Wine has been in the headlines lately, but for reasons that wine investors aren’t finding very tasty.
Nobles Crus, a wine fund based in Luxembourg, drew the attention of the Financial Times a few months ago over its valuation methods.
More recently, the Cayman-based Vintage Wine Fund announced it was shutting down, citing redemption requests and forced sales in a weak market.
With news that’s pretty hard to swallow, experts say there are some lessons to be had for financial advisors and their oenophile-clients who may be considering investments in wine funds.
Many fine wines have generated solid long-term returns with low correlation to traditional financial assets. In the short to intermediate term, however, wine prices are volatile.
The Liv-ex Fine Wine 100 Index, calculated by London-based Live-ex, is frequently cited as a benchmark for the top fine wines’ prices. The index is calculated monthly and tracks price movements of 100 of the most sought-after fine wines for which there is a strong secondary market.
Movement of the Index shows wine-price volatility over the past three and a-half years.
From a level of 209.33 in January 2009 it rose to 364.69 in June 2011, an increase of 74%. It then fell roughly 30% to 257.68 in July 2012 and has since recovered to 274.22 by June 2013.
Why Structure Matters
Fine wines are an illiquid investment: They don’t trade like financial instruments, so selling a holding at the investor’s desired price can take time.
Combine the market’s illiquidity with open-end wine fund structures that offer liquidity, and you can have a mismatch, experts say.
Essentially, these funds — including the late Vintage Wine Fund — have matched long-term assets with short-term capital, says Timothy Clew, co-managing partner at TWT Investment Partners, a private-equity style wine investment fund in Ridgefield, Conn. That mismatch can cause problems if redemption demands increase, especially in a down market.
“Short of having a distribution network of your own and having a company of your own to sell these wines, it’s not easy to get out of positions quickly,” Clew (right) said in an interview with ThinkAdvisor. “You can’t simply say 'I’ve got 1,000 cases of x, y, z wines, I want to get out of them right now' and call your broker and say, ‘It’s time to sell those things’ and understand that the trade was done at 12:53 p.m.”
Wine investments don’t work like that, Clew explained. “You can sell things over time, and certainly you can get out of positions. But it requires time, number one. And, frankly, unless you’re willing to take huge discounts to sort of prevailing market prices… a large position would require months to get out of.”
Regulators in Luxembourg have instructed Nobles Crus to halt investor redemptions, but the fund’s liquidity (or possible lack thereof) is not the underlying problem, according Clew. Last fall, news reports began questioning the fund’s valuation methods.
Other wine-fund managers typically rely on publicly available Liv-ex prices, while Nobles Crus used its own method to value its portfolio.
Some of the fund’s internal valuations were cited as being substantially above Liv-ex prices. These higher valuations helped the fund show consistently positive investment results despite overall lower prices in the fine wine market.
“I think the problem was that the world looked up and said ‘These guys are marking what they own at just crazy prices,’ ” says Clew. “And, of course, the incentive was [there], because it was a fund structured kind of like a hedge fund. The managers were being compensated real time on whatever marks they were putting on the assets that they owned. So, they were overstating [prices], by most people’s estimation. I guess you could charitably describe it as being very aggressive pricing …”
Clew’s says that his fund’s private equity style format — in which investors commit for 10 years — avoids the liquidity mismatch.
The fund requires a minimum $250,000 investment and also owns its own distribution network. This business structure gives the fund immediate feedback on market prices and can help it generate business profits, even when wine prices are lower, according to the expert.
He also believe the fund’s fee structure is more equitable to investors than hedge-fund style fees.
For wine investors seeking an alternative to funds, Clew says that do-it-yourself wine investing can still pay off. This approach also allows investors to drink their holdings, regardless of market prices.
Another option is to establish the equivalent of a separately managed account for fine wine. That gives the investor access to a wine advisor, who can provide market knowledge, vintage insights and buying power, while still allowing the investor to own their own wines.