The idea that wine can be an investment was almost a running joke for the longest time. In fact, the only reason our ancestors held onto wine was that it was practically undrinkable for the first 10 years of its life. . Today, while technology and experience have allowed us to harness the variables governing a wine’s flavour profile better, there is still a certain unmatched charm in uncorking wines that have aged for decades.
But with each old bottle opened, there are fewer left to be enjoyed and shared. And this growing paucity, in-keeping with the dynamics of supply and demand, can drive prices up.
So, hypothetically speaking, if I had bought bottles aplenty from the 1982 vintage when they were launched and stashed them away in a controlled space for all these decades, today I would have been in a position to plan an early retirement by simply selling them selectively. Alternatively and equally hypothetically, if I had made the same investment in 1983 (or worse encore, from 1992), just a few years apart but significantly poorer in terms of weather, which badly affected the quality of wine produced and consequently their potential to age, I would be a working man with a huge debt to pay off and plenty of dead bottles of wine!
Which is why we now have wine investment specialists. These are usually financial experts, who work in the financial space with more traditional investment products, who further have a specialised team that understands the world of wines in depth and know what to pick up and when to let it go.
For better insight, I got in touch with Hedonova, an AIF firm that invests in alternative assets like wines, NFTs, crypto, and P2P lending. Suman Bannerjee, the CIO at Hedonova, sat me down and took me through the main aspects of wine investments — how they handle it, how I can get on board and what kind of returns can I look at.
So how exactly can wine be considered an investment?
Over the last three decades, wine has gone from a fringe investment to a collectors’ item to a matured asset class. There exists now an entire global online exchange where wine bottles are traded, called, Liv-Ex. Some wines increase in value over time, much like other collectible items. This is because as the wine ages, it can develop more complex flavours and aromas, making it more desirable to collectors and connoisseurs. As a result, older and rarer wines can command higher prices on the market.
Does it make us similar returns like the stock markets and/or mutual funds?
Like any asset class, prices go up and down. Wine markets also move in cycles that are surprisingly predictable. Bull markets last 36 months while bear markets last 18 months. In terms of returns, wine has outperformed equity markets by a large margin. Since 1998, wine markets have returned 21% compared to 16% for the equity markets.
How does it compare to watches or fine art as investment?
Surprisingly, watches have a matured investment market since the product is standardised but the market is too volatile and is plagued with fakes. There are some parallels with art; both of them have similar consumers — the ultra-rich, both are physical products so they thrive in a high inflation environment and both are brand dependent, i.e., art is driven by legendary artists while a wine’s perceived value is higher when it comes from big brand name wineries.
What is the minimum time period one needs to stay invested?
Either two years or seven years. These two time horizons serve different types of investments. The former are the financiers, like myself, who provide capital to wineries before the harvest, take ownership when the wine is in barrels and then sell to a distributor. The other way is to buy wine after it’s been bottled and then hold it. The former is operationally intensive while the latter is everyday investor friendly.
How does Hedonova operate in the wine investment market?
We are early-stage investors in wine. We give capital to wineries to buy the entire vintage right after harvest when the wine is still grapes. Because of this, we can enter at lower prices. We then hold the wine barrels for around two years while the grape juice ferments to become wine. Before botting, we sell to a late-stage investor or wine distributor.
How much money can one expect to make with a good wine investment?
Depending on the region, type of wine, and vintage, wine can return between 16% and 22%. Wine from France, which is red and from 2001 to 2006 have historically had the highest returns.
What about taxes, etc. on the profits earned?
Taxes depend on the county the investor is in. In India, wine investments made abroad is taxed as income from capital gains or income from other sources.
What is the worst case downside?
Just like any tradable security on an exchange, wine prices go up and down every day. There are two risks specific to wine — bad French weather and unfavourable tariffs from the US or China. Like it or not, French wines like Bordeaux, Burgundy, and Champagne dominate the global wine market with a 60% market share. But the lack of the Gulf Stream (a warm ocean current) cools down the wine-growing regions and can lead to crop failures in specific years. Apart from natural concerns, there are other global implications too. US and China are the largest importers of wine but when in 2021, the US imposed tariffs on wine imports from Europe, which caused market turmoil. In such cases, demand gets affected which hits prices and consequently, the value of your investment.
How does one invest in wine? Can they do it themselves?
I can break this down to three steps. One, open an account on a wine exchange like Liv-Ex. Two, buy wine from France, Argentina or Chile. Three, diversify across vintages, 2016 or before offer some of the best wine. Hold for two business cycles, around 90 months. This is one of the few times I can recommend that people can do it themselves – if the investment flops, you will still be left with a lot of decent wine to drown your sorrows in!