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.