As well as being one of the world’s favorite tipples, wine is a great investment opportunity. But you might not want to rush to invest in your favorite Friday night Merlot, as not every wine is a good addition to your portfolio.
1. Wine as an investment opportunity
Luckily, the wine industry helps you know where to invest, by defining “investment-grade fine wines”. These high quality wines usually go up in value after around five years. Of course quality matters, but what makes a wine especially investment-worthy? There are a few things at play:
- Demand vs. supply: It takes the right location, land, and production to make a fine wine, and that limits how much can be made. Demand for a great wine grows faster than supply, and this drives up the value.
- Pedigree: This is a combination of the wine’s origin and history. A wine from a famous vineyard with a great track history will have a better pedigree. Wines from certain regions are more valuable – like a red from Bordeaux or sparking from Champagne.
- Vintage quality and production: The vintage is the wine’s year of production. Grape variety, climate, soil quality, and the oak used in that year all make a difference. For example, a year with perfect weather can produce a great flavor vintage.
- Critic scores: There are numerous wine rankings and ratings that impact how much a wine is worth. In general, wines need to score at least 95 out of 100 to be a good investment.
- Drinking window: This is the wine’s shelf-life. Some wines need to be drunk right away, while some get better with age. Investment-grade wines are usually at their best at least 10 years after bottling.
2. Why invest in wine?
People are drinking more wine than ever before, but there’s only a limited amount to go around. Fine wines are especially rare, and this makes them worth more. To add to that, fine wines get better with age, so they’re more desirable and valuable after they’re bottled, which makes them an even better investment.
So how much return can an investment-grade wine make? An industry benchmark called the Liv-ex 100 tracks fine wine prices. In the past 20 years, its value rose by over 270%, beating the S&P 500 – the standard index for US companies. Fine wine has done better than other investments during market downturns too. For example, compared with equities and bonds, wine prices remained fairly stable during the 2007-08 financial crisis and the 2020 pandemic downturn.
On top of all this, fine wine’s also handy for diversification, as it tends to have less in common with stock markets and traditional investments. When you put it all together – wine’s shown healthy growth, resilience against economic uncertainty and it also helps balance your portfolio. Cheers to that!
Keep in mind that there are always risks with any investment, and wine’s no exception. Your wine bottles need the right storage conditions to achieve the best aging process. There’s also a real risk of fraud and scams around wine sales, so it’s worth getting a wine specialist to help you source the right vintage and supplier.
3. How to get started investing in wine
One way to get started is to simply buy wine yourself through wine brokers or at auctions. Although it’s the simplest way to get started, you’ll need a deep understanding of the industry to pick the right investment, and buying your own bottles adds the complexities of transport, storage, and insurance.
You could consider investing in wine-related stocks, but that cancels out the benefit of wine diversifying away from traditional markets. A different approach could be to invest in a wine-focused fund. These funds include money from a broad range of investors and they select specific vintages to invest in. But there’s a limited number of wine-focused funds out there, and they often require a high level of investment.
A simpler and more hands-off way to get started is to invest in a broader alternative asset fund that includes wine as one of their investments. These funds have the expert knowledge needed to select the best wines and create a blend of diverse alternative assets for the best return potential.
4. Case study: How Hedonova invests in wine
Our approach to investing in wine is to look for inefficiencies in the supply chain. We try to find where we can apply capital to make the supply chain efficient. Wine is a very expensive business. Grapes only grow once a year, take up a lot of land, and require a lot of care and tons of water. Years of rent and insurance need to be paid, and once harvested, the grapes need to be put in barrels and stored in temperature and humidity-optimized conditions. The vineyard’s money is stuck for a very long time. We buy the barrels of entire harvests from the vineyards which give them cash they can use for the next harvest. And because we’re buying early, when it’s essentially grape juice, we pay a much lower price. We then hold the wine for two to three years before selling them to the next investor: other wine investment companies.
Our wine holdings are mixed, with both blue chip performers like Burgundy reds and upcoming wines like whites from China and Australia.