place to invest in wine
The increasing desire to invest in and consume wine stemming from China and emerging markets means that the wine industry is likely to continue to provide good returns on investments made into it. Moreover, Hong Kong has now replaced New York and London as the best place to auction wine. Not only are the wine prices fetched on Hong Kong auctions much higher on average than those in New York and London, but it is also right next to the hottest wine market in the world – mainland China.
In the end, like with all other investments, wine investors should heed the warning, “buyer beware.” If investors choose the wine fund approach, they should look for firms that create investment portfolios based on each investor’s specific needs, risk tolerance, investment liquidity requirements, and long-term investment goals.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.