An investment in wine, while probably sounding a little farfetched to most investors, has actually proven to be very lucrative over the past few years. While everyone knows a good wine can make or break a gourmet meal, few realize it can do the same for an investment portfolio. Recently, the value of fine wines has appreciated at an impressive rate. They do not correlate with stocks or other traditional assets, and tend to be more stable. For investors interested in diversifying their portfolios, a bottle—or a case or two—of wine may be just the thing they need.
What makes wine a worthwhile investment? The demand for fine wines is increasing as more people worldwide take an interest in it as a commodity. Traditionally based in Europe and North America, the market has recently spread to include Russia, India, China and Korea, according to The Fine Wine Fund.
Yet, although more people in more countries are actively seeking out fine wine, “there are relatively few (perhaps only about 75 in total) investment grade labels, whose production levels remain more or less fixed,” according to Decanter, a United Kingdom wine magazine. Then there’s the added factor that wine can be drunk, which diminishes the supply of desirable vintages. Because demand is quickly outstripping supply, the value of fine wine compared with other investment options is higher than one might think.
The demand for wines as an investment commodity is increasing
Over the past 20 years, an investment in fine wine would have achieved a compound annual return of almost 15 percent, according to Liv-Ex, who tracks fine wine investment via its Liv-Ex Fine Wine 100 Index
But along with the good news, there is also a warning for potential investors: With the purchase of wines becoming so competitive, it is possible that the initial purchase prices will rise to the point that it is difficult to make much profit.
A number of wine investment funds exist throughout Europe, the United Kingdom and much of the rest of the world. These funds allow investors to put money into fine wine while avoiding the complications often associated with the market—namely cellaring, regulating the environment for quality control, issues with imports and, of course, the desire to drink it. Many of these funds have done well in recent years.
“As at the end of October 2011, The Fine Wine Fund has returned 49% since inception in September 2006 at an average rate of 8% per annum net of all fees,” according to Fine Wine Fund website. The Vintage Wine Fund reports a return since inception in 2003 of 37.58 percent. Considering the stock market's performance during that time frame, an investment in wine has performed very well indeed.
Unfortunately, most wine funds are overseas and do not accept U.S. investors.
Investors interested in this approach may want to keep their eye on wine-oriented organizations, as it may only be a matter of time before more wine funds begin to appear in the U.S.
Of course, despite the recent success of wine investments, it is possible that an investment wine purchase could decrease in value. So far, over the past year, the Liv-Ex index is down 9.48 percent. Investors shouldn’t put more money into wine investments than they can afford to lose. But at least with some wine investments, there is an advantage that does not exist with any other investment: Even in a worst case scenario, investors can drink the high quality wine from their stores.