How Do Wine Investments Really Work?

Investing in wine as an asset is still a relatively new concept and as a result it is seldom discussed. In Singapore, it is quite common to only hear about it after a wine scam comes to light.

Wine investing is categorised as a form of alternate investment along with other investments such as commodities, luxury watches and art pieces.

It’s not for everyone, information about the sector can be hard to access and there have been numerous stories over the years about unknowing investors being taken advantage of.

However, if you’re enthusiastic about your wine and interested in finding out more about how it works as an asset class, there is a growing market for you to get involved with. You will certainly not be alone.

A growing number of people have invested in wine and as more people jump on the bandwagon, the industry has seen many changes including the creation of investment funds that focus only on wine, the advent of stock exchanges such as the “Fine Wine 100”, as well as businesses focusing on professional storage solutions and insurance for such purposes.

Two Ways Of Investing In Wine

There are two main ways to invest in wine. The regular and probably less risky method would be to invest in a fund that specialises in wine investments. It’s like a mutual fund, with a portfolio of wine bottles. The managers of these funds tend to be experts in the arena and it could be a great way to start your foray into wine investing.

On the other hand, if you’re quite keen on learning about wine or have some knowledge in the area, it may be more satisfying to invest by choosing a portfolio of wines yourself. That would require you to select and purchase wine cases, with one standard case amounting to 12 bottles of 750ml wine, through a trusted wine broker.

Aside from helping you to purchase the wine of your choice, storage and insurance services can be arranged by the broker as well.

Types Of Wine To Invest In

To begin with, it is important to first know that the majority of wine produced in the world is meant for consumption, rather than for investments. It is estimated that about 90% of all wine produced in the world are meant to be consumed within a year of the production, and 99% of wine within 5 years. These are wines that you shouldn’t even keep for a long time, let alone invest in.

Even among wines that are meant to be aged and kept for years, not all can be considered for investment. Across the tens of thousands of wine producers around the world, only about 250 produce investment grade fine wines. It’s also estimated that about 90% of investment grade wines are produced in Bordeaux, France.

A simple way to understand this is to draw a parallel with watch investing. Even though there are many watchmakers around the world, who can claim to be creators of innovative and beautiful watches, only a handful of brands such as Rolex and Patek Philippe stand out as brands that can produce investment grade watches.

How Do People Make (Or Lose) Money From Wine Investments?

All investors have a simple objective – to make a profit. Similarly, wine investors buy wine today with the aim of selling it at a profit in the future.

What creates the potential for profit is the fundamental economic concept of supply and demand. Due to land limitation and other production constraints, there is a limited quantity of investment grade wine that a wine producer can deliver each year.

For example, a top French producer may only be able to produce 5,000 cases of wine each year. This drives up demand, and more importantly, desirability, as wine enthusiasts and investors seek to secure the limited cases of wine.

As some of these wines age and are consumed, the supply of that specific bottle diminishes over the years while demand remains constant, or even increases, if the wine is highly desired. The imbalance of supply and demand leads to price increases. At the same time, as the saying goes, fine wine gets better with age and also enjoys consistent global demand for high quality older vintage.

Typically, wine investors need to hold cases of wines for at least 5 or more years to allow it time to become rarer, before selling it at a profit in the secondary market.

The Limitations Of Wine Investing

Unlike the investments made in stocks, bonds or properties, wine investors do not enjoy any returns while holding their wine investments. They only make money when prices go up, and if they choose to sell their wine.

Keeping the wine bottles at an appropriate storage facility under the right conditions also costs money. Being valuable, the wine bottles will also need to be insured. Storage and facility costs can add up to be about $10 per bottle per year.

Wine is also an illiquid asset compared to equity or bonds; hence it may not be suitable for everyone. Investors need to look at their investment needs and risk profile.

Incurring Foreign Exchange (Forex) Cost

As Singaporeans, we incur Forex costs whenever we use our Singapore Dollar to buy and sell overseas goods. The same concept applies to wine investing. Charges are usually broken down into two main components.

Firstly, you will face bank charges. Banks may charge you a flat fee for the transfer of funds to an overseas bank account. Secondly, if you don’t shop around, you may be offered uncompetitive exchange rates which could make overseas purchases more expensive. For example, Forex spreads we observed from a local bank are as much as 2% (i.e. 200 pips) for the US Dollar.

Buy Sell Spread
USD/SGD 1.3730 1.3995 0.0265

 

If you wanted to invest USD$10,000 in your wine portfolio, you would need S$13,995. However, if you want to cash out the same USD$10,000 from your portfolio, you would only receive back S$13,730.

That equates to a Forex transaction lost of S$265, or about 1.9%, excluding any additional transfer fee. When making such transactions multiple times, these costs will eat into your investment return.

To reduce Forex costs incurred, it is important to shop around for money transfer providers who can give you a competitive rate spread and products to help manage the risk of adverse currency movements.

Online money transfer services such as World First offer a much better solution that reduces these costly Forex inefficiencies many investors encounter.

Using a specialist broker like World First for the transfer of funds overseas, you enjoy more competitive spreads on the exchange rate than what is typically offered by most banks. This gives you an immediate saving when dealing with foreign currencies in your investments. Furthermore, World First don’t charge private individuals fees when making transfers unlike many international banks. This could save you as much as $30 each time you make a transfer.

Wine Investing – An Alternate Investment With A Global Market

To own a decent wine investment portfolio, one would easily require at least USD$10,000. Given the long-term approach that an investor needs to take for wine investing, it’s certainly not an investment area for the average person.

That said, if you happen to be an experience investor and a wine enthusiast at the same time, the process of researching and learning more about wine investing can be a fun process to be involved in.

This article was written in collaboration with World First. All views expressed in this article, including our thoughts on wine investing, are the independent opinions of DollarsAndSense.sg

To find out how to make cheaper, faster international money transfers, go to World First today.

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