Wine glitters like gold

A worker checks on bottles of wine at a supermarket in Shanghai, China. Picture: Aly Song

A worker checks on bottles of wine at a supermarket in Shanghai, China. Picture: Aly Song

Published Feb 18, 2017

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Johannesburg - A global rally in stocks is driving some

investors to drink, but not in the way you might think.

Prices for fine wines have climbed to their highest

levels since October 2011 on speculation that equities near record highs are

poised to drop. Wines and the funds that buy them are being viewed much like

gold - as a store of value in uncertain times - after the UK voted to leave the

European Union and the US elected Donald Trump as president.

“Favourable macroeconomic conditions, constrained supply

and robust demand will continue to drive the market,” said Chris Smith, an

investment manager at the London-based Wine Investment Fund. The fund returned

17 percent in 2016, boosting its net asset value to 248 million pounds ($310

million). “Prices to most buyers still look cheap in historical terms.”

A weaker pound is helping to make sterling-based wine

contracts cheaper for overseas investors and boosting the value of indexes,

which are denominated in the British currency and track the value of the

most sought-after wines. Chinese investors have also returned to the market

after overstocking when prices were rallying in 2010, only to be followed by

five years of losses.

The Live-ex 100 Benchmark Fine Wine Index has gained in

each of the past 14 months, its longest winning streak since June 2010. The

gauge returned 25 percent last year, beating the 19 percent made on the FTSE

100 Index of the largest companies on the London Stock Exchange. It has room to

rally another 18 percent before hitting its mid-2011 peak, according to Smith.

Experienced investors

To be sure, wine funds aren’t for everyone and not

typically the type of products generally open to retail investors because of

the risks associated with them, said Charles Boulton, UK market head of HSBC

Holdings’ private-bank unit, which has about $315 billion under management. The

funds are targeted at experienced investors, he said.

“A lot of the wine funds are small and you may run into

liquidity issues,” Boulton said. “The time horizon for suitable returns on

these investments is relatively long and it can be a volatile asset class.”

They are not without their risks either. The Cayman

Islands-based Vintage Wine Fund, which in 2008 held 110 million euros ($117

million) of assets, closed in 2013 after a poor performance prompted investors

to pull their investments. A year later, Luxembourg-based Noble Crus Wine

Fund was shut down. So was Bordeaux Fine Wines Ltd., which had one of its

directors banned by the British government from running a company after money

meant to buy wine was spent on race horses, sports cars and private jets.

China demand

Demand from China is rising after a crackdown on excess

and bribery dissuaded investors in the world’s second-largest economy from

making purchases. Bottled wine imports to China jumped 21 percent to $1.66

billion in the first nine months of 2016, according to the China

Association for Imports & Export of Wines & Spirits.

The 10 million-euro Malta-based WSF Sicav’s Wine Source

Fund, which also invests in whisky, has gained 32 percent in net asset value

since it started in 2012, according to CEO Philippe Kalmbach. He is also the

founder of Wine Source Group, which buys wines from among the top producers in

the world for distribution to restaurants and hotels.

Read also:  Fine wine, fast profits

The fund attracts investors with a service that offers

reservations on private jets and yachts, sommeliers on demand for your dinner

party and last-minute seats at more than 500 of the world’s best restaurants.

It buys 60 percent of its wines on the open market and the rest directly from

producers, then stores them in bonded warehouses to age in optimal conditions,

he said, adding that it trades about one third of its portfolio a year to

ensure it remains liquid and meets all its redemptions.

If not for wine

Wine Owners, a London-based company that builds

individual wine portfolios for investors as opposed to a wine fund, saw trading

increase to 662,000 pounds in the fourth quarter of 2016, from 263 000

pounds a year earlier, manager James Sowden said.

Kim Carter, 63, wants to increase his allocation to

the Wine Investment Fund to about 5 percent of a portfolio he owns, declining

to give details on his current holdings. He started his investment pool by

selling a brass-fittings manufacturer to Hanson in 1989 and also invests in

private equity in the UK and Canada and co-founded Wishing Step Pictures, a

documentary film company in Toronto and Hamilton, Bermuda.

“I like wine, but I’m in it for the investing,” he said

by phone from Contadora Island in the Gulf of Panama. “It’s always done

incredibly well for me.”

BLOOMBERG

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