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The price of wine

The notion of fine wine as a serious investment may sound like an excuse for oenophiles to stock up on their favourite vintages…

By Elroy Dimson , Christophe Spaenjers and Peter L Rousseau 01 April 2016

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It is quite true that the non-financial benefits of such purchases can be enjoyed the moment the cork is pulled. But resisting this temptation can deliver real investment results that are more than respectable in the current period of low returns. 

Indeed, the value of vintage wine can actually increase as it advances past the age at which it can best be drunk. More on that in a moment.

It is estimated that a quarter of the world’s high-net worth individuals own a wine collection and that it represents, on average, two per cent of their wealth. In light of this, we set out to investigate the investment performances of vintage wines, taking as our starting point that elite group known as the premier crus, or First Growths, the great red wines of Bordeaux, namely Haut-Brion, Lafite-Rothschild, Latour, Margaux and Mouton-Rothschild.

There have, of course, been previous studies in this field but they have tended to look at price movements over a period of 15 years or less. We have considered historical prices over many decades, which gives a longer term perspective. Also, we have investigated the effect of aging on wine prices, independent of market changes. This, too, is unique.

To give some idea of the reach of our research, we should point out that we went right back to the Universal Exhibition in Paris in 1855, on the basis that it was in that year that wine brokers formalised a system of classification. Subsequently, it was the second half of the 19th Century that saw the introduction of estate bottling for high-quality wines – previously they had been sold under the name of the wine shipper – and the arrival of the distinctive labels and corks familiar ever since.

Collecting price data so far in the past was certainly a challenge. We alighted on two high-quality, reliable and invaluable sources of information in this area.

The first concerned prices achieved by the London auction house Christie’s, which held its first session dedicated solely to wine as far back as 1769. This long tradition made Christie’s a unique repository of data. The second involved the price lists of the wine dealer Berry Bros & Rudd, also of London, which has been in the wine trade since the late 17th century.

Initially, the figures seemed to have little to tell us. Inflation-adjusted wine values did not rise for the first 25 years of the last century, and this was followed by a boom and a bust about the time of the Second World War.

There was, however, a big change during the last half-century, when they rose substantially. Driving this increase has been a dramatic growth in the number of high-net worth households round the world with access to fine wines. One example of this globalisation of wine buying has been seen in the dramatic increase in Chinese consumption of Bordeaux wines.

This, in turn, has produced real, inflation-adjusted annual returns averaging 5.3 per cent between 1990 and 2012. Once that figure has been adjusted for the cost of storage and insurance, it stands at 4.1 per cent.

Measured against equities, this is a distinct under-performance, when you include in equity returns the benefit of cash dividends. Indeed, once the differences in transaction costs are taken into account, the gap in returns on wine versus equities is yet more pronounced.

But the picture is a lot more impressive when the returns on fine wine are compared with other assets. They have, for example, exceeded those on gilt-edged securities and US Treasury bills, as well as returns on art and on investment-quality stamps.

Of course, the values of different assets do not move completely independently of one another. There is a positive relationship between equities and wine prices, and periods of over-valuation in financial markets can be seen as having a spill-over effect on the price of assets such as wine.

What this means is that returns on fine wines can be predicted to be lower after a period of out-performance in relation to non-financial assets, such as art or stamps. What is more, investors may be well advised to treat the average return identified for the five wines in our sample as the likely upper limit for returns on fine wine more generally

As with any asset, the value of wine can rise and fall in the immediate term.

We mentioned earlier that wine can continue to appreciate in value even when well past its drinking best – indeed, in some cases when it has become undrinkable. This is for the simple yet (to some) baffling reason that such wines can have a value if buyers take pride and enjoyment in their ownership.

Nor is this the case solely for the finest wines. Both the premier crus and the lesser vintages can appreciate once they are beyond maturity, but age affects their values in a different way.

Given that the First Growths improve in drinking quality after bottling, their value rises strongly up to maturity and then stabilises. Prices are essentially flat until the wines are sufficiently past maturity to be regarded as “collectibles”, this being the term for wines that are to be stored indefinitely without the goal of ever drinking them, rather than as consumption goods. At this point they start to rise again.

The pattern for the low-quality vintages is different. As may be expected, the price declines rapidly after bottling because there is no improvement in drinking quality. This decline continues until the potential enjoyment of owning the wine as a collectible exceeds that of drinking it, at which point prices rise with age.

Practically-minded people may protest that the whole point of wine is, surely, to drink it? Our research shows this is not necessarily the case and that there is a financial value than can be put on the pleasure of ownership of a wine beyond maturity. Indeed, for the low-quality vintages, the very fact that they are likely to have become rare quite quickly after bottling may increase their value as a collectible.

Comments (2)

Gilles 2 years, 6 months and 9 days ago

Would you call wine an illiquid asset?

Maibeki 2 years, 6 months and 12 days ago

insightful

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