Cult Wines: wine can be a great asset class for investors

People love wine because it tastes delicious and if you drink enough it makes you giddy (in other words drunk). People therefore typically buy wine to consume it. A study, conducted by Sonoma State University, found that 90% of American consumers open a bottle within one to two weeks after purchasing it. Who can blame them? It is a drink after all.

However, there is a unique breed of people who are both passionate about wine and financially savvy. They look at fine wine as both a drink to be consumed and as an asset class prime for investment. This outlook might upset romantics, but it raises a question for all wine aficionados to explore: “What makes fine wine an attractive asset class for investors seeking financial return?”

We sat down with Tom Gearing to explore this exact question. Tom is the Co-founder and CEO of Cult Wines, a wine investment company. They combine financial and technology expertise with a great love and passion for our favourite beverage. Tom’s pearls of wisdom are uncovered below:

Why should you invest in wine

Reason 1: fine wine is a store of value, which typically appreciates in value over time

There are historic records of people collecting fine wine and perceiving it as a luxury product. Thomas Jefferson, for example, collected first growth Bordeaux. Tom was quick to point out to us that “in the last 350 years, a bottle of first growth Bordeaux has always had a dollar value on the market. You cannot say that about a share in a particular company. There’s not many companies that have been around for that long.” There is reassurance for any investor that if they invest in fine wine, the asset they own has been traded for a significant period of time and therefore is a store of value.

Furthermore, the dollar value of a fine wine typically appreciates the longer you hold onto it. There is a finite amount of wine produced by a Domaine or Chateau each vintage. As people drink the wine from that vintage, there is less supply. Assuming demand remains consistent over time or even increases, then the price of the wine will increase too and generate returns for the investor when they come to sell their asset. Looking back at historic performance data from the last 25 years, Tom suggests that a sensible return to expect is approximately 10% per annum on fine wine investments. By contrast, the S&P 500 index has returned an average annual return of 7.7% since 1928. Not bad!

Reason 2: fine wine offers investors diversification

All investors would like guaranteed high returns. Unfortunately, investment is not that simple. Investors are always balancing risk and reward in their investment decision making. A key technique they use to mitigate risk is diversifying their investment portfolio. It is prudent to invest in different asset classes that ideally have low correlation in their performance. In the circumstance that one asset decreases in value, there is a good chance the other asset will not and therefore protect the investor.

Wine is a great asset class for investors looking to diversify their portfolio. Tom summarised that “In most of the time periods you look at, whether they are boom periods or downturns, wine has shown to have a relatively low correlation with the rest of the financial markets”. He puts this down to the fact “it is protected in a way because you have so many different cultures, economies and pockets of wealth that like wine.” There is always demand somewhere in the world giving the market stability.

Of course, if the world economy tanks then in all likelihood so too would your wine portfolio. However, you will have much greater problems than your wine investments if that is the case.

Reason 3: there are potential tax perks (listen to your tax advisor NOT The Premier Cru!)

Fine wine can be a tax-free investment. HMRC regard it as a wasting asset, assuming the predicted useful economic life of the wine is less than 50 years. In such circumstances, it enjoys an exemption from Capital Gains Tax. Get the champagne on ice (or perhaps in a bonded warehouse)!

The wording above is sufficiently bureaucratic and tedious. We are not tax advisors. Seek advice before assuming your investment is not subject to capital gains tax, otherwise Dishy Rishi might be having words with you.

Reason 4: you can invest whilst having… Fun?!

Cult Wines are truly passionate about wine. Tom has been visiting Burgundy with his father, Co-Founder & Chairman, since childhood. He regaled stories of tasting his first wine, a Grand Cru Musigny Blanc by Domaine Comte Georges de Vogüé, and visiting top Domaines (see picture below). Those trips kickstarted a deep love and appreciation, which is woven into the culture at Cult Wines.

It’s fair to say that investing and passion do not always go hand in hand. However, investing in wine is not only financially rewarding but also fun (especially with Cult Wines)!

Too good to be true? You bet…

Challenge 1: you need to know quite a lot about wine

When something seems too good to be true, it normally is. The first challenge to investing in wine is that you need to know quite a lot about fine wine to make good investment decisions. We tested Tom to rate the investment potential of our recent purchase of 2022 Marsannay Clos du Roy by Domaine Sylvain Pataille (which we will be drinking). We gave him no prior warning and he was instantly able to assess whether we made a good investment decision. This is a touch intimidating for the novice!

There is an obvious solution to this one: find a good advisor who knows what they are doing. After all, you would do that with any other asset class you want to invest in.  

Challenge 2: you need to have a long time horizon

The supply and demand dynamics that enable wine to appreciate in value are a blessing and a curse. The blessing is that it enables wine to increase in value. The curse is that it can take a long time do so. Supply typically needs to dwindle for the price to significantly appreciate, which takes time.

Once again, there is an easy solution to this challenge. Allocate a sensible proportion of your investment portfolio on wine, so that you are not relying on your wine investments to generate a return quickly. Other asset classes will be better suited for that purpose. As Tom stated “if you have £20k in a savings account and you put it all into wine, then that’s a stupid idea”. No further commentary required.

Challenge 3: it does not offer the same liquidity as other asset classes (the irony of that statement is not lost on us!)

You cannot guarantee that wine can be sold as quickly as other asset classes. The process can take longer because it can take time to find a buyer. This challenge can also result in less predictable price spreads, especially if there are very few potential buyers for the wine.

Tom acknowledged that “no one has quite answered the question for retail investors around liquidity for wine”. One of the principle challenges for Cult Wines is managing client expectations upfront, as often “people have an unrealistic expectation that any wine can be bought and sold just like that”.

The solution is twofold. Firstly, heed the advice above that you should allocate a sensible proportion of your portfolio on wine and not put all your eggs in one basket. Secondly, strike a balance between regional diversification in your investments and concentration on specific wines and producers. Diversification is helpful as wines from some regions might be quicker to sell than others. For example, grand marque champagne is always in demand from trade customers (e.g. restaurants). It might be easier to sell than a young Cru Classé Bordeaux that takes ten to twenty years before it is ready to drink. Concentration is also important as it is far easier to sell 10 cases of wine from one in-demand producer than it is to sell 10 cases of wine from 10 different producers.

Challenge 4: counterfeiting unfortunately does exist

We’ve all seen Sour Grapes. Counterfeit wines do exist, but do not let that perturb you. Of the challenges above, this is really the easiest problem to avoid.

The solution is simple. Buy from reputable sources and get condition reports when you purchase an investment grade wine.

Conclusion

Wow! This has been a long one. Thank you so much for reading.

We love to drink wine and that’s where our hearts, time and attention will always be. However, why shouldn’t you invest in something you love? You will probably end up far more knowledgeable about your investment and make better investment decisions as a result.

There are risks to investing in wine, just like any other investment you make. With a trusted advisor like Cult Wines, the potential reward can far outweigh the risk whilst complimenting your investments in other asset classes.