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Business Times - 22 Aug 2011

Venturing into wine investing

Giving expert tips, a consultant and a professor tell TEH SHI NING what novice investors should look for while trying their luck in wines

WINE may have lost some of its allure as an investment option here in recent years due to alleged scams at wine investment companies, but it continues to pique the interest of increasingly affluent investors hunting for alternative investment options amid the stock market's volatility. While still a niche market, even in Europe, interest has grown worldwide with greater availability of pricing information. Electronic wine exchanges such as the London International Vinters Exchange track price changes in premium wines with its Bloomberg-listed Liv-Ex 100 benchmark index.

This rose 19.3 per cent year on year as at end-July, compared to a 9.5 per cent fall in the S&P 500's total returns over the year to date. Various studies arguing that wine prices are historically uncorrelated to traditional asset classes and can thus aid portfolio diversification have also bestowed upon wine some legitimacy as an asset class.

Still, wine, along with other lifestyle investments such as art, boats and watches, likely draws investors' interested in the assets themselves. After all, it is not the most efficient investment vehicle. Premium wine still takes years to reach its potential, and can be difficult to sell quickly if you need cash, so your investment time horizon will have to be fairly long.

In Singapore, there is an expanding pool of young people, including young women, who have taken their love for wine into their investment portfolios too, says wine consultant and the founder of the Wine Lovers' Club, George Wong.

But these range from the connoisseurs and aspirational or 'wine pretentious' drinkers to the 'beverage wine consumer' and the 'new wine drinker', all of whom have very different attitudes and levels of knowledge of wine.

Investing in wine requires far more than a cursory knowledge of which wine to pair with the evening's meal. In fact, less than one per cent of the world's wines are investment-grade, says Mr Wong, who holds a Wine MBA from the BEM - Bordeaux Management School.

Desai Narasimhalu, director of the Institute of Innovation and Entrepreneurship at the Singapore Management University, says: 'One has to have an intimate knowledge of factors such as the terroir, varietal, region, estate, the winemaker and the vintage, before one can become a savvy wine investor.'

About 80 per cent of the world's investment-grade wine is still produced in Bordeaux, France, says Mr Wong, who suggests that novice investors seek out ones highly rated by wine critics, such as Robert Parker, and familiarise themselves with wines by reading the Bordeaux Classification and Langton's Classification Wines.

'The majority of the world's total wine production is largely produced to be consumed fairly quickly and at fairly mundane prices, so investment-grade wines can command significant premiums over their original release prices,' he says.

Wines are priced on many different factors, and it can be harder to gauge its value than a stocks - which equity investors regularly do with technical charts, financial ratios and forecasts of a company's earnings.

'There could be two vineyards next to each other, but their wines are priced differently for different reasons, including the height at which the wine is grown, the way sunlight falls on the ground, the method of making wine, the wine maker, and so on,' says Prof Narasimhalu.

If you feel confident about venturing into wine investing on your own, then buying wine direct from reputable wine distributors or merchants may be a good idea. But otherwise, wine brokers help with the time-consuming process of researching the market, and arranging for shipping, insuring and storage of your wines in appropriate temperature-controlled warehouses. As wine investing remains unregulated however, this can be tricky and is where your greatest risks lie.

In June, the Hong Kong office of Premium Liquid Assets, one of the major wine investment companies here, came under investigation for an alleged investment scam, leaving hundreds of investors with the Singapore office seeking answers and even legal recourse. Last year, some investors saw their six-figure investments with Assets Wine Management turn sour when the owners went uncontactable, and another wine investment company Universal Assets Group made headlines as investors lodged police reports over delayed payouts.

Mr Wong says black sheep exist in every industry and does not expect this to deter investors from wine. 'However, it's time for the government or regulatory authority to step in,' he says.

Before that happens though, he says investors can look out for ones which, on top of being financially sound, provide structured wine education programmes for investors such as organised trips to the chateau. 'It is especially important for the investment companies, to build investors' and the public's confidence,' says Mr Wong. Otherwise, investors speak to the broker at the point of sales, only to realise that the broker has resigned or the company has folded two years later.

It is also helpful to check on a broker's ability to help you exit your investment - whether he has a strong international network of dealers, importers, traders and auction houses will matter here.

Doing that due diligence is all the more important as wine investing can look very attractive. Increasing scarcity means that a portfolio of 'blue-chip' wines may yield average returns of 10 to 12 per cent a year. Commissions and fees - which can range from 5 to 12 per cent - may erode these gains though, as will storage, insurance and shipping fees.

Also attractive are the low initial prices of en primeur or wine futures - which offer investors the opportunity to buy into a wine while it is still in the barrel. Payment is made up to 18 months before a vintage is officially released, but there is no guarantee that the wine will gain in value once bottled and out on the market.

Wine funds

For the well-heeled, some private banks offer wine funds. But wine funds, and their advisers, unlike most other investment funds, are not regulated by the Monetary of Authority of Singapore, so it's your job to know what you are or aren't buying.

'If you are interested in wine purely as a financial investment, and are put off by a product whose price is governed by weather, sun, rainfall and the whims and fancies of wine critics, then a wine fund helps take the leg-work out of investing,' says Mr Wong.

'Wine funds regard their vintages are purely financial objects - the art of the winemaker's dream is translated into profits and losses,' he says. As such a wine fund investor can step back from worrying about which wines to select, how to store them, or when to sell.

But as with collective investment schemes, your money will be locked in for a stipulated length of time, and management and performance fees are par for the course. Research and due diligence into the fund's background and advisers is a must, but even then, a wine fund's historical performance is no guarantee of future performance. Of course, there are those who would purchase the wine in large quantities for reasons other than to make good money. 'I know one person who has invested in wines so that he can serve it during his son's wedding,' says Prof Narasimhalu.

Mr Wong quips: 'One great thing about investing in wine is if things don't come up as you hope, you can always pull a cork and enjoy a glass of your delicious investment to drown your sorrow. It's a lot better than a share certificate!'