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Wine A long-term alternative investment that yields high returns and has low correlation with other assets
Investment-grade wine is an alternative asset class similar to gold, fine art, rare coins, and stamps. In the last decade, investment in
Fine Wine provided higher returns compared to the traditional asset classes such as equity, bond, real estate, or commodity due to its
limited production and increasing demand from the emerging markets, especially China. Also, Fine Wine investment had low
correlation with other asset classes (less than 0.4) during the same period. Higher returns and low correlation make Fine Wine an
interesting investment asset class. Moreover, after moving in the negative territory for almost four years on poor vintage quality, Fine
Wine prices rebounded in August 2014 due to positive investor sentiment, driven by rising demand from China. The investment-grade
wine index Liv-ex has generated positive month-on-month returns for four months in a row since August 2014. Amid such historically
low price levels, Fine Wine is emerging as an attractive investment alternative for long-term investors considering its high returns and
low correlation with other asset classes. Fine Wine is expected to have a bright future in 2015 due to growing demand from buyers in
Asia and the US; moreover, an improved vintage harvest in 2015 would support the price of Fine Wine.
Ankit Goel, Bhavik Mehta, and Garima Gupta Investment Research Team, Aranca
Fine Wine investment offers portfolio diversification at higher returns and low correlation
Investment in wine generated consistent (~9.5%) annual return in the last decade
According to MarketLine, the global wine industry was expected to sell 22.1bn liters of wine and generate total revenues of around USD
292bn in 2014. Only ~1% of the total wine produced is used for investment purposes, while the rest is consumed. The wines used for
investment purposes are also called blue chip or investment-grade wines. As the value of wine increases over time, it offers high
returns if held until the maturity stage, which varies from a minimum of five years to 20 years or more. Over the last decade, the price of
wine had an average annual appreciation of approximately 9.5%. Gold is the only asset class under our study which generated slightly
higher returns (10%) than Fine Wine during the same period. Since investment in Fine Wine provides higher long-term returns and has
low correlation with other asset classes, it is considered as an attractive alternative asset class and acts as a portfolio diversifier for an
investors investments.
Fine Wine and gold yielded highest returns among different asset classes in the last decade
450
400
350
300
250
200
150
100
50
0
2004
2005
2006
2007
LIVX100 Index
S&P Global REIT
CISDMEW Index (Hedge fund)
S&P World Commodity Index
2008
2009
2010
2011
2012
2013
S&P 500
MSCI World Index
Gold
MorningStar EM Corporate Bond Index
2014
Source: Bloomberg
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In the last three years, the investment-grade wine index Liv-ex 100 declined 7.1% which can be mainly ascribed to a drop in the prices
of Bordeaux wine which constitutes the majority of the index. In June 2014, of a total of 100 wines contributing to the Liv-ex 100 Index,
about 84 wines were from Bordeaux. In the last four years, the Bordeaux region witnessed poor vintage quality, with the 2013 vintage
considered as the worst in 30 years owing to weak harvests. This deteriorated the quality of wines, leading to a decline in prices.
Reversing the downtrend, the Liv-ex 100 Index began generating positive month-on-month returns since August 2014. A current low
price level lured buyers back to the market, as investors believe the price of wine has bottomed out. The demand for Bordeaux wine
has improved since August 2014, led by increasing investor confidence, especially in Asia and the US. Among Asian countries, China is
a key growth driver, where wine consumption is expected to almost double to 400mn cases of wine by 2016 from 230mn cases in 2012,
according to Morgan Stanleys estimates. With this, China could become the biggest wine consumer globally, outpacing the current
leading consumers France, the US, and Italy. In 2012, the estimated wine consumption in France and the US was close to 340mn
cases each, while that in Italy was 250mn cases. Overall, this rising demand for wine from the US and Asia (especially China) is
expected to outrun the supply as production levels have fallen in the last few years. This would also contribute to an increase in the
prices of Fine Wine. Moreover, a normal-to-good vintage harvest in early 2015 may be a key catalyst supporting the rising prices.
Fine Wine investment offered the lowest risk-reward than other asset classes in the last decade
12%
Gold
MSCI EM Index
Return
8%
CISDMEW Index
(Hedge fund)
6%
S&P 500
MorningStar EM
Corporate Bond Index
4%
MSCI World Index
2%
0%
0%
5%
10%
15%
Risk
20%
25%
30%
Source: Bloomberg. We have used available indices with data history of 10 years or more to represent various asset classes. Period: November 2004-November 2014
Superior risk-adjusted returns: During the last decade, the investment-grade wine market generated the highest riskadjusted returns (as measured by both, the Sharpe ratio and Sortino ratio) among the asset classes included in our study. The
Sharpe ratio and Sortino ratio of the Liv-ex 100 Index came at 0.67 and 0.92, respectively, higher than all other asset class.
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Fine Wine investment yields the highest risk-adjusted returns than other asset classes
Sharpe Ratio
Sortino Ratio
LIVX100 Index
LIVX100 Index
Bond Index*
Bond Index*
Gold
Gold
S&P 500
S&P 500
MSCI EM Index
MSCI EM Index
(0.5)
0.5
1.0
(0.5)
0.5
1.0
Source: Bloomberg. Risk free rate considered as US 10 year Treasury bond yield. Period: November 2004-November 2014. *MorningStar EM Corporate Bond Index.
Portfolio diversification: Historically, the investment-grade wine market has not shown high correlation with other major
equity-type asset classes, nor does it tend to strongly move in line with hedge funds, gold, bond, or other commodities. It had a
correlation of 0.24 with the S&P 500 Index, and correlations of 0.16 and 0.34 with the Gold Index and S&P World Commodity
Index, respectively. Thus, investments in investment-grade wine may help investors protect their portfolio against events that
have severe impact on the equity and commodity markets. Among other asset classes, only gold possesses similar portfolio
diversification characteristics. The Gold Index and Fine Wine Index had correlation of less than 0.4 with all other asset classes
under our analysis.
Fine Wine investment provides good portfolio diversification as it has low correlation with other asset classes
S&P 500
S&P
Global
REIT
MSCI EM
Index
S&P World
Commodity
Index
CISDMEW
Index
(Hedge
fund)
MorningStar
EM
Corporate
Bond
0.16
0.24
0.26
0.28
0.34
0.38
0.39
0.16
1.00
0.10
0.17
0.33
0.39
0.32
0.31
S&P 500
0.24
0.10
1.00
0.84
0.79
0.45
0.80
0.66
0.26
0.17
0.84
1.00
0.71
0.36
0.68
0.73
MSCI EM Index
0.28
0.33
0.79
0.71
1.00
0.57
0.91
0.73
S&P World
Commodity Index
0.34
0.39
0.45
0.36
0.57
1.00
0.64
0.51
CISDMEW Index
(Hedge fund)
0.38
0.32
0.80
0.68
0.91
0.64
1.00
0.76
MorningStar EM
Corporate Bond
0.39
0.31
0.66
0.73
0.73
0.51
0.76
1.00
LIVX100
Index
(Wine)
Gold
LIVX100 Index
(Wine)
1.00
Gold
Source: Bloomberg. Correlation of last 10 year M-o-M returns. Period: November 2004-November 2014
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Consistent returns over time: Investment in Fine Wine should be considered for long term as the returns are more
consistent and less volatile for longer time horizon due to supply-demand imbalance in the long term. The figure below
illustrates that CAGR returns over a 10-year period are consistent and not so volatile, whereas CAGR returns over five- and
seven-year periods are relatively more volatile.
Liv-ex 100 Indexs 10-year CAGR has been consistent compared to 5- and 7-year CAGR
Liv-ex 100 Index
25%
25%
20%
20%
15%
15%
10%
5%
10%
0%
5%
-5%
-10%
5 year (CAGR)
7 year (CAGR)
Nov-14
Jun-14
Jan-14
Aug-13
Mar-13
Oct-12
May-12
Dec-11
-5%
Jul-11
0%
10 year (CAGR)
-15%
M-o-M
YTD
1yr
5yr
Tax-free investment for UK investors: The taxation authorities in the UK consider investment-grade wine, with life
expectancy of less than 50 years, as a wasting asset. Thus, any profit derived from the sale of such wines is not subject to
capital gains tax under the current UK taxation rules.
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Spoilage, damage, or theft: Investment-grade wines, being a tangible and consumable asset, are subject to the risk of
spoilage, damage, and theft. However, an investor can minimize these risks by storing wines in a safe and temperature- &
humidity-controlled facility and by buying insurance for the wines replacement value.
Supply of counterfeit wine: Wine investors are always at the risk of being supplied a counterfeit wine. A recent news article
from the InsuranceNewsNet magazine estimates that 70.0% of all Chateau Lafite Rothschild in China are counterfeit.
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This report is published by Aranca, Inc. Aranca is a customized research and analytics services provider to global clients.
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