How to invest in fine wine as an alternative asset class investment

BEAUJOLLE, FRANCE — “There are few things in life that cannot be improved with good wine,” reads a translation of a sign in Villefranche-sur-Saône, Beaujolais, as the French wine region celebrates its new season.

It’s a motto that is increasingly being applied to investments as oenophiles and investors seek to diversify their portfolios with a more eclectic mix of assets.

With a low correlation to the global stock market, a good collection of alcoholic items can be an excellent accompaniment to traditional investments. But not all wines are created equal, and knowing where to start can require an experienced palate.

“Unlike enjoying a bottle of wine when you open it, drink it with friends and have a great time, there are many, many years of learning and understanding that go into appreciating fine wine,” Nick Pegna, global head of Sotheby’s wine and spirits, CNBC said.

“I think that’s very attractive: it’s an intellectual as well as a hedonistic experience for people.”

Fine wine consistently ranks as one of the best-performing alternative asset classes within Knight Frank’s luxury investment index, which compares the annual returns of collectibles including art, watches, cars and handbags.

Over the past 10 years, fine wine prices have risen 149%, the second highest return of any alternative investment after whiskey (322%) — and well ahead of cars, coins and jewelry.

The most famous bottles among them grew even more, with wines from France’s Burgundy region — known for its Pinot Noir and Chardonnay grape varieties — up 214% over the same period.

However, as with the aging process itself, investing in fine wine usually takes time and a healthy stomach.

Prices fell 11.3% in the year to October, retreating from a high base after a Covid-fueled rally, according to the Liv-ex Fine Wine 100 benchmark, which tracks the 100 best-traded fine wines on the secondary market.

“This is not a short-term game; it never has been,” said Anthony Maxwell, chief commercial officer of the wine trade marketplace. “Of course, the wine is a minimum of five years, it is an average prospect and more.”

Investors looking to enter the wine market can view the investment as a work of art, experts say, with quality, rarity and provenance key factors to consider.

“It has to improve with age in the bottle, it has to have some brand recognition and – perhaps most importantly – it has to have resale value,” Maxwell said.

For that, research is key, Maxwell said, noting that improved access to data in recent years has made it easier for new entrants to gauge brand valuations, critical acclaim, production processes and consumption levels.

“With better data, with more transparency, it’s helped turn what was maybe a little bit of a closed club, a closed shop, into something much more accessible to many more people,” he said.

Still, beneath the facts and figures, investors must also have genuine enthusiasm for wine, experts agree.

“It’s a passion,” Peña said. “If you don’t like drinking great wines, it’s going to be a pretty boring investment.”

Wineries and wine merchants can be an excellent starting point for investors who want to gain access to young wines at a lower cost than holding them for the long term. Meanwhile, auction houses provide access to already highly prized brands and collectible bottles.

Sotheby’s is currently hosting a year-long sale of 25,000 bottles curated by Taiwanese art collector and businessman Pierre Chen, with auctions taking place in Hong Kong, Paris, Burgundy, New York and London until the end of 2024.

The collection, titled “An Epicurean’s Atlas,” is expected to fetch up to $50 million across the five sales, which Sotheby’s Pegna said speaks to the extremely lucrative nature of the market. Henri Jayer Vosne Romanee Cros Parantoux 1er Cru Magnum, for example, will fetch around $70,000.

“It is clear that [Chen] explored the vineyards of Burgundy in the early days, before people really spent much time there. But he also took some expert advice in building it,” Pegna said.

The sale comes as increased affordability and a growing consumer base have given the market a boon.

Fine wine auctions at Sotheby’s have nearly tripled in value over the past decade, from $58 million in 2013 to $158 million in 2022. Over the same period, the number of bidders has increased by nearly 400%, and the number of new bidders by nearly 500%, two-thirds of whom are in their 30s and 40s.

“There’s tremendous new interest,” Peña said. “Nearly half of our new buyers come from the US, but also from the younger demographic.”

Unlike many traditional investments, chattels or tangible assets such as wine are often exempt from capital gains tax, which adds to their appeal. However, it is important to seek local advice and consider trading costs which can affect overall returns.

“You have to be willing to take 10% in and 10% out,” Maxwell said.

Depending on the size of the collection, storage is also an important consideration. Experts recommend that wine be stored in bonds or in authorized storage facilities, which are usually exempt from tax implications, such as VAT, and can help protect the integrity of the bottles.

They can also prevent any “fits of enthusiasm” to taste it, Peña noted.

Finally, decide ahead of time which bottles you’re buying to “lay around” – or store – and which you plan to drink.

“Often people rationalize what they’re doing from an investment perspective and then change their mind later because they start to love the collection and want to drink it,” Peña said. “If you can, decide in advance what to buy to eat and what to drink.”

As for the experts’ hot tips for your next investment win? Well, according to Maxwell, there’s an often-overlooked crop.

“You could definitely do worse than buying a few cases of 2016 Bordeaux,” he said. “And if it all goes wrong, you’ll have delicious wine to drink at the end.”