Buying rare wines is like investing in a startup: You need 10 years of runway to see significant returns. But wine is a lot more lucrative these days.
Had you allocated $100,000 to Cult Wines, a U.K.-based wine portfolio manager, your money — which is to say your wine — would have returned an average of 13% annually. In 2016, its index performance was actually 26%.
The fine wine secondary market hovers around $5 billion, a fraction of the $302 billion global wine market. But Euromonitor projects that while "key luxury players face mounting risks in 2018," the wine and champagne category is set to increase by an estimated 7%.
When it comes to what private bank Coutts & Co. calls the "passion index," wine is right up there with fancy cars and rare coins.
Given the unique nature of wine, however, investors should hire a manager. Cult Wines, Farr Vintners and Berry Bros. & Rudd are among a small group that will invest your money depending on your risk level, suggest purchases and track your portfolio.
Tom Gearing, co-founder of Cult Wines, said his more than 1,700 clients should hold onto their wine for at least three to seven years before trying to sell it. The management fees, 15% of the total investment value, are paid upfront and include storage. Farr Vintners charges 10% commission on purchase of wine and 10% on the sale.
Such managers buy from only trusted sources so that they can confirm the wine's authenticity. Cult Wines does guarantee the wine, should it be opened, but this is less than 1% of the total value of their annual trades. Most stay corked.
Investment wine even has its very own exchange. The London International Vintners Exchange, which came online in 1999, shed some much-needed light on what had been a very opaque market. It's now the industry standard for tracking prices of luxury wine and includes the Liv-ex Fine Wine 100 Index, which follows the top 100 most sought after wines.
French Is the Must-Have
So what to buy? To anyone that knows wine, French is the must-have and French Bordeaux the absolute must-have. The apex is the premier crus, or first growth wines, a classification system begun in 1855 that created a ranking of importance still in place today. On the list are Haut-Brion, Lafite-Rothschild, Latour, Margaux and MoutonRothschild. Each chateaux can also have secondary labels, which may not be as valuable as the first.
The problem with premier crus is that it's the very top of the market. Unless you get in early, your wine won't see massive increases. Jamie Ritchie, worldwide head of Sotheby's Wine, reports that a diversification has begun.
"Last year it was Bordeaux and Burgundy at 40% each," he said. In the past, Burgundy was 20% of the total investment wine. "We've seen a huge, growing demand in Burgundy. Great Bordeaux is selling well, but there's actually too much of it."
One other French quirk is the en primeur market, which refers to the opportunity to invest in wines while they're still in the barrels. It's a risky business, though, given that the vintage could end up with poor marks from critics. But when the wine turns out well, there are more profits to be had. For investors who don't mind the risk, there's a chance for a 20% to 40% increase in value after only one or two years.
Knowing when to sell is why you trust someone else with your bottles. "There's a huge market for mature wine. From restaurants and drinkers. People want mature wine — they aren't in the market for the wine when it's first released. We buy the wine back from investment customers and sell it to drinking customers," said Stephen Browett, chairman of Farr Vintners, which opened in 1978.
With about 14,000 active clients, U.K.-based Farr manages about $523 million of wine in bonded storage. "Private people find it to be a fantastically efficient investment," Mr. Browett said.
Client portfolios typically hold 65% of their wines from Bordeaux and 15% from Burgundy. Wines from France's Rhone Valley, Italy and even California follow, but bottles from Napa Valley or other locales in the Golden State are a tiny fraction of what's traded. To many investors, California's wine-making history is still considered young. Farr prefers California wines with French roots, like Opus One and Dominus.
'Financial Market Approach'
"When you're looking at French producers, they're the ones who've been doing it with that kind of intensity for quite some time. It's dependable. That's one of the things you have to have in a collectible product," said Rob McMillan, executive vice president of Silicon Valley Bank, which invests heavily in wineries on the west coast. Despite their success on American restaurant menus, only a small subset of California wineries gets investment attention.
Mr. Gearing co-founded Cult Wines in 2007, seeing it as a tool for diversification. "It's got a long-term record, it's low volatility, and it's an asset uncorrelated to the financial market," he said. "We didn't want to be a wine broker or merchant or carry inventory. We wanted to be a financial market approach to wine."
Today, Cult Wines manages about $100 million in assets.
To date this year, Sotheby's has sold $64 million in wine, with about 80% going to private collectors who plan on drinking it someday and 20% to investors. While Cult Wines does buy from auctions, deals aren't generally to be had there.
Despite this, Sotheby's and Cult Wines are seeing the same shift: an investing boom coming from Asia. In addition to Hong Kong, Cult Wines is opening an office in Singapore this fall.
According to Mr. Gearing, 30, Cult Wines has over 800 unique brands under management. The top holdings, Lafite and Pavie, are each 6% of his total, at an average bottle price of $621 and $304, respectively. While "the vast majority is traded daily," he said, there are areas of opportunity.
"While Bordeaux and Burgundy can demonstrate periods of higher shorter-term growth, the long-term stability of champagne adds important diversification benefits," he said.
Chad Walsh, head sommelier of Michelin-starred restaurant Agern in New York, registers online for auctions at which he'll bid for both work and personal investment. "It's one thing to chase the blue-chip stuff at a good price," he said. "But the best investments are when you're finding the thing that everyone is buying when they're squeezed out of whatever the blue chip was."
'Liquidate the Company'
Of course, in the world of collectibles there are risks. Famously, there was the cataclysm that befell WineCare, a storage business in New York City that flooded during Hurricane Sandy in 2012. A U.S. bankruptcy court judge ordered that the owner "liquidate the company."
Bill Carmody, a trial attorney in New York who used WineCare for his small collection, said: "It was a total loss. The bottom line was, there was no insurance."
The lesson? Check out the insurance plan before you start investing, not to mention paying attention to where your bottles are kept. All of Cult Wines clients' assets are stored in a sophisticated, static, temperature-controlled facility inside a government-bonded warehouse (which keeps the wine exempt from taxes and duties) and includes an insurance policy that covers up to 110% of the market value. Each bottle has a "passport," like a bar code, that's recognized within the fine wine trade and ensures they have been checked for provenance and condition.
Cult Wines said it only accepts ex-chateau (wine bought direct from a vineyard) or SIB stock, both in the original wooden casing, which is the most valuable. Buying and holding wine in a bonded warehouse caries with it an audit trail for every case and a trusted method for tracing its origin.
Sophie Skarbek-Borowska began investing with Cult Wines in 2014. The marketing executive knows her wine (she has a certificate from Wine & Spirit Education Trust), but still wanted help.
"I understand more about wine than cryptocurrency, microchips and even Coca-Cola," she said. "I would never be able to invest in wine on my own."
She invested just a small sum and, while any profits are quickly reinvested, in aggregate, her account has seen a 41% increase—not excluding fees.
One of the most in-demand wines is Domaine de la Romanée-Conti. A bottle of the most recent vintage, 2015, would set you back $17,000, and that's if you beat out other bidders. For Ms. Skarbek-Borowska, it was an opportunity of a lifetime.
"There was no way I could get it, but because this poor person was doing a fire sale, Cult Wines got it and sold it to me," Ms. Skarbek-Borowska said. She bought it for $8,510 in 2015. Today, it's worth $15,210.