If your clients have patience, money and some more money, investing in wine might be an ideal portfolio diversification strategy.
Beyond the steep transaction costs, insurance and storage fees, illiquidity and a general lack of regulatory oversight, wine can be a fine investment for the right person, according to Avinash Singh, senior manager at Aranca Investment Research.
“When it comes to investing in wine, information availability is not the same as with stocks or bonds, so the onus of research and knowledge is all on the investor,” he said. “To get started investing, you really need two things: money and a knack for getting to know what good wine is.”
While he admits the list of investment risks is long, Mr. Singh, in a new research report, also underscores the value of wine investing as an alternative asset class.
As an investible marketplace, fine wine is known to be extremely diverse and inefficient, which can create big opportunities for those in the know.
But even the most popular index in the space, the
Liv-ex 100 Index, a London-based global fine wine index, presents a convincing case for dabbling in the category.
According to Mr. Singh's research, the benchmark's 9.2% annualized 10-year return through June is second only to gold's 10.4% annualized return among major assets classes.
NON-CORRELATED
But what's most attractive about wine is the lack of correlation among the major asset classes over the 10-year period.
The Liv-ex 100 had a
correlation to the S&P 500 Index of just 0.23. In fact, the wine index's correlation to gold, real estate, bonds and emerging-market stocks ranged between 0.17 and 0.38.
By comparison, the correlation between the S&P 500 and the S&P Global REIT Index was 0.82, or nearly full correlation.
That kind of data is probably not lost on the financial advice community, but the risks lurking in what is still a
relatively uncharted market prevents most advisers from steering their clients toward wine investing.
“I have been personally interested in wine and have collected wine for over 15 years and know quite a bit about it, but I don't give advice to clients in this regard,” said Assaf Pinchas, wealth manager at Allegiance Financial Group.
INEFFICIENT MARKET
Mr. Pinchas described his personal wine collection as “valuable, but not necessarily an investment.
“My cellar has a certain worth, but I buy wine typically to drink it,” he said. “If you know what you're doing, there's no question in my mind that you can make money on a regular basis investing in wine, but you have to be really sophisticated because the market is not very efficient.”
For a sense of how easy it would be to make a poor investment decision when it comes to wine, Mr. Singh's research found that of the 24 billion liters of wine produced last year, only 1% is considered to be of investable quality.
It's for such reasons that most advisers put wine investing in the same category as stamp collecting.
“Whether it's wine or cars, I just don't know about people going into it as an investment or as an alternative investment,” said Charles Sachs, president of Private Wealth Counsel.
“In my opinion, wine is a collectable first and foremost, and profit should not be a motivation for purchasing wine,” he added. “If somebody is going into it because they enjoy wine, that's fine, and if they happen to make some money, that should be ancillary.”
David Haraway, principal at Substantial Financial, said his limited knowledge with wine investing stops at the large bid-ask spreads and the sticky tax issues.
“I do know that, like stamps, art and other tangible personal property, it is disfavored by the tax code,” he said.
Kristi Sullivan, owner of Sullivan Financial Planning, hasn't had any clients asking her about wine investing yet, but she would likely steer them in a different direction.
“I think of wine collecting as more of a hobby than an investment,” she said. “If you're wealthy enough to have the time and do the research and have some awesome wine cellar set up, you're not really doing it for the money.”
