Wine fund ban puts spotlight on industry

Fine wines were once seen as an esoteric investment but the sector has grown. It’s become more popular as the asset is generally less correlated with the movement of stocks and bonds, making it attractive in unstable markets.

But the expansion of the sector with new investors has brought with it some concerns.

One of Europe's biggest wine funds was suspended in May prompting questions about the sector and its investments. The move came when regulators in Luxembourg banned redemptions and new sales of the Nobles Crus fine wine fund after it was unable to pay a number of large investors who tried to exit the fund.

The €109 million portfolio is managed by Elite Advisers and invests in fine wines, including Bordeaux and Burgundies, which gain value as they mature.

But the suspension of Nobles Crus has raised questions about what wines the fund and the wider industry has been investing in.

Although the sector has attracted new customers in recent years, particularly from emerging markets, some regulators have started to limit who can invest in the market.

Retail investors in the UK will be restricted from investing in fine wine funds from early next year according to new regulations introduced by the new regulator, the Financial Conduct Authority (FCA).

However, no such restrictions apply to Irish investors, according to the Central Bank.

What happened with Nobles Crus?
Questions were asked about the fund in September 2012 when it continued to post steady returns as most other wine funds were struggling to advance.

Up to that point, the fund had reported returns of 13 per cent per annum since being set up in 2008.

However, a closer look revealed that, unlike most of its competitors, the fund’s holdings were valued using an unusual method.

The most widely used form of wine valuation is Liv-ex, a London-based market for investment grade fine wines. All the prices on the index are based on the sales of commonly traded wines on the international market.

But rather than use the Liv-ex Fine Wine 100 index, Nobles Crus used its own valuation method from an average of prices at 60 different wine merchants and 10 independents auction houses, along with wine data from Winesearcher. com.

The fund continued to post impressive annual returns and made consistent gains even in the period following 2011, when the commonly used Liv-ex fine Wine 100 index fell by 23 per cent.

But further research from Liv-ex indicated a number of the wines in the fund were valued at more than double the price found on the exchange.

One of the wines, a Lafite Rothschild from 1996, was valued by Nobles Crus at €1,718, more than double the Liv-ex price of €855.

"Intangible factors"
However the fund manager insisted its valuation relied on "intangible factors", such as the condition and quality of the wine, and claimed that using Liv-ex was "misleading in the extreme".

Following the speculation about its returns, a second auditor, Ernst & Young, was called in to evaluate the fund in October 2012.

Deloitte had earlier in the year approved the fund’s valuation process, finding that it had valued its holdings according to its stated criteria.

A few weeks later, in October 2012, the fund’s managers said they were considering changing the fund’s valuation methods, a process they said had been underway since earlier in the year and predated press speculation.

Despite the announcement, in the months following a number of large investors looked to exit the fund. When Nobles Crus was unable to meet payout requests, the fund was temporarily suspended by Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF).

According to a representative for the CSSF, the fund is still suspended as it “encounters a liquidity problem and is in the process to find a sustainable solution which is in the interest of all its shareholders”.

Elite Advisers confirmed that the fund is still suspended and added, “our investors are fully aware of the situation and are regularly kept informed”.

The group declined to give further comment.


Investing in a wine fund?
Make sure it's liquid
If anything, the debacle with Nobles Crus has reminded investors of the need, as with all investments, to really understand what you're investing in.

There are some pointers investors should think about when looking to invest in wine. Wine Investment Fund director Andrew Della Casa says: "You need to understand what you're getting into and you need to do a bit of research ... the key issue is to be able to get in and out of the market when you want to."

Liquidity problems, one of the issues for the Nobles Crus fund, can mean it’s difficult to get out of a fund – a problem in a downward market. You need to be sure the fund is made up of frequently-traded, liquid wines, that will be easy to sell.

Liv-ex is generally considered the most reliable wine valuation method, as it has access to readily available international wine prices.

“There needs to be an investment approach that identifies liquid assets and non-liquid assets ... you could have a portfolio of wines that are very illiquid as they’re very seldom traded, and there’s no real valuation mechanism for them because they are so illiquid.

“That’s obviously a double whammy as not only do you not know what the risk attached to those wines is, as you can’t quantify it, but also you can’t value the portfolio because there’s no bid/offer spread,” Della Casa adds.

The wine should also be insured and stored in a government approved bonded warehouse where you can ask to view the wine. Despite the concern around wine funds, it can still be a strong investment.

Della Casa says: “It’s an asset class which has very low volatility compared to others out there. Also as it’s physical, it will always have intrinsic value and, with all this printing of money that’s going on around the world, we’re hearing increasingly the word ‘inflation’ being bandied around.

“Of course if you’re holding something physical that has intrinsic value you’re hedging against inflation.”