Is It Time for Fine Wine?

For those clients who want to have their investments and drink them, too, wine futures could merit some consideration. The Liv-ex 100 Fine Wine Investables Index, which tracks the price movements of the 100 most sought-after fine wines with active secondary markets, is up close to 40% year to date. Wine-auction results are making headlines: an imperial-size bottle of Cheval Blanc 1947, a rare Bordeaux, sold for $304,375 in mid-November -- setting a world record for a single bottle at auction, according to Christie's.

Wine futures are purchases of the leading Bordeaux vintages still in barrels and not yet bottled. Tristen Beamon, general manager and Bordeaux buyer at importer and retailer Wine Exchange in Orange, Calif., says that after the grapes are harvested and fermented, the wine is stored in barrels. Wine producers invite leading wine critics and retailers to taste the wine at its early stage, usually in April.

The world’s top critics give the vintage a score as an early indication of its quality, and final scores are assigned when the wine is bottled. For example, a particular wine might receive a score in the range of 94–97 when in the barrel, with 100 being the top score.

Producers use that range score to price the wine for future delivery, hence the term: wine futures. The wine is sold in multiple tranches. If a tranche sells well, the producer will raise the price of subsequent tranches. Wine retailers then resell their allocations to retail customers who wait for delivery. “Customers who are buying the 2009 futures won’t see their wine until the end of 2011 and perhaps early 2012,” says Mike Osborn, founder of online wine retailer Wine.com.

Futures prices can move quickly. Osborn says that clients who purchased 2009’s first tranche in the late spring and early summer of 2010 have seen the value of their wines increase by 20 to 25% already. Some clients sell their wines at auction as soon as they receive them, says Osborn, but others store the bottles in anticipation of future price increases.

Possible Downsides: There are several risks. A vineyard can experience a natural disaster, such as an earthquake or floods. Also, the wine might spoil or the bottles can be damaged in transit. In addition, if a wine merchant doesn’t deliver the goods as promised, the buyer is left holding an expensive but worthless sales receipt.

There’s also the risk of wine fraud, in which a counterfeit label for a top vintage is placed on a lower-quality wine, highlighting the need to work with reputable merchants. David Diesslin, CFP, with Diesslin & Associates Inc. Financial Advisors in Ft. Worth, Texas, has been collecting wine for years and buys futures periodically.

It’s been a profitable hobby: He estimates that his average bottle cost is about one-tenth of its current market value. Diesslin recommends using a credit card for purchases to protect deposits against vendor problems. It’s also important to be aware of the wine’s history, he says. Of course, wine investments don’t come with guaranteed payoffs.

Kent Smetters, president of Veritat Advisors in Philadelphia and a professor at the Wharton School, studied wine prices through year-end 2006. “We basically found that except for first-growth French wine, investments in wine did not really produce a high enough return to justify their risk and in particular they were not a low-beta asset,” he explained.