James Miles James Miles Director, Liv-ex Ltd , History and development of the History and development of the fine wine investment market Hong Kong International Wine & Spirits Fair Conference HKIWSF 2009 1
Introduction d i • Today we are going to look at: The history and importance of fine wine o investment and speculation. investment and speculation. How critics and transparency have o transformed the market. transformed the market. Fine wine’s investment characteristics. o S Some weaknesses and what we can k d h o learn from more established markets. HKIWSF 2009 2
The role of speculation h l f l i • Speculation adds to liquidity and aids p q y Wine is for pleasure. p price discovery. But speculation plays a vital role. plays a vital role. • • It ll It allows producers to finance their crop d t fi th i which often isn’t consumed for 10 years It has been linked to or more. or more. wine since the wine since the beginning of time. • For many collectors investment is part of the fun and helps subsidize an expensive pastime. HKIWSF 2009 3
A potted history d hi 40-60AD: First vines planted in Bordeaux l d d • Compared to fine wine, mainstream 1100s: UK becomes assets are positively nouveau Wine assets are positively nouveau. Wine major export market major export market production dates back 6,500 years. 1663: Samuel Pepys: “drank a sort ll d • of French wine called f F h i Bordeaux has been producing wines for Ho Bryen that hath a 2,000 years and London has been good and most buying for 900+ . buying for 900+ particular taste I l never met with” • Today collectors store $2bn+ of fine Today collectors store $2bn of fine 1855: the Left Bank 1855: the Left Bank is classified wine in UK bonded warehouses, Liv-ex members are offering $1.5bn for sale 1978: Wine Advocate published bli h d Ad t and wine funds hold more than $300m. d f d h ld h $ 1999: Liv-ex launches au c es HKIWSF 2009 4
Today’s market d ’ k that the fine wine • Liv-ex estimates The fine wine market is worth approx US$3bn annually. US$3bn annually market has trebled in size in • Auctions account for just $300m. the last five years. the last five years. • Globally, merchants dominate: in Europe they sell 40 times more fine wine than they sell 40 times more fine wine than auction houses ($2bn vs $50m). • New markets, such as Hong Kong and China, have had a dramatic impact. HKIWSF 2009 5
How to define fine wine? d fi fi i ? • The five First A wine with an active secondary market Growths plus p that has potential to appreciate in value that has potential to appreciate in value Cheval Blanc, and improve in bottle. Petrus and Ausone account for 65% of account for 65% of Strong track record Liv-ex trade by o Critical acclaim value in 2009. o • In practice, this is a very narrow group Lafite Rothschild of top Bordeaux and a handful of others. p has accounted for has accounted for 24% alone this on • A typical fund has 80-90% invested in the back of th t the top eight brands. i ht b d Chi Chinese demand. d d HKIWSF 2009 6
C i i Critics and transparency d • Independent critical appraisal has Traditionally the preserve of the p transferred pricing power from the transferred pricing power from the European producer to the consumer. aristocracy... • Price tracking and comparison websites Critics and such as Liv-ex.com have transformed a transparency have traditionally opaque market traditionally opaque market. demystified the demystified the market... • These factors have democratised the These factors have “democratised” the And massively d l market and precipitated strong growth. increased confidence and participation. HKIWSF 2009 7
The power of Parker h f k Liv-ex trading history of Lafite Rothschild 2 0 0 8 4,000 Robert Parker releases On the 29 th April On the 29 April score of 98 100 score of 98-100 2009, Parker 3,500 surprised the market with a 98 market with a 98- l) case (12x75cl 3,000 100 point score for Lafite 2008. £ per The price leapt 2,500 75% overnight. 2 000 2,000 1,500 1,500 16/04/2009 23/04/2009 30/04/2009 07/05/2009 14/05/2009 21/05/2009 28/05/2009 04/06/2009 11/06/2009 18/06/2009 25/06/2009 02/07/2009 09/07/2009 16/07/2009 23/07/2009 30/07/2009 06/08/2009 13/08/2009 20/08/2009 27/08/2009 03/09/2009 HKIWSF 2009 8
Building transparency ildi Liv-ex fine wine market data: Liv ex fine wine market data: • Live bids & offers Live bids & offers • Merchant offer prices • Trade-to-trade T d t t d transactions • A Auction hammer prices ti h i • Release prices • Full price history HKIWSF 2009 9
A A compelling investment case lli i t t Liv-ex Fine W ine I nvestables I ndex Liv ex Fine W ine I nvestables I ndex 2048 • Supply/ demand thmic) dynamic: supply is 1024 evel (logarit static (even falling), 512 whereas demand is 256 rising due to new rising due to new Index l markets. 128 • 64 Diversification Diversification Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 characteristics: strong annual returns low returns, low I ndex/ com m odity I ndex/ com m odity CAGR 1 CAGR 1 Vol 2 Vol 2 Corr 3 Corr 3 volatility and limited Fine W ine (LVX INV INDEX) 1 2 .6 0 % 1 1 .7 8 NA correlation with Equities (FTSE 100) 4 .3 0 % 1 4 .7 5 -0 .1 2 Gold (London PM Fix) mainstream assets. 4 .1 0 % 1 5 .7 1 0 .0 2 House Prices (Halifax Index) 5 .5 0 % 3 .1 6 -0 .0 4 1. Compound Annual Growth rate (Jan 1988 - May 2009) 2. Annualised standard deviation (lower equals lower volatility) 3. Monthly correlation (Pearson) with fine wine: 0.5-1 is a high positive correlation, -0.5 to -1 is low positive correlation. HKIWSF 2009 10
But it is no panacea i i • Investors should never lose site of the fact that wines must one day be drunk. The storage and opportunity costs Private collectors should also not be discounted. face paying away face paying away 10-15% to their • Requirement for physical delivery to merchant or transfer ownership contributes to: p 20% + at auction 20% + at auction. Low liquidity o High Transaction costs Hi h T ti t o Slow working capital cycle o • Systemic risk & lack of transparency hamper en primeur trading. HKIWSF 2009 11
S Some possible solutions ibl l i The fine wine market could learn a lot from more established markets: • A central depository of ownership would allow for dematerialisation allow for dematerialisation. • Electronic transfer of title would reduce costs, cycle time and risks providing capacity for significant growth. • Production/ sales volumes at en primeur should be audited and published. Tasting samples should be independently verified. HKIWSF 2009 12
C Conclusion l i • Fine wine justifies a place in a diversified portfolio for both pleasure and investment. • • The main themes The main themes – namely new namely new markets and transparency – are still in their infancy. y • Efforts to modernise the settlement i f infrastructure would free up huge ld f h capacity for growth and help the market fulfil its exciting potential market fulfil its exciting potential. HKIWSF 2009 13
Slides and full text are available at liv-ex.com Come and see us at stand 3 CE3 2 . Come and see us at stand 3 CE3 2 . HKIWSF 2009 14
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