Passion investing: Diversifying your portfolio into the wine market

There are many people who enjoy a glass of wine, and some who go to great lengths to collect a fine, vintage bottle. For others, an interest in fine wine may lead them to consider it as a potential way to diversify their investment portfolio.

“Wine is an example of people turning a passion into an investment,” says Angie O’Leary, head of wealth planning at RBC Wealth Management-U.S. “It’s comparable to individuals who also choose to invest in scarce tangible assets such as rare coins, classic cars or antiques.” There’s a growing trend, she says, around passion investing that goes beyond simply collecting for personal use, instead offering diversification and the potential for investment returns.

To demonstrate the increasing interest in this type of investing, there are a series of indices that track prices in the fine wine market. The industry-leading benchmark is the London International Vintners Exchange, which includes the Liv-ex Fine Wine 100 Index that tracks the top 100 most sought-after wines. The index generated a five-year return of more than 22 percent through the end of 2018.

But that kind of return doesn’t mean you should go out and completely fill your portfolio with wine or other such investments, says Liz Jacovino, wealth strategist at RBC Wealth Management-U.S.

“Wine, like other passion investments, should only represent a small part of your overall portfolio, and needs to fit within the context of your overall asset mix,” she says.

Different approaches to wine investing

While many fans and collectors of wine may think buying premium bottles of wine is the only way to invest in the product, there are actually several different methods to tap this market, including:

• Wine futures: Wine that is still aging in the barrel and sold as-is. You invest upfront, but the wine is typically not bottled for at least two years and is not shipped from the winery for three years after harvest. “This is a speculative purchase where you’re trying to predict the quality in advance based on a variety of factors, including your knowledge of the vintner and the weather,” says Jacovino.
• Pre-arrivals: Wine that is bottled but not yet officially released on the market. Since these are young bottles, the price you pay may be lower than the retail price tag. The quality may also be more evident than with wine futures, and the turnaround time for making potential profits may be faster.
• Market wines: Wine that can be purchased on the open market. In this case, you may have a clear sense of what the volume of production has been for a given vintage and a better idea of the quality. Certain wines may be in high demand and sell out quickly when they initially come to market. Due to limited quantities — as with stocks, bonds and other securities — there’s also a secondary market for wine.
• Invest directly in a vineyard: Either by partnering with an established vineyard or starting your own, investing directly might be considered a long-term investment, requiring a great deal of expertise and operational know-how.

How to choose a wine

France – specifically the Bordeaux and Burgundy regions – produces the majority of high-demand wine for investment purposes. In fact, up to 80 percent of all investment-grade wine comes from France. A smaller amount of investable wine comes from Italy and California.

Many investors prefer to hire a professional wine manager to help recommend and facilitate their purchases. Because this is an ever-changing marketplace, it requires a great deal of specialized knowledge to separate the best investment opportunities from the rest of the market.

“Ultimately, the person advising you will also likely be the one who will take the wine you own to market for you,” says Jacovino.

Assessing the risks

As with any investment, it’s crucial to understand the risks of investing in wine, which could include:

• Market unpredictability: Market demand for specific wines may ebb and flow. The process of choosing wines as an investment involves a degree of speculation about the future demand for any vintage in which you invest.
• Storage: To help maintain your investment, wine will need to be properly stored, either by yourself or in a professional wine storage facility. “If you store wine on your own, look into adding a rider on your property insurance to protect it,” says O’Leary.
• Fees: You’ll likely have to hire a wine manager to help you purchase, store and sell the wine you’ve chosen. This service comes with fees, often in the range of 15 to 20 percent.
• Fraud: In some circumstances, wines have been sold that are not actually the vintage represented on the label. Particularly in the secondary market for wine, there have been documented cases of fraud.
• Extended time horizon: Because high-demand wines typically increase in value over time, investors may need to be patient, which means being in a position to set aside a sum of money that may not deliver a return for a significant time.

“Expect a holding period of at least 10 years to benefit from potential price appreciation, though it’s reasonable to plan on holding your investment for even longer,” says Jacovino.

Getting into the wine market with the goal of earning a return requires an understanding of the challenges and risks involved, which is why many wine investors seek the guidance of professional wine buyers. While the potential market for wine may lead some investors to consider it a potential way to diversify their portfolios, working with someone experienced in the marketplace could allow your passion investment, just like a fine bottle of wine, to appreciate with age.