- While the creation of a secondary market for wine dates back to the late 18th century – the “modern” version of it can be traced back to 1966, when Christie’s and Sotheby’s started selling wine from old collections at public auctions.
- The current secondary market for wine is underpinned by Liv-ex, an exchange based in the UK which provides liquidity and a benchmark.
- Wine as an asset class has been performing well in the past twenty years, as highlighted by the close to 3x gains in the Liv-ex 1000 index between 2004 and 2021.
A brief history of the modern wine trade
While wine trading has been happening for millennia – traces of it can be found in the ruins of the old city of Pompeii, as well as in excavations of ancient Greek ports – a more professional version of it did not start until the late 1700s.
Until then, it was customary for traders to cut the wine with other spirits to appeal to local taste, or with water to generate more revenues. Cutting used to be so widespread that true wine aficionados – such as Thomas Jefferson – started asking the producers for direct access.
A true quality classification of wine did not become available until the mid 1800s, when the association of French producers built the first rank of Bordeaux wines. By then, the British – at the time the wealthiest consumers in the world – were the largest buyers of French wines, also thanks to substantial tariff reductions. It is thus not surprising that London became the place where wine auctions first took place.
By the 1980s, the UK capital had become the center of the international wine auction market. But while London was the trading capital, Americans had become the largest buyers amidst extraordinary wine market growth fueled by dollar appreciation and an economic boom.
As most ancient collections were being raided by auction house scouts and sold, it became increasingly hard to find older vintages, with demand clearly outstripping a finite supply. Prices of very old bottles grew exponentially, transforming wine into a luxury asset – as well as a collectible.
Liquidity and Markets
Wine’s transition into becoming an investment asset – with standardized pricing and valuation methods – was only completed in the early 2000, when the Liv-ex 1000 index was first created. Liv-ex was founded by two stockbrokers, James Miles and Justin Gibbs, whose goal was to build an online stock exchange for wine.
In order to qualify for the main index, wines must have attracted a regular market on Liv-ex. They must also be physically available in the UK market, which may exclude some of the most recent vintages. The wines included in the index are reviewed on a quarterly basis by committee.
The Liv-ex 1000 is calculated using the Liv-ex “Mid Price” – the midpoint between the current highest bid price and lowest offer price on the Liv-ex trading platform – for each wine component. Each price is then verified by a valuation committee. Each component is represented by one 12×75 case1.
Since 2004, the index has returned over 285%2, which makes fine wine an attractive source of returns, with the potential to add diversification to a balanced investment portfolio.
And there is scope to differentiate between growth and blue chip, too. In 2020, the best performing regions within the Liv-ex 1000 were Italy, Rhone and Champagne, none of them considered a traditional heavyweight such as Bordeaux.
Asset class specifics
Since fine wine prices are primarily driven by internal factors, they have historically shown low correlation to equity and other major financial markets.
Fine wine’s low volatility can be a result of its internal supply-demand dynamics, as supply of good wines is finite and shrinks with time, as wine is consumed. This latter feature can be an element of differentiation, and keep volatility subdued even over long time periods.
Lack of correlation with inflation has also been observed3 and is intuitive. While wine as a consumer good can at times be directly correlated with inflation, high-end vintage wine prices tend to move more independently.
Finally, there can be tax advantages in certain countries where fine wine qualifies as a ‘wasting asset’ – having a predictable life of less than 50 years – which could exempt it from capital gains tax. Yieldstreet has yet to enter the space, but has been offering access to other traditional ‘passion’ assets like Art Equity Funds on its platform. It recently launched Art Equity Fund IV, which includes work from New York-artist Jean-Michel Basquiat.
Source:
1 With the exception of Domaine Romanée Conti (primarily a bottle market) where each component has been reflected by one 75cl bottle. The index is price weighted at launch as follows: Bordeaux 500 – 33%; Bordeaux Legends 40 – 10%; Burgundy 150 – 28%; Champagne 50 – 3%; Rhone 100 – 4%; Italy 100 – 9%; Rest of the World 60 – 12%.
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2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]