Fine Wine Funds – Caveat Emptor!


Location Date: 
October 1, 2012
Content: 

I am a big fan of wine and, as my friends know, my passion are the wines of Burgundy.  I have many friends who also love wine and some who also distribute or produce fine wine –it is a wonderfully social and pleasurable hobby!

Over the years, I have had numerous people approach Arrow about distributing or investing in a wine fund.  I have always said that sounds like fun but no thanks.  I believe that there are four reasons to just say ‘no’.

Firstly, size matters.  There is only so much “investment grade” wine in the marketplace –the competition from existing long time ‘non-financial’ buyers with strong relationships across the distribution chain can make it very challenging to secure a significant allocation of the best wines.  In my opinion, you would likely max out a wine fund’s capacity at about $75 to $100 million.  So from a business perspective this is not a very scalable strategy.

Secondly, the costs of managing such a fund would be high. Storage, insurance, valuators and the cost of buying/selling (bid/ask & VIG at auctions etc.) make this a real challenge.

Thirdly, liquidity (no pun intended) would be a challenge.  There are some wine funds offering monthly liquidity to investors which makes little sense to me.

Finally, and most importantly, pricing is a real challenge.  An article that appeared in the FT over the weekend highlights this issue very clearly. Nobles Crus, one of the larger of the dozen or so funds out there, appears to have a major pricing discrepancy versus its peer group. The Fund’s performance versus the Liv-ex index of fine wine prices (www.liv-ex.com) has been nothing short of spectacular as shown in this graphic.

If you simply showed me this graph AND you said it was not fraud, then I would say this guy has either a great short book or is an incredible wine picker. Alas, you can’t short wine and the downside correlation between collectable wines is virtually 1 –with only a few exceptions. As the FT reports, “Nobles Crus’s 50 largest holdings of Bordeaux, which represented a third of its portfolio, were worth €26m, according to Liv-ex. Nobles Crus had valued the same bottles at €36m –37% higher”.

Regardless of whether there is something sinister or not, pricing is usually done at the mid price of the bid/ask spread based on Liv-ex quotes. That makes no sense to me –it should be done at the bid –especially if you are offering monthly liquidity. Otherwise these funds are better suited to a private equity structure whereby fees are charged on a “when sold” basis to avoid any discrepancies. Apparently the FSA is now looking into banning these types of funds from being sold to retail investors. A good idea!

With the global slowdown in full effect, the wine market looks vulnerable. The ultra high net worth in markets like Asia which have fuelled huge demand for the best of Bordeaux and Burgundy are likely to take a pause. This is good news for most collectors but for investors may I suggest you sell and take your redemption proceeds “in kind” –drink up all that excess liquidity!!

Jim McGovern