Evaluating Investment-Worthy Wines (3/4)

When you hear the word “investing,” you immediately think of stocks, bonds and mutual funds. But as many are finding out, you may also be able to turn a profit on a nice bottle of Cabernet or Sauvignon Blanc if you know how to pick them. Quickly becoming a popular alternative investment, fine wines actually have a long history of strong returns. According to Entrepreneur, “The non-traditional investment has yielded a 13.6% annualized return over the last 15 years.” And savvy investors are sitting up (or sipping up) and taking notice.

For those looking to hedge against the familiar booms and busts that stocks and bonds go through, wine makes a solid case. Collectibles, like fine wine, deliver investment returns with little to no correlation to traditional assets. In fact, they may even be negatively correlated with the stock market. Instead, the value of wine responds to factors such as weather patterns, harvest yields and vintage and consumer trends, all of which intersect with supply and demand. Because these factors are unrelated to the overall stock market, wine can be a terrific complement to a traditional portfolio. As such, investors are increasingly turning to investment-grade wine as a way to improve diversification.

While wine can be a very lucrative investment, it is important to keep in mind that indexes like Sotheby’s and London International Vintners Exchange, commonly known as Live-ex, track tens, if not hundreds, of wines, and any individual wine in the index may not match the performance of the index itself. So just like you choose a variety of stocks to diversify an investment portfolio, it is important to buy a variety of individual wines to avoid placing too much weight on the performance of one vintage or producer. It is also important to note that the target is investment-grade wine rather than the less expensive bottles you might buy from a local wine shop.

Sounds straightforward, but with only a tiny portion of the world’s wine being investment-worthy and a wide range of factors that influence a wine’s potential to appreciate in value, it is easy to get tripped up. Some of the factors are fundamental, while others are more market-driven and related to supply and demand. That being said, no matter the vineyard, there are a number of factors that have a significant influence on the investment potential of every wine.
Below are some tips for those interested in stocking their cellar with investment-grade wine:

• Know Your Vintages – A wine’s vintage refers to the year in which grapes are harvested, and wine is produced in a particular region. Weather and growing conditions vary between seasons, so from year to year each wine vintage offers a unique taste, aroma and quality. Understanding a wine’s vintage can provide crucial insights into the growing season. For this reason, it is important to understand which vintages yield the best production of the wine you are considering investing in. 

• Reputation Really Does Matter – A wine’s potential for appreciation is impacted by the reputation of the wine producer. You can determine which wines have the most potential on the secondary market by paying special attention to the producers that appear again and again. These recent trends can indicate growth, which is something to keep an eye on. If you want to play it a bit safer, you will want to look at consistency and reputation over long periods of time. Leading producers, such as Domaine de la Romanée-Conti (DRC), Pétrus, Château Mouton Rothschild and Château Lafite Rothschild, as well as wines from the regions of Burgundy, Bordeaux, Champagne, Rioja, Rhone Valley, Tuscany and Napa Valley, have all historically performed very well as investment-worthy wines because of their worldwide reputation. 

• Understand Aging Potential – Wines that have good aging potential are wines that get better in the bottle. They continue to evolve, developing additional complexity, mouth feel and flavor. To determine if a wine is investment-worthy, assessing its ability to age well is crucial. Wines with significant aging potential are often bottled before they are really ready to drink and need time to structurally integrate and open up in order to be enjoyed. Factors that influence the potential of a wine to age well include the grape variety/varieties, vineyard, climate, vintage, vine age, vine yield and ripeness, as well as key aspects of the grape itself, including extract, phenolics (i.e. tannin), acidity, sugars and pH. And once the wine is made, the overall balance of its structural and flavor components also impacts the potential. The producer’s wine-making practices, packaging and storage conditions all have a big impact too. With so many factors to consider, looking at a producer’s track record for crafting wines that age well can be a helpful place to start.

• Look at Longevity – The best wine investments are in bottles that will last until the intended drink date and beyond. Wines must be age-worthy before they can be investment-worthy. And just like aging, longevity varies among wines. Investment-grade wines tend to mature around 10 years after bottling, with select premium labels aging for extended periods, appreciating in value and quality all the while. Others will only be drinkable for a shorter period after fully maturing, so be sure to take this into consideration when evaluating wines to invest in.

• Is it Scarce? – One of the allures of top wines is that they are hard to get. This wine scarcity drives up the value of the vintages you invest in and makes them increasingly valuable over time. As purveyors open bottles, the demand outweighs supply and prices can soar. This has been found to be true for regional wines like Burgundy, Champagne and Bordeaux, as investment-grade wineries may only release a few thousand cases per year, a fraction of their larger counterparts. And some regions almost exclusively sell to négociants instead of directly to consumers, further exacerbating this scarcity.

• Research Pricing Trends – A wine’s price history demonstrates the trend in value, with investable wines showing a steady progression upwards. Since scarcity can be hard to predict, researching past pricing performance can be helpful. In fact, experts suggest spending at least six months to a year watching auctions to learn about market trends, pricing and how different types of wines are selling before entering the marketplace yourself.

• Listen to the Critics – Because wine quality cannot be determined before tasting, buyers often depend on expert opinions. For investing, critic scores are extremely helpful in determining the best wine investment because they reflect expert opinions. There are different rating systems for high-quality wines. Over the last couple of decades, Robert Parker’s 50-100 scale has become the most commonly used way for evaluating wine, with investment-worthy wines typically receiving “classic” or equivalent ratings (95 out of 100). Wines that don’t meet the highest critical standards are considered more risky investments. 

A Few New Listings this Week