Fine wine portfolio may yield palatable returns

Prudent investing in wine depends on knowing your vintages, writes Laura Slattery.

Wine has a starring role in the Oscar-nominated film Sideways, which follows the story of wine expert Miles Raymond and his friend as they embark on a wine-tasting road trip through the vineyards of California.

Pinot Noir-savouring Miles, who cherishes wine so much he rates potential partners according to their knowledge, would no doubt be horrified by the idea that the most important quality about a particular vintage is not its effect on your palate but the effect on your wallet.

For some specialist, UK-based investment houses, fine wines are nothing more than a source of profit, a way of turning a pile of cash into an even bigger pile of cash.

One such company is Premier Cru Fine Wine Investments, which has recruited a number of Irish investors to its books since it exhibited at The Money Show in Dublin's RDS a few months ago.

"We look as wine purely as a commodity, we're not passionate about the claret itself," says Ms Stacey Golding, investments director at Premier Cru.

"You don't need to know about wine if you are going to use the expertise of a company, although if you are doing it yourself, you do," she says.

In the Republic, wine merchants such as Mitchell & Son, Searsons and Berry Bros & Rudd all sell wine to investors taking the DIY approach. These investors are likely to be aficionados seeking the kudos of a well-stocked, self-financing cellar, where any profits from the sale of wine are used to buy again.

However, Premier Cru was formed with the intention of offering structured, managed wine investments to people who can't tell their Merlots from their Cabernet Sauvignons - in other words, people who are more interested in smelling the money than breathing in the fruity aroma of a full-bodied claret.

Although there are oenophiles on its client list, Ms Golding says there are also many others who simply want to get away from the stock market and use fine wine as a way of diversifying their investment portfolio.

Its home page does not feature any pictures of sun-drenched vineyards or lovingly shared bottles of red, favouring instead a more sober graph illustrating how a managed fine wine portfolio has outperformed the FTSE All Share Index over the past quarter of a century. The average returns are 10-12 per cent per annum, Ms Golding says.

Premier Cru requires a minimum upfront investment of €2,500. Alternatively, investors can contribute €130 a month to an open-ended investment plan.

Once enough funds have been built up, Premier Cru will purchase the wine and hold it in investors' names.

The wine is stored under bond in the UK, so investors won't be able to enjoy the cachet of showing off a rare vintage to their dinner party guests before carefully stowing it away and uncorking a €12.99 bottle of plonk instead.

But even wine lovers seeking an emotional return as much as a financial one often pragmatically opt to keep their wine under bond in the UK, thus avoiding excise duty of around €25 per case and 21 per cent VAT - costs that will eat into any profits, says Mr Ben Hawkins of the fine wine desk at Berry Bros & Rudd.

Proper storage facilities are harder to find in the Republic and eventually the wine will have to be shipped back to the UK for sale anyway.

The fine wine investment market deals almost exclusively in Bordeaux reds, with the top 30 châteaux having the most stable history of increasing in value.

The investment works on the principle that fine wine matures and improves with age (before eventually perishing). As a limited amount is produced at each property and supply dwindles as the wine is drunk, early investment in top wines from good vintages should result in a profit.

"The key is getting in early," says Mr Hawkins. In other words, buy "en primeur".

Also known as wine futures, en primeur refers to the process of buying case quantities of just-harvested wine before it is bottled and released onto the market (two years later).

By the summer, wine merchants will start selling Bordeaux 2004 en primeur.

The process begins in April, when distributors, importers, merchants and critics descend on Bordeaux for a mass-sampling session. Over the following weeks, the châteaux announce their prices.

This year the prices are expected to start at a reasonably low level, thanks to a large crop and a weak US dollar, according to Mr Hawkins.

This is important, as a small crop and a highly rated vintage in 2003 led to strong demand for the noted "first growths" and other famous names. The inflated prices and restricted supply cut many investors out of the market.

The top châteaux release very small quantities at first. As the hype circulates, they release more of the wine onto the market just a short time later but at a higher price.

Good contacts are essential for people who want to buy at the opening prices.

"If you're ordering through a wine merchant, you need to build up a sales history," according to Mr Hawkins.

"If something suddenly becomes popular, the chance of getting an allocation will be small if you've never bought a case from me before," he says.

The release prices are often subject to the palate of just one influential American guru, Robert Parker, who publishes ratings on a scale of 1-100 in his journal, the Wine Advocate, a few weeks later.

"Most investment brokers and merchants follow his ratings and anything over 90 they will invest in," says Mr Dermot Nolan, a master of wine, who runs wine appreciation courses for the Wine Development Board of Ireland, a trade body promoting wine consumption.

For Mr Nolan, the market's reliance on the whims of the critics is one reason why wine investment can be a tricky undertaking to get right.

"Robert Parker's ability is highly regarded, but it is one man's opinion. And he has been known to revise his opinion. If he does, all of a sudden the value of the wine will go down."

Fraud, however, is perhaps the biggest threat to investors' money. Unwitting consumers, intoxicated by promises of triple-digit returns, are commonly persuaded to hand over thousands of euro for inferior wines worth only a fraction of the price.

Irish consumers have been victims of at least two such scams, at the hands of Dutch company Vintage Wines and London-based Croft & Dupont.

Just because some people know their wine doesn't mean they're not going to lie to you, Mr Nolan points out.

"If you're buying stocks and shares, you might go to Davy Stockbrokers for advice.The difference is they're regulated. If they lie to you, it will at the very least cause serious damage to their reputation."

Even if investors successfully avoid the wine sharks, there may be other dangers ahead. Investors, or those advising them, need to know precisely when the wine will come of age. Put off selling until the wine is commonly agreed to be past its best and it could turn out to be worthless.

"In some ways you need to be more astute in when to sell wine than you would in getting your timing right in selling shares," Mr Nolan believes.

Investors managing their own cellar should buy at least two cases of any one wine - one case to sample every so often to keep tabs on how it is developing and the other case to keep unbroken for reselling at the optimum moment.

The best wine investment returns are to be found over a 10- to 15-year period, according to Berry Bros & Rudd, while at Premier Cru the minimum term is three years, although the company recommends that clients invest for five years or longer.

"You can liquidate your investment, excuse the pun, at any time you want," says Ms Golding.

When investors decide to turn wine back into cash, they put it up for sale either through the broker market or through UK auction houses such as Christie's and Sotheby's.

But what happens if they can't find a buyer, if the vintage turns out to have been overhyped, or if the cases have been accidentally stored at the wrong temperature?

What if the wine turns out to be "quaffable, but not transcendent", as Miles describes a glass in Sideways, fetching less than what they paid for it?

For serious profit-chasers, there may be little comfort in the fact that, should their investment fall in value, they can always drink it.

PROS AND CONS OF CHANGING YOUR MONEY INTO WINE

Glass half full:

* The top wines from the best vintages have historically outperformed the stock market. For example, in 1991 Berry Bros & Rudd sold a 1990 Château Latour at £420 (€612) a case. Today, it would fetch £2,600 a case, an increase of more than 500 per cent.

* Financial advisers frequently recommend that investors diversify their portfolio, and wine investment, as it is not affected by interest rate changes or stock market fluctuations, could prove a good alternative.

* Investing in wine, like investing in fine art or first-edition books, may have a certain feel-good factor, making for more interesting conversation than the latest equity-linked managed fund or fixed-interest asset you poured money into.

* The returns on wine are free of capital gains tax (CGT), which is charged at a rate of 20 per cent in the Republic, because wine is classed as a "wasting chattel" and thus not liable for CGT.

Glass half empty:

* You may need to spend a lot in order to catch a glimpse of the spectacular returns quoted, which may not include the cost of storage, insurance, the annual management fees charged by brokers (typically 1 per cent) or the sales commissions charged by merchants (about 10 per cent).

* The profits of the past may be of little relevance for today's investors. Sceptics argue that only the exceptions make the headlines, that comparisons to stock market indices are misleading because wine investors won't receive dividends, and that average returns haven't been quite so sparkling in recent years.

* To get fair market value for your wine, you may have to wait eight to 16 weeks for a broker to find a buyer.

* If investors need their money in an emergency, brokers may give them a spot price which could cost them 10-15 per cent of the market value.

* You may need a stiff drink if you discover that you have been the victim of a scam: there are several unscrupulous companies charging double or triple market prices.