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An Alternative Investment to Savor: Wine

The risks to know when clients seek advice about building wine collections to diversify their portfolios.

As the U.S. Ambassador to France, Thomas Jefferson carefully sampled wines across the Bordeaux region during his travels in the spring of 1787. After quaffing a broad range of robust reds, he grew especially enamored of the wines from a group of chateaus (Yquem, Haut-Brion, and Lafite) and shipped more than 500 bottles back to the states. Thus began the New World’s first documented obsession with wine collecting.

A couple of centuries later, Bordeaux wines are still considered to be among the finest in the world, especially among wine collectors and oenophiles. That’s due to the unique aging process for these wines.

“90% of all wines should be consumed within one year of being produced,” says Kevin Zraly, author of Windows on the World Complete Wine Course. Another 9% are best consumed within five years of production, and the remaining 1%, which are usually Bordeaux wines, “only get better with age,” he says. 

And aged wines make for ideal collector’s items. Along with those from Bordeaux, Burgundy wines are also seen as a top long-term investment and have been gaining market share in recent years among collectors. 

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Zraly has spent the past 50 years helping consumers develop a more sophisticated palate and deeper appreciation for wine. Much has changed in that time. “When I got into the business, only France and Germany made top-tier wines,” he notes.

Nowadays, highly-regarded wines are being made across the globe. Credit goes to advances in production techniques. For example, stainless steel fermentation vats help wines to avoid becoming oxidized. And vintners have improved their planting and harvesting techniques. “This is the golden age of winemaking,” says Zraly.

Wine is flourishing as the Covid-19 pandemic drags on. Despite a sharp drop in restaurant sales, total wine sales surged 19.3% (by volume) in the first six months of the pandemic, according to Nielsen.

Zachys Auctions, one of the largest wine auction houses in the U.S., saw its client base grow significantly in 2020, according to Charles Antin, auctioneer and head of wine auction sales at Zachys Auctions.

With clients seeking out investments that are non-correlated with the stock market, alternative investments have garnered greater attention. But should wine become part of clients’ alts exposure? The answer depends on the amount of time clients are willing to devote. “You need to become really knowledgeable about wine before you start collecting,” says Zraly.

Antin told RIA Intel via email that new wine collectors should have a game plan, which can be framed with a few questions. “Why are you buying wine? Is there a specific region you like? Are you trying to widen your horizons? Are you buying to drink this wine in the next few months, or age it for years? Are you a drinker, an investor, or a little of both?”

And even as clients start to build a collection, they need to remember that the role of alternatives is to preserve value and show modest annual appreciation. For example, while stock markets boomed in 2020, the Liv-ex 1000 index, which tracks global fine wine prices, rose 2%. (Liv-Ex stands for the London International Vintners Exchange).

Yet there is a clear surge in interest at auction houses. Around $122 million in wine changed hands at auctions in 2020, up 32% from 2019, according to Acker Merrall, a wine auction specialist. Antin, concurs. He notes that “as a whole wine auctions are increasing, for sure, but the actual dollar amount of wines sold can fluctuate based on what collections are coming to market.”

Auctions, however, can be pricey. The buyer pays a buyer’s premium on top of the hammer price, which can often exceed 20%. “On the selling side, the fee varies widely and is negotiable based on the size of the consignment,” Antin said.

To be sure, many clients will simply end up drinking their collections, in part because they can be challenging to sell. Henry Handel, senior director at wine importer The Taub Companies, notes that in many states, you can’t simply sell wine back to the store you bought it from for a profit or sell it personally online due to local state liquor laws. Most of the re-sale market is dominated by auction houses which will cost you a percentage of your expected growth.

Wines of certain years, or vintages, can demand higher prices than others by the same producer. “Scarcity drives value” and rare examples from peak vintages can garner top prices, according to Handel.

Clients can also buy wine futures contracts referred to as “en primeurs.” TotalWine.com, for example, runs a Bordeaux futures exchange. A bottle of 2019 Figeac, that will not be fully aged and ready for delivery until some future date can be bought in advance for a locked-in price of $720. Wine Advocate says this wine has “steal-your-heart scents of mulberries…” among other notes. Those kinds of descriptions bring new meaning to the term purple prose.

Handel says that wine collectors can start to zero in on wines that are garnering a growing level of industry buzz. As one example, he notes that small producers such as California’s Screaming Eagle Winery, which produces 600 to 700 cases per year, can fetch high prices for its wines thanks to their scarcity.

Asked to peer into his crystal ball and ponder the next up-and-comer in the wine world, Handel suggests wine buyers look at the wineries in the Uco Valley of Argentina. “They’re doing incredible farming there,” he says.

What kind of returns should clients expect when constructing a wine collection? RareWineInvest.com suggests that wine prices have had far fewer drawdowns than stocks since 2004, and in that time, have appreciated 247% (based on the earlier-note Liv-ex 1000 index), compared to 129% for the MSCI Europe index.

That analysis appears a tad optimistic. Net of insurance and storage costs, wines prices grew 4.1% on annualized basis from 1900 through 2012, according to University of Cambridge (UK) Professor Elroy Dimson. Looking further into published data on the topic, a pair of professors the University of Bordeaux (Jean-Marie Cardebat and Linda Jiao) found a “low correlation between fine wine prices and financial markets.” This suggests that wine collections do fulfill the core mandate of alternative investments.

Zachys’ Antin suggests that advisors and their clients shouldn’t expect to rack up market-beating gains, though. He notes that “there’s a lot of talk about how a ‘portfolio of fine wines beats the S&P 500—but I think that’s misleading.” He adds that collectors need to “buy wisely when it comes to conditions, provenance, and individual wine.”

Antin does believe that wine prices trend up over time. “But the question is how long is the time? Wine investing isn’t a get rich quick scheme any more than anything else. But it can be a fun and profitable way to diversify.”

Zraly, with his half century of industry experience isn’t sure wine is a wise long-term investment. “At this point, fine wines have become much more expensive than they were a few decades ago.” That’s partially the result of a growing roster of Japanese buyers that pushed up wine prices in the past few decades, and more recently, Chinese buyers developing an ample appetite for fine wines, regardless of price.

“I’ve never sold a bottle,” Zraly adds, “even though many of my wines were great buys when I made them.” 

Like many wine drinkers, he prefers to savor his efforts, rather than profit from them. 

If an enthusiast has never attended a wine auction (either in-person or virtually), Antin recommends it. Wine collecting could be a good alternative investment. Or, if nothing else, an experience (or a few glasses) worth the price.

“If you’re into wine, and haven’t dipped your toe into auctions, you’re missing out.” 

David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning

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