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Why investments in fine wine age… just like fine wine

November 16, 2021
|
Insights
updated on
April 15, 2024

Key Takeaways

  • Fine wine has returned 8.5% annually over the last 121 years.
  • The global wine market is expanding with some regions like Burgundy, France up 64.73%.
  • Fine wines offer investors benefits like diversification and de-correlation to public market volatility through tangibility-based assets.
  • While traditionally exclusive to industry insiders, fine wines and other alternatives are becoming more available to investors on platforms like Alto.

Oenophiles, rejoice. It’s no secret that fine wine is a luxury to enjoy. But did you know that you can embrace it in more than just a glass?

Wine has been a mainstay of human civilization for countless generations. And where there is commerce, there is investment. For more than 8,000 years, people have been producing wine. And, for more than a century, investment-grade fine wines have generated returns for investors.

What is fine wine?

According to the Knight Frank Luxury Indices, which compares collectibles’ returns (read: art, watches, cars and handbags), fine wine prices have ticked up 149% over the last 10 years. It sits second only to whiskey (322%) when it comes to alternative assets. Over 121 years, fine wine has returned 8.5% annually.

The global wine market is showing increased interest in premium and luxury bottles. Over the last five years, the global fine wine market is up 32.46%, with some regions like Burgundy, France up 64.73%.

And wine isn’t only a go-to during the good times. During the 2008 economic crisis—you know, when the S&P dropped nearly 38%—the Liv-Ex 1000, the broadest index of the fine wine market, only fell less than 1%. Following the COVID-19 pandemic in 2022 when the S&P 500 lost 15.6%, the Liv-ex Fine Wine 1000 was up 16.1%.

It’s no wonder why some fine wines have waitlists of a decade. Screaming Eagle, considered the original cult wine of Napa Valley, for example, has a more than 10-year waitlist to get an allocation of one of their bottles. Shrouded in secrecy, this exclusive bottle can only be acquired by early adopters and the well-connected.

Let’s get into why this asset seems to be such a ripe opportunity —and how you can invest in wine without the wait.

What are the potential benefits to investing in fine wine?

While the global wine market is substantial in size, investment-grade wines only make up a small percentage of overall production. These limited, luxury bottles offer investors a whole host of benefits.

1. Diversification

Wine offers a unique opportunity for individuals to diversify their portfolios with an asset class that, historically, has not moved in correlation with traditional stocks, bonds and real estate. That’s because its value is based on factors that have little to nothing to do with general economic conditions, interest rates or corporate earnings.

2. Tangibility

Unlike some other financial instruments, wine bottles are tangible assets that investors can physically own and enjoy.

3. Collectibility

Because some bottles with unique characteristics and historical significance can appreciate in value, fine wines are attractive to both investors and collectors alike.

4. Tax Advantages

Section 1202 of the Internal Revenue Code provides a potential capital gains tax exclusion for qualified small business stock, which may apply to qualifying wine investments. Capital gains tax rates may also apply to profits from the sale of collectibles.

An Alto IRA also allows accredited investors to access fine wine with their tax-advantaged retirement funds…although, there are rules that prevent IRA investors from storing the physical bottle by themselves.

5. Favorable Supply and Demand

Let’s go back to Economics 101 to understand what drives this return – the fundamentals of supply and demand.

At release, fine wine from a single vintage tends to sell out immediately to winery member allocation lists, merchants and investors. The release price is typically the lowest price point a highly collectible wine will ever see. Over the next 20 to 50 years, the wine trades, and the powers of supply and demand influence price.

Various factors impact demand over time:

  • Scarcity: As a consumable good, the supply of wine is ever-decreasing, and once released, no more wine of a particular vintage will be produced.
  • Inaccessibility: Friction from regulations, information asymmetry and opaque and inefficient investment strategies have limited the market for assets like fine wines, creating abundant opportunities for investors.
  • Exclusivity: Limited production quantities—due to vineyard conditions, winemaking techniques or small-scale operations—can create exclusivity, which can boost value.
  • Maturity: In addition to an ever-decreasing supply, the demand for wines increases as it ages and the quality improves. Typically, the older the wine, the more valuable it becomes.
  • Global Economic Conditions: Economic changes can impact consumer spending on luxury goods, like fine wine. When the economy is good, consumers may spend more money on fine wine, upping its value.
  • Harvest Conditions: Changing climates can change the harvest conditions and, therefore, the characteristics of wine, which can ultimately change consumption patterns.
  • Cultural Trends: Evolving cultural trends and consumer preferences, driven by evolving tastes and lifestyle changes, can impact demand for certain wines over others.
  • Emerging Markets: Shifts in demographics, such as emerging markets with increasing interest, can create new opportunities for growth.

Ultimately, the combination of these supply-and-demand factors drives long-term price appreciation. And while supply and demand consistently work in favor of fine wine appreciation, there are other catalysts, variables and opportunities that drive value growth.

Here are a few examples:

  • Ratings: Wine ratings and critic reviews can significantly impact the perceived quality and desirability of a particular vintage or winery.
  • Industry Events: High-profile wine events, such as auctions, can generate buzz around rare and collectible bottles.
  • Reputation: The expertise, track record, and reputation of winemakers can impact the perceived quality of their wine. Likewise, brand reputation and heritage can command higher prices as consumers may be willing to pay premiums for prestigious wines.
  • Investor Interest: Investor interest and speculation in the fine wine market can influence prices as buyers seek potential financial gains.
  • Emerging Technologies: The overall fine wine industry has seen massive innovation. For example, blockchain technology has allowed investors to authenticate and trace investment-grade wine bottles leading to increased investor confidence.

Fine wine auctions at Sotheby’s, for example, have significantly increased value over the last decade, climbing to a record of over $100 million generated in 2023. It’s seeing a 20% increase year over year, and, in 2022, there were nearly twice as many new bidders as the year prior.

What are the risks of investing in fine wine?

Understanding catalysts and variables is crucial for wine enthusiasts, collectors and investors alike looking to navigate the fine wine market and make informed decisions. That’s because, while offering high potential for appreciation and unique diversification, fine wine comes with its fair share of risks.

One significant challenge of investing in fine wine is the inherent illiquidity of the market. Because the investment-grade fine wine market is so small, selling fine wine can be both time-consuming and complex. The lack of a centralized market and little price transparency can also make managing fine wine investments difficult.

For investors who aren’t looking to sell any time soon, storage can pose challenges, too. Fine wines need to be safely and securely stored in the right conditions. Shipping costs to move those bottles can also be expensive.

Navigating these challenges requires a thorough understanding of market dynamics. Fortunately for accredited investors today, fine wines are becoming significantly easier to access.

How to invest in fine wines

Alto and Vint have partnered to provide investors a choice in how they want to diversify their portfolio strategy with a real asset alternative with tax-advantaged capital from their   IRAs.

Vint is a platform that’s focused on expanded access to investing in fine wine and rare spirits, an exciting alternative asset that aligns deeply with Alto’s mission to make investing in alternatives easier for everyone.

Vint allows anyone to purchase interests in expert-curated wine collections and efficiently diversify into this asset class. It takes all of the aforementioned variables into account when selecting assets to be included in collections for investors.

An example of how Vint selects fine wines

Champagne has long been revered for its investment potential, the prices it commands, and the quality it achieves with age. Champagne prices have outperformed all other wine regions over the past 12 months (as of October 2021) and continue to see increased demand as US tariffs subside.

Given the favorable macro environment for Champagne, growing demand in Asia, and the significant age-to-value correlation, experts consider this one of the most promising wine investment regions.

With this analysis, Vint curated a Champagne collection featuring the best vintages from 2002-2008. In addition to the best vintages, Vint selected wines from the top producers in the region, like Krug, Pol Roger Winston Churchill, and Dom Perignon-described by experts as some of the “most sought after wines on the secondary market.”

Supply and demand are constantly influencing factors, but these additional catalysts unlock additional return opportunities. Upon public release of this collection, it sold out to 75 investors in under 90 minutes. Demand is not only great for Champagne but also Vint collections!

The bottom line

With over 121 years of strong returns, stability and limited correlation to other assets, everyone should be able to access the fine wine asset class. And thanks to Alto’s partnership with Vint, you can.

Whether you’re trying to hedge against inflation, improve your downside protection, or invest in something you are passionate about, fine wine investing has something for anyone.

Visit Vint’s website to learn more about them and their upcoming collections.

Invest in alternative assets using tax-advantaged retirement funds.

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