We speak to Andrew Della Casa who co-founded The Wine Investment Fund about why a strategy of investing in select Bordeaux wines has been a winner for the fund. He also describes the profile of an investor that is willing to commit money to a wine fund.
What is your value proposition?
Fine wines can make money. And as the grand-daddy of wine funds we should know. We set out to invest in an asset class which would give us double-digit annualised returns. Since its launch in 2003, The Wine Investment Fund has on average returned 1.13% per month net of fees and expenses. Last year we liquidated the first tranche of wine stock we bought in 2003 and we've more than doubled our investors' money over that period. On stock we are liquidating this year we continue to achieve the same return. We are delivering these returns even though most asset classes lost value in 2008 and into 2009.
What wine do you invest in?
We buy only Bordeaux Cru Classe wines. Production of these wines is limited and is controlled by the Appellation Controlee system. Supply is further limited by the fact that we consider only some 40 chateaux as producers of investment grade wine. We select wines from only the top 5% of all Bordeaux wines -- 35 million bottles out of Bordeaux's total annual production (estimated at 700 million bottles). The annual value of this top tier of wines is around £2 billion ($3.3 billion), and the total amount on the market at any one time (including older vintages) is about £6 billion. As demand for Bordeaux increases, we may start investing in the next tier of wines, representing around 15% of production. However, we are unlikely ever to buy from the remaining 80% -- these will not produce our required return. We believe fine wine is the only asset class which provides a perfect inverse supply curve: not only is supply of any particular vintage limited at the outset, it diminishes due to consumption.
What is your background to select the wines?
We buy wines for our portfolios from an investment standpoint thus are unemotional about our picks and make choices purely to maximise returns. Our management team comprises two professionals with a background in wine.
How do you manage the fluctuations in the prices of wine?
The main way we reduce risk is by not investing at the en primeur stage. Our research shows that during this period prices are volatile as opinions on the vintage change and any return these wines might provide does not compensate for the additional risk.
We also avoid newly bottled wines as prices tend to be flat during this period. However, as consensus emerges on the quality of a vintage, consumption and hence demand increases and the wines hit their first flashpoint -- ie a steep increase in price. From then on there are periods of flatter pricing and periods of sharp increases.
We avoid buying wines from small chateaux where the limited production run causes high price volatility. We do not buy wines coming to the end of their optimal drinking period -- at that stage limited supply causes price fluctuations making it difficult to establish the correct market price. We manage our portfolios not only to manage risk but to minimise risk.
What are your assets under management and what are your investment parameters?
We currently manage some £40 million -- we started in 2003 with just a million pounds! For individuals the minimum investment is £10,000 and the average is around double that. For institutions the minimum is £500,000 and, again, the average size is around double that.
Who are your investors and how do they approach you?
Our investors include high-net-worth individuals, institutional investors, wealth management businesses, family offices and even fund-of-funds. We have investors spread across North America and Europe and increasingly Hong Kong and Korea. Asian investors are relatively new additions but interest from the region has been high and we are considering raising an Asian tranche.
Now that we have more than a five-year track record, we find more institutional clients are willing to invest with us. We believe our investors seek us out for the portfolio diversification we provide. A wine fund is a wonderful product -- it's eclectic yet can deliver good returns at a lower risk than both established and alternative asset classes.
What kind of redemption pressure do you face?
We have had only one redemption since we launched seven years ago. We attract investors who understand the asset class, its appreciation potential and our investment philosophy. For a couple of years now, we have been offering redemption options to our new and existing investors without any lock-ups.
How do you source and exit wines?
In the past, to create a portfolio of wine, an investor might go to a wine merchant or broker. But due to conflict of interest the portfolio may have ended up comprising wines the merchant was over-stocked on and there was little price transparency. We source wine wherever we find the best price, subject to conditions on provenance. We use brokers, merchants and Liv-ex (the fine wine exchange). Typically, we manage to source wines at around 5% below wholesale. We sell through the same channels we buy from but also to high-end hotel chains, restaurants and other end consumers.
This story first appeared in the July issue of FinanceAsia magazine.
