A corker – if you’re lucky...

Melanie Stern is Section Editor of Families in Business magazine.

Wine has long been a popular collectible and investment – but do nothing without competent advice in this expert's market, says Melanie Stern

When one thinks of wine, images of wealthy chateaux owners in southern France springs to mind, walking barefoot over slate kitchen floors, a cellar-full of vintage Bordeaux quietly gathering dust.

But while the wine market continues to enjoy a reputation as a safe investment for the affluent, simply buying up crates of anything old and pricey with a well-known brand, and then storing it indefinitely, is as expensive in practical terms as it is in investment folly.

Like most collectibles, wine is not a science and does not operate on measurable terms such as government bonds or equities. Business families who like the idea of investing in wine should start by locating a reputable market expert to do the necessary graft.

Know the costs and pitfalls
There are many pitfalls for the novice that make expert advice essential. The common belief that any older wine is a good investment, has instigated a supply of very good and very expensive fakes of older vintages mostly available in Europe but bought by America and Asia. The brand strength of the market, particularly with the wealthy, has attracted many shady dealers who set up in areas such as London's Square Mile with a reputable-looking name and staff, offering a variety of ways to buy bad wine and lose money.

Assuming one successfully avoids these issues, the costs of storage, authentication and insurance – absolutely essential to preserve the one thing that lends intrinsic and future value to wine, its quality – should be carefully evaluated against the cost of wine and the risks of it losing value. Additionally, buying wine for investment should not be approached in the speculatory way one would buy for pleasure. "Drinking wine for pleasure is fantastic – the world is your oyster – but that is a totally different market from the investment market, which is very polarised, very restricted, and only involves the absolute top end of Bordeaux Chateaux from the best years," Serena Sutcliffe, renowned Master of Wine and Sotheby's director of fine wines tells Families In Business. "You can't really move far outside that orbit if you are looking to make an investment."

Many wine investors buying and selling wine fall into it by accident, having simply bought too much to drink, and often the first port of call is an auction house. The odd sale here and there falls under the taxman's radar but anything perceived as more substantial or regular sales becomes trading and enters taxable territory. However, wine can be bought from auctioneers and merchants 'in bond', or before it has paid tax, and if it is stored in special 'bonded warehouses' it can be sold on still under bond without the seller ever having to pay tax.

Under-house cellars are less common these days but there are many professional storage companies who can make up for this. The good ones include insurance of your wine in the price of hiring the space. "Wine is not gold – it's a living thing and can change," Sutcliffe says. "Wine can lose its quality through bad storage which is not cold enough, or damp enough, so anyone creating any level of collection who does not have their own cellar will need to pay for professional storage. Buyers are always going to ask how it has been stored – any reputable place would in fact refuse to take your wine unless you paid for the insurance on top."

Financially traded wine
Following in the footsteps of other commodities, invest­ors can buy wine futures on what is called the En Primeur market.

Futures contracts oblige the purchaser to buy a specified quantity of a physical stock at a specified price and time in the future, meaning the wine purchaser can reserve the amount of wine they want from a certain winery at a certain price, between six months and two years before the wine is ready for sale. Wine futures are also cheaper than buying the physical product when it is finally released to the public. Currently, wine futures are available from places such as family-owned wine merchants Berry Bros & Rudd, Premier Cru Fine Wine Investments and the Australian Wine Exchange, the only capital markets-operated shares offered to the market. French financial exchange Euronext launched a wine futures market in 2001 but, despite being set up as a professionalised capital market structure with market-makers and contract clearing, it failed. Euronext believes it was because the market was not ready for it. The outstanding contracts were wound up last summer and Euronext does not forsee a second attempt. "Wine ventures are very difficult to sustain because wine prices don't fluctuate enough and gains tend to be gradual, rather than sharp," Berry Bros & Rudd's head of fine wines, Simon Staples, explains. "However we do say that if a client makes the right selection and looks over a five-year period, wine futures should rise between 15-20% per year compound."

The impetus to buy futures is that they are usually sold on the very best, most popular vintages of Bordeaux or Burgundy chateaux which accrue the best values – and the volumes made can be small. This is due to points of production law (for instance, Chateaux Mouton Rothschild produces only 20,000 cases or so, and Chateaux Le Pin or Lafleur less than 1,000). Reserving some at the time it goes into cask ensures you get some at all, and because they are sometimes released in such small volumes, the price to the public can escalate quickly. Futures avoid this. But, while they are likely to appeal as a portfolio diversification tool to managers of family offices, or others trading on behalf of business families, this fairly nascent market should be treated with extreme caution. "In the period between buying wine futures (when the wine is still in the cask) and the date of delivery, many companies that people have bought futures in have gone bust, and therefore they have lost their investment," Sutcliffe says. To avoid this, stick to the most renowned top-quartile dealers. Conversely, BBR's Staples notes that his clients take delivery of their wine in their own private reserves under their own names, not the company's, so the asset is always under the ownership of the purchaser should the 304-year-old company go to the wall.

Getting what you pay for
Talk to a merchant to fully understand the experts' recommendations for perennially good wine investments, but the advice is always the same – buy younger wines for investment purposes and leave the older vintages to be drunk with a good meal for pleasure. "Many people decide they want to invest in 'a few old wines', but those two things are incompatible since older wines have completed their value increase. Good investments are top Bordeaux years '89, '90, '95, '96, '98 and '00," Sutcliffe says." The top Bordeaux classified growths, first and second, and super-seconds, "are the crème de la crème because they have that magic combination of quality and quantity you need to create a market" the Master of Wine adds. Californian wines can feature at the top end and Australia has only one investment grade wine, Grange; Italy offers a few Tuscan Cabernet Sauvignons of investment grade – but France is where the best quality wine is.

Premier Cru's managing director Paula Golding says this current En Primeur market is a promising investment, given 2003's soaring summer temperatures resulting in a smaller but much higher quality yield. "As far as I'm aware there has never been an En Primeur Bordeaux wine that has gone below the opening price over a five-year investment period," Golding reports.

BBR's Staples says that Bordeaux vintages '82, '90 and '00 will always be sought after. "The 2003 vintage released this April/May looks terrific in certain areas of Bordeaux and we expect the price to be reasonable because of the low dollar rate, which will raise demand," he says of this year's offerings.

"Most people who buy purely for investment end up being very interested in consuming some of their wares," Staples adds. Atop that warm slate farmhouse floor with a tidy profit in their portfolio, perhaps.