The Journal The Authority on Global Business in Japan

“Good company, good wine, good welcome can make good people,” wrote Shakespeare in Henry VIII. But can wine make a good investment, too?

Wine connoisseurs need no convincing of the merits of their favorite beverage. Yet, the latest data reveals fine wine is outperforming both traditional and luxury investments—including art, cars, coins, and jewelry.

Helped by the resurgence of France’s top Bordeaux wine chateaux, investment-grade wine delivered a sparkling 24-percent gain in 2016, according to The Wealth Report 2017 by real estate consultancy Knight Frank LLP.

Fine wine comfortably outpaced the nine-percent increase for luxury cars, which placed second in the Knight Frank Luxury Investment Index.

In contrast, more mainstream investments posted generally lower returns. While the benchmark US S&P 500 Index rose 9.5 percent in calendar 2016, Japan’s Nikkei Stock Average eked out a mere 0.4-percent gain. US bond funds rose around five percent for the year, while bank deposits offered negligible returns with interest rates near zero in much of the developed world.

The mixed returns of such mainstream assets have spurred investors to seek alternatives with higher risks, but also potentially greater rewards.

ASSET CLASS
On October 10, members of the American Chamber of Commerce in Japan (ACCJ) and guests learned the value of one such alternative investment—fine wine—at a networking and “passion investing” event hosted by the ACCJ’s Alternative Investment Subcommittee.

While collectors might store wine for personal consumption, funds such as London-based Amphora Portfolio Management Ltd. (APM), an award-winning fine wine investment service, are seeking to make fine wine a legitimate alternative asset class.

“The top one percent or so of fine wine—that which improves with time in the bottle—is produced in painfully limited quantities. As each bottle of a particular vintage is drunk, supply diminishes,” explained APM Director David Jackson.

“At the same time, the combined impact of increasing consumption in new markets such as Hong Kong, China, and elsewhere in Asia, and the natural process of the wine improving over time, increases demand.

“This heady combination of decreasing supply and increasing demand puts upward pressure on the price of the underlying asset over time.”

APM compares this to the demand for luxury goods such as handbags, which can easily be produced in greater quantity if demand rises. In contrast, “fine wine can be used and enjoyed just once.”

Jackson also described wine as akin to a mini-stock market, due to the range of producers around the globe offering their product over multiple vintages.

“Unlike, say, gold or oil with their single homogenous price, with wine you don’t simply diversify into the asset class; you further diversify within the asset class itself,” he explained.
“Addressed wisely, this can be utilized to manage risk. It also facilitates an active management approach enabling investors to outperform the indices.”

For fine wine, the London-based Liv-ex market offers a range of indices that investors can use to track performance. According to Liv-ex, as of October 31, the top performer was the Liv-ex Fine Wine 1000 index, comprising seven subindices that include wines from France’s Champagne, Bordeaux, and Rhone regions, along with Italy and the rest of the world.

The index was showing a five-year return of 33 percent and a one-year return of 10.5 percent, with wines from Burgundy and the rest of the world (Australia, Portugal, Spain, and the United States) particularly strong performers.

APM has a “quantitative” approach to wine investing, which seeks to outperform the Liv-ex 50 Fine Wine index. It also points to the benefit of its UK-regulated bonded warehouses in assuring storage and provenance (origin), with investors maintaining title of ownership.

For those considering wine investment, APM suggests that “balanced, risk-adjusted portfolios” should comprise a minimum of £10,000 ($13,100), although investments can start from £2,000.

DRINK INTO KNOWLEDGE
Along with wine funds, wine investors can seek the comfort of exchange-traded investments by buying wine-related stocks. Other options include wine futures, which require buying large amounts of pre-reserved wines through middlemen—although the wine may not be available for up to two years.

However, a more personal method of mixing business with pleasure is starting an individual wine collection.

An avid wine collector and longtime American resident of Tokyo told The ACCJ Journal that inexperienced buyers seeking a collection should start small and “drink their way into knowledge.”

“I wouldn’t start in a region but would start with a particular grape, or couple of grape varieties—let’s say six different Chardonnays, capped at $50 each—and then explore the regions,” he said on condition of anonymity.

“You might do some legwork, go to a shop where you have a good relationship with the seller, and try to drink your way into knowledge. Try and avoid doing what many of my friends have done, in trying something and really liking it and then buying tons of the stuff. Your tastes can change, and there may not be a secondary market for the particular wine.”

For serious collectors, he said having documented provenance is crucial due to the risk of fraud, as is professional storage and transport.

Fortunately for collectors, Japan offers the benefit of “super diligent” importers along with retailers which are generally fair. “They’re not gouging you, nor do they say, ‘Sorry, you’re not a great customer so you only get one bottle.’ If it’s on the shelf, it’s yours for the taking.”

He added: “One of the things that Japan generally does not do is take their stock and mark it to market. When the 1990 Bordeaux hit the market here, there was a department store selling Chateaux Latour and Chateau Margaux—both fabulous wines going for ridiculous prices in the United States—but they were at original release pricing here. Friends of mine and I bought everything they had. It’s a wine we can drink for the rest of our lives quite happily.”

SPECULATIVE MONEY
Another wine enthusiast, Tokyo-based Jenifer Rogers, said wine investing should be treated like other alternative investments.

“I’ve drunk a lot of wine in my life and know what I like . . . [but] it’s more a passion than an investment. For me, it would be a very low percentage of my overall investments, probably not even a percentage point. When I invest in such things that are more speculative, I like to keep it within a range where I can sleep at night,” said Rogers, Asurion LLC’s general counsel for Asia and vice-chair of the ACCJ Alternative Investment Subcommittee.

APM admits that wine, like any traded commodity, “can go down in value as well as up.”

This was seen in the Liv-ex market, which enjoyed a bull run from around 2005 due to the burgeoning demand from China, only to suffer a major correction in 2012 until it started growing again in 2015.

Counterfeiting scandals have also rocked the wine world, including the so-called “biggest wine hoax in history” perpetuated by Rudy Kurniawan, which inspired the 2016 film Sour Grapes. Said to possess “the greatest cellar on Earth,” Kurniawan was given a 10-year prison term in New York for relabeling cheap wine to appear as high-end bottles that sold for tens of millions of dollars.

However, Ernie Olsen, managing partner at consulting firm OCC K.K., suggests that wine can be an attractive investment “if you invest in the right wines, from the right vintages, store them properly at all times, and can prove the provenance of the wines.”

“New winemaking techniques and winemakers are expanding the range of choices and possibilities. This means there are opportunities to find the new ‘wine gurus’ that will be popular in the future and whose wines could therefore make good investments,” he said.

Australian wine writer James Halliday argues that the golden rule of wine investing is to “only buy wine that is known and appreciated by the wine community. If it seems to be a bargain, there’s likely to be a flaw that isn’t immediately obvious: bad storage is a prime example,” he wrote in The Australian newspaper on September 2.

Halliday also states that “white wines seldom gain value with the ease of red wines . . . Shiraz, be it from cool, temperate or warm regions, is everyone’s favorite.”

GROWTH POTENTIAL
With alternative investments now including everything from pop star David Bowie’s prints to antique jewelry, whiskey, and venture capital, fine wine likely will gain a growing following—particularly as demand increases in Asia and emerging economies.

Japan is also seeing growth in the wine market, mainly thanks to an increase in demand from working women. Consumption has swelled 50 percent since 2006 to an average of 2.4 liters a year per capita, and is projected to grow by one-third through 2020, according to global market intelligence publisher Euromonitor International.

“As the world population grows and people have more of an appetite for special things, fine wine in particular should benefit, especially with the appetite created by the Chinese and Indians for wine investment,” Rogers said.

“My friends and I were joking that it’s a good retirement plan. If you lose everything else, at least you can still drink it.”

Anthony Fensom is a communication consultant/writer with experience in Australian/Asian financial and media industries, including six years in Tokyo.