As winter ended in 2020, and it became clear that Covid-19 was spreading unabated in the U.S., stocks tumbled into their fastest-ever bear market and credit markets effectively closed for a brief time.
Since then, even while the pandemic persists, equities reached record highs. Now, central banks are curtailing their economic support and investors are preparing for market volatility as the Federal Reserve begins to taper its bond purchases. Wealth managers can expect an uptick in calls from clients, many echoing a similar refrain: “How can I shield my portfolio from this market shift?”
Alternative investments might be the answer and their most liquid forms — wine and whiskey — are as investable as ever with the help of new platforms and boozy (in a good way) asset managers.
Most private wealth advisors (55 percent) don’t allocate any client money to alternative investments and those who do might not be allocating enough. Accessibility, cost, and complexity are the most common reasons. The universe of alternative investments is broad and it requires deep knowledge to successfully navigate it. RIA Intel has reported on investments in preferred stocks, commodities, paintings and other art, Broadway shows, dilapidated Montana ranches, and others.
It's written about investments in wine collections, too. Cases of wine sold at auctions more than doubled in value last year. But they can be hard to access and tap into profitably, due to stiff auction fees, storage, insurance and other carrying costs. That can create a challenge for advisors that want to help clients glean exposure to this alternative asset class in a straightforward and cost-effective way.
But companies are emerging to reduce that friction.
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Vinovest, a Culver City, California-based company, has built a trading platform for buyers and sellers of wine that removes the headaches associated with direct ownership.
Investors can invest in a portfolio of wines with just $1,000. Vinovest deploys those funds, in tandem with other invested funds, to authenticate, purchase, insure and store wines. An investor can eventually sell bottles or cases, and if history is any guide, do so at a reasonable profit. The firm’s fees max out at 2.85 percent, far below what auction houses charge.
The wine portfolios are performing well, with less volatility, too.
Vinovest tracks a proprietary index called the Vinovest 100, which has not lost value since 1999, when it fell just 1.6 percent. Since 1983, the index has delivered a 10.6 percent annualized return. Equally important, such returns have a low correlation with stocks. Investment returns in the wine market have one-third of the volatility of global stock markets, according to Anthony Zhang, co-founder and CEO of Vinovest.
A unique twist for investors is the ability to invest in different segments of the market. Zhang says that the wines from regions such as Bordeaux and Burgundy are like “Blue-Chips that have stable values over time, they’re kind of like the Large Cap stocks of the wine world.”
In contrast, vintages from producers in Argentina, Australia, Oregon and other “new world” regions have more in common with emerging market investing. Investors may shoulder more volatility in exchange for potentially greater upside.
And unlike wine transactions made at auction houses, which can yield an uncertain price when the gavel strikes, Vinovest guarantees that selling prices for its investors will be within close range of recent market transaction prices. “We collect a lot of data points of all past transactions and develop pricing confidence based on the most recent prices for similar or identical cases of wine,” says Zhang.
Terroir counts, but so does the climate
For centuries, premier wines have been associated with ideal soil and location, known as terroir. Yet climate change has begun to have an impact on which regions will flourish or struggle in the years ahead. For example, hotter summers in France may blunt the quality and yields of wines produced by the industry’s most vaunted vintners.
“Hotter climates lead to smaller yields,” Zhang said. “Grapes ripen earlier, with less juice, which can reduce supply.”
Of course, the industry will have climate change beneficiaries as well. “Places like Germany are moving beyond Rieslings and starting to produce some very good red wines,” adds Zhang, who also thinks Canada and other cold weather regions may prove to become increasingly fertile terrain for wine growers.
Asked to predict on up-and-comers in the collectible wine business, Zhang points to Barolo, Barbaresco and “Super Tuscan” wines (which are grown in Italy with grapes that are native to elsewhere).
The Next Frontier for Investors: Whiskey
While wine collecting has been around for centuries and has only recently emerged as a platform-based investable asset, other connoisseurs are focusing on the emerging market for premium whiskey.
Various high-end brands of whiskey (the catch-all name for bourbon, scotch, rye and other spirits made from fermented grain mash) have already developed cult followings in the U.S., Europe and Japan. Meanwhile, interest is swelling in countries like India and China in tandem with an increase in affluent households that can afford to buy and drink more expensive spirits.
That growing interest is leading more clients to ponder how to build whiskey collections to diversify their asset exposure. And 2020 was a period when whiskey proved its mettle as a true alternative. “Anecdotally, drinkable investment asset classes have always done well in a downturn,” according to the Knight Frank Wealth Report 2020. Both rare whisky and wine have shown reasonable gains over the past 12 months.”
According to Knight Frank, the category of “Rare Whisky” (sic) produced a stunning 535 percent gain over the past decade, handily surpassing nine other categories of collectible assets.
Wave Financial launched a fund to capitalize on that interest. It acquired the output of 2,700 barrels of whiskey being produced by Danville, Kentucky-based Wilderness Trail. The whiskey producer makes a “sweet mash, which is harder to produce than a sour mash, but leads to a smoother flavor profile,” according to Ben Tsai, president of Wave Financial.
Wave’s “Real Asset” fund is providing the capital to help Wilderness produce and then age the barrels of whiskey for an expected six years. Like some fine wines, whiskey flavor profiles improve as they age and appreciate in value.
Tsai believes that the investment can yield a net annualized internal rate of return (IRR) of 20 percent through the six-year holding period, and that projected return already accounts for a 5 percent upfront acquisition fee, a 1 percent annual management fee, and hedge fund-like performance fees of 15 percent on barrels that are sold.
The timing is good, as surging demand for premium whiskey has led to a shortage of well-aged examples, according to Tsai. Due to “demand for whiskey, especially Kentucky Bourbon, it is currently difficult to find bourbon whiskey that has aged greater than four years on the open market.” That suggests that when the Wilderness Trail whiskey is ready for sale, it will enter a tight supply environment.
Wave Financial provides both asset management and wealth advisory services, marrying traditional investment classes with an expertise in modern digital currencies and non-fungible tokens (NFTs). The firm was founded in 2018 and already manages more than $1 billion in crypto-based assets.
Investors in Wave’s Real Assets fund who don’t want to retain their investment for the full six-year holding period will be offered security tokens represent fractional ownership to the existing investors. To those willing to wait, the end-of-cycle payout will be made in cash.
Tsai sees domestically produced premium whiskey as a truly global asset. “You’re seeing a worldwide surge in interest, especially across Asia, which could lead demand to outstrip supply in coming years,” he said.
And that kind of backdrop is ideal for firming prices. More to the point, both fine wine and premium whiskey are proving to be stable assets throughout economic cycles, a key consideration as the bull market goes into extra innings.