By | December 6 2012
I hesitate to declare this for the third Liquid Assets in a row, but the consensus among the trade seems to be that we really have now reached the bottom of the finewine market. The Liv-ex generalist indices (that is to say, those wholly or mainly composed of Bordeaux) posted gains across the board in August and September. No cause for excitement (these were tiny gains – in the region of 0.5 percent), but perhaps the green shoots of hope are what the market needs to flourish again.
As I mentioned in the last issue, the Liv-ex Fine Wine 50, Fine Wine 100, and Bordeaux 500 are arguably unrepresentative of the fine-wine market as a whole, given their heavy Bordeaux makeup (only the 100 index contains wines from any other region). These "benchmark" indices have, therefore, painted a gloomy picture over the past year as Bordeaux prices rationalized. The first growths, as represented by the Liv-ex 50, remain down 22.6 percent year on year.
Other regions have continued to outperform the traditional Bordelais mainstays of wine trading. Domaine de la Romanée-Conti’s stable of wines rose 1.5 percent in September; and the top 25 Champagnes, by 1.4 percent. Burgundy, Italy, and Champagne all saw their share of trade on Liv-ex increase yet further, while Bordeaux’s share continued to drop in August and September, down to below 85 percent.
During the third quarter, the overall number of trades on the Liv-ex platform was down only around 10 percent year on year, but much lower values caused turnover to decline more significantly against 2011 levels (by as much as 50 percent in July; slightly less in August and September). In the last issue, I mentioned that the bid-to-offer ratio on Liv-ex was less than 0.2 – that is, bids represented less than 20 percent of offers. The balance of buyers to sellers on the exchange had improved by the end of August, with the ratio reaching 0.43. Liv-ex refers to this as "a key metric for gauging market confidence," since the ratio historically "falls during periods of market stress."
The third quarter is always slow in wine-auction terms. This summer was even quieter than usual, adding less than $50 million to global revenues. The only sales held during July and August were in Cannes and Abergavenny – while the larger Hong Kong and US auctions kicked off in September. Accordingly, sell-through rates dipped under 90 percent for the first time this year, at an average 89.5 percent. The US and Europe led this decline in Q3, whereas Asia bucked the trend.
Three strong Hong Kong sales held by Zachys, Christie’s, and Acker Merrall & Condit in September gave Asia a 97.1 percent sell-through rate for the third quarter, improving the year-to-date figure to 91.4 percent, up from 90.1 in the first half. All three sales featured à la mode Burgundies, and Acker’s sale headlined Champagne "from the legendary collection of Robert Rosania," breaking records for Salon, Krug, and Roederer. While DRC dominated the top tens of all three sales, classic Bordeaux is still the bread and butter of wine auctions. For example, in Acker’s sale, the headline Champagne lots represented 18 percent of the sale, while Burgundy made up 23 percent, and Bordeaux 53 percent.
Despite this success in Asia, the more general lull saw wine-auction revenues fall further still behind 2011 levels to September. At $236 million year to date, global turnover is down 28.5 percent on last year, despite there having been only one auction less. With 51 further sales scheduled before the new year, 2012 is due to match 2011’s 146. Only 0.2 percent fewer lots have gone under the hammer, but actual sales are down, and the average price is only three quarters what it was. If sell-through rates continue to fall, we could well see fullyear revenues drop more than one third below the 2011 total.
No auction house has improved on 2011. The revenues of US houses Skinner, Spectrum, and Heritage were down 60.3, 52.2, and 46.2 percent respectively compared to the first three quarters of 2011. Sotheby’s is also trailing its 2011 performance significantly, its 36.6 percent drop allowing Zachys to be the second house in as many quarters to overtake it in the wine-auction rankings (fig.2, below). Zachys logged an impressive average sell through of 97.4 percent to September, compared to Sotheby’s 92.9 percent.
However, Sotheby’s is traditionally strong in Q4 and has already upped its form at the time of writing, with a $9.2-million white-glove (100 percent sold) blockbuster on October 5. With six more auctions to come, Sotheby’s may well finish the year back in second place, though there’s very little chance of catching Acker in the home straight.
Sotheby’s has taken its foot off the pedal in Hong Kong, with four sales this year compared to six in 2011 and less than half its revenues originating in the Special Administrative Region. This could account for its lagging slightly behind competitors. In the light of Hong Kong’s flash ascent from 2008, followed by its front-running the downturn of the last 12-18 months, Sotheby’s may be a long-term strategy. The auction house has been broadening its focus to include other emerging markets, most notably Latin America. Earlier this year Sotheby’s wine-department executives toured the region to promote their April 16 sale of ex-château Cheval Blanc and Yquem, holding events in São Paulo, Rio de Janeiro, and Mexico City. Following an auction on September 16, Duncan Sterling, Sotheby’s New York head of wine, said, "Buyers […] came from 18 counties with nearly 20 percent of the wines in the sale selling to Latin American collectors – our highest ever rate from this rapidly expanding market."
Nonetheless, Acker remains in pole position for now. Hong Kong continues to serve the house loyally, with auctions based in the city bringing in 61.3 percent of its revenues to September. Its total of $54.2 million represents a (relatively!) modest decline of 17.8 percent year on year. Speaking of modest, Welsh auction house J Straker, Chadwick & Sons brought in $1.5 million over the same period. However slight that may seem in comparison with the international players, it was the only house that more or less managed to match its 2011 results.
WINE AS AN ASSET CLASS
In issue 36, I presented the investment concept of SWAG, (silver, wine, art, and gold). Since then, a book has been published on the subject, penned by the acronym’s creator, economist and former hedge-funder Joe Roseman, and subtitled Alternative Investments for the Coming Decade. Roseman delves deeper into the economic environment that renders so-called SWAG investments – which can also include other precious tangible assets such as platinum, copper, rare stamps, and watches – so relevant.
This environment is one of crippling debt. For the first time ever, in 2011 the Organisation for Economic Co-operation and Development (OECD) member countries’ overall debt-to-GDP ratio surpassed 100 percent. To put this into context, the figure was 76 percent as recently as 2006. In desperate attempts to reverse this trend and trigger growth, governments do two things that make it difficult to preserve capital: They keep interest rates artificially low, and they print more money. The former, explains Roseman, is one of the main goals of financial repression, which he defines as "theft by those who have borrowed recklessly from those who have saved prudently." The latter causes inflation, as well as a "redistribution of wealth." Roseman bemoans this outcome, describing quantitative easing (QE) as "the public sector’s version of a Ponzi scheme."
Easing into retirement
The tenet of the book is the importance of capital preservation through finite, tangible assets, in order to provide insulation against "the potential ravages of the economy and more specifically against the attack on purchasing power that arises from money printing." Roseman points out that his strategy is not limited to the rich. "All segments of society need to protect their assets," he says, "and that includes how portfolio and investment managers manage pension funds, insurance funds, and endowment funds."
This sentiment rings true in the UK. In October, the National Association of Pension Funds pleaded with the regulator to be able to offset the corroding effect of QE on pension pots. It argued that almost half of current deficits in final-salary schemes were due to QE. So, what exactly can those "prudent savers" among us do to tide the dilution of what we have? Pensions are dwindling; savings in the bank accrue more slowly than inflation at current interest rates.
"If only one could invest in the money supply," rues Roseman, citing its fast growth and limited volatility. Since no such fund exists, his alternative suggestion is to find an "asset class that mimics the expansion of the money supply." Why SWAG, of course. Roseman enlists Voltaire to help make his point, quoting an abbreviated version of his 1729 words that "paper money, based solely on confidence in the government that prints it, always ends up back at its intrinsic value, that is to say zero."
The fixed and finite nature of SWAGs is what enables them to "capture the effect of that rise in the money supply," explains Roseman. In other words, as more money is printed, the supply of these assets remains constant, and they become relatively more valuable.
Of such "collectible" assets, wine is the arguably the most finite of all, at least when considering specific wines, or even investment-grade wines in general. As each bottle of a wine in a certain vintage is consumed, the supply of that wine is diminished forever. In more general terms, the production of classed growths in regions such as Bordeaux and Burgundy is more or less fixed. The effect is rendered more extreme still in the case of legendary producers such as Henri Jayer, whose retirement in 2001 and death in 2006 saw an end to bottlings under his name. On February 10, 2012, a case of Jayer’s Vosne-Romanée Cros Parantoux 1985 sold for more than HK$2 million ($265,000).
Simultaneously, demand is increasing as new markets discover wine and it becomes part of their culture. "As every student of economics knows," states Roseman, "when a demand curve shifts to the right and a supply curve shifts to the left, price gets driven sharply higher." The unique supply-and-demand relationship inherent in fine wine makes it particularly attractive in a world in which other stores of value are undermined by money printing.
Increasing interest in wine from emerging markets and increasing wealth both point to that demand curve shifting further to the right. Historically, wine prices have loosely mimicked the growth in the number of billionaires worldwide, promoting the idea of fine wine as a luxury good and something purchased by the super-rich despite the wider economic environment. Since the 2011 crash, however, billionaires have managed to stay billionaires, with a few newly crowned members to boot, and yet wine prices have suffered acutely (fig.3, below). A pessimist might dismiss the trend altogether, while an optimist might predict a rally of wine prices to keep them in line with the purchasing power of the world’s richest few. Opportunity knocks
William Beck, partner of Wine Asset Managers, says that when you combine this phenomenon with the major winemarket downturn of the past year, "you could argue fine wine is significantly undervalued." uses US M2 money supply as a proxy for global money supply, showing a divergence with investment-grade wine as it has fallen in the past two years. "The more you look at figures like this," says Beck, "the more you think [wine] is a screaming buy."
"We’re convinced that now, more than ever, we’re in the right industry," enthuses Beck, excited by the opportunity. Beck echoes Roseman in his belief that "a sustained period of consistent money printing" is inevitable as the Western world struggles to grow its way out of massive debt.
The theory is supported by Yale University lecturer Vikram Mansharamani, who says, "In times when paper wealth is seen to be more risky, investors are drawn to real, tangible assets." He is quoted in a recent Barclays Wealth Insights report titled Profit or Pleasure? Exploring the Motivations Behind Treasure Trends, in which the bank surveyed more than 2,000 high net worth individuals on their sentiment towards SWAG. Only Barclays refers to the asset group as "Treasure" and splits it into collectible categories such as precious jewelry, antique furniture, and coin collections, as well as the original SWAG components, fine art (here split between paintings, sculptures, and tapestries), precious metals (grouped into one), and wine.
The report’s introduction picks up on the same notions of SWAG or treasure being viewed as a panacea to "traditional financial markets." The report also cites "a mistrust of esoteric financial instruments," as well as "a perception that tangible, scarce, and non-fungible investments could provide a stable store of value in uncertain times."
Barclays’ report found that this type of investment represented an average of 9.6 percent of the total net worth of the individuals questioned. The figure is 17 percent in China. In his book, Roseman recommends investing between 20 and 30 percent of a portfolio in SWAGs. While there may be a gap between the reality and Roseman’s suggested ideal, it is clear that such investments are increasingly seen as viable alternatives to traditional financial instruments.
This is evidenced by the glut of wine and art funds to launch in recent years, and also by the heightened interest that banks are showing in these asset classes. Deloitte’s Art and Finance Report 2011 found that 56 percent of private banks had experienced stronger demand for tangible assets since the 2008/09 downturn, 83 percent feeling that "there are strong arguments for including art and collectibles in traditional wealth management" .
Profit v pleasure
The collection of wine, art, and other treasures is nothing new. In the foreword to the Barclays report, Thomas Kalaris, chief executive of Barclays Wealth, reminds us that "Owning possessions that are financially valuable, emotionally pleasing, and culturally significant is a timeless tradition and one that shows no sign of abating." What is perhaps changing is the recognition of treasure assets as a bona fide investment.
Nonetheless, collectors themselves do not necessarily view their treasure assets in this light. Barclays found that respondents hold only 18 percent of their collections as an investment. Overwhelmingly, individuals are motivated by enjoyment rather than financial benefit, and this is nowhere more the case than with wine collections. Only 10 percent of wine collectors hold wine for investment purposes, the second-lowest percentage after collectors of tapestries. Only 7 percent believe their wine collection will provide security should other investments fall, the lowest percentage for all ten asset categories in the survey, compared to 50 percent for collectors of precious metals.
Conversely, a high 39 percent of wine collectors are so attached to their collection that they view it as "priceless," below antique furniture, jewelry, and sculpture, at 45, 44, and 44 percent respectively, but well above stamp, coin, and precious-metal collections. A wine collection scores similarly to paintings, tapestries, and classic cars on the emotional-attachment scale.
Whether it is acknowledged for its financial benefits or not, wine collecting seems to be on the up. Of the respondents to Barclays’ survey, 28 percent own wine collections, compared to 21 percent five years ago, representing growth more or less in line with that of the other asset types. The report’s authors caution that this could be due to the relative age and wealth of those respondents five years ago. However, since wine is more popular among under-45s, by 5 percent compared to over-45s, the growth in those holding wine probably does reflect a real increased interest in the asset. Of the ten treasure categories in the survey, wine is the fifth most popular in terms of the proportion of people who collect it, ahead of classic automobiles (15 percent), among others. Top of the list was jewelry, which 70 percent of respondents own, and then fine art of the pictures-andpaintings variety (as opposed to sculpture or tapestries and rugs), owned by 49 percent of individuals. Antique furniture and precious metals also prove more popular than wine.
Despite wine being held by a significant proportion of wealthy individuals, it represents the lowest percentage of their overall wealth compared to other treasure assets, at an average 2 percent – on a par with stamp collections! However, even art collections (whether paintings or sculptures) represent only 4 percent of an individual’s total wealth. The price of the most expensive painting ever sold is more than $250 million for Cézanne’s The Card Players. This is more than 1,000 times that of the most expensive bottle of wine: $232,692 for each of three bottles of Lafite 1869 sold by Sotheby’s in Hong Kong in October 2010. It is 250 times more than the 128-bottle, 40-magnum super-lot of Château d’Yquem sold by Christie’s in May 2010. So, even at 2 percent of an individual’s total wealth, these wine collections must be pretty sizable to be worth half the average art collection.
Show and share
The most sizable wine collections of all are in the Far East. In Singapore, wine is the second most important collectible in value terms, behind precious jewelry. Singaporeans hold 16 percent of their wealth in treasure assets, compared to Hong Kongers’ 14 percent. In Hong Kong, wine is the third most popular treasure type, again behind jewelry, and also trailing coin collections.
Nowhere else in the world does wine enter into the top three most popular treasure categories according to Barclays’ study. The survey also questioned respondents on their motivations for collecting treasure assets. "Enjoyment" was the first reason given in 14 of the 17 countries covered, including both Singapore and Hong Kong. The second motivation for Singaporeans is to "show off" the treasures, while in Hong Kong, it is "sharing."
All three motives are perfectly aligned with wine collecting. More than any other "treasure," wine is made for enjoying – albeit the enjoyment factor is more fleeting than with a painting that you can look at over and over again or a car you can drive every day. Wine is also an ideal medium for showing off, as has been demonstrated in Hong Kong and China, where a famous brand such as Château Lafite achieves cult status and confers prestige and clout upon the person giving it as a gift or bringing it to a dinner with friends or business contacts.
Wine is more conducive to sharing than private indulgences such as jewelry or antique furniture. "Wine is often an anomaly compared with other types of treasure because it is meant to be shared and, unlike other treasures, consumed," note the authors of the Barclays report. Wine is the most shared of all ten assets studied, with 69 percent of wine collectors saying they like to share it with friends (26 percent ahead the next category, classic cars). Arguably, art can be shared in a more constructive manner, through being loaned to a public gallery, whereas fine wine remains a luxury shared only in the upper echelons of society.
If we grant that wine collections meet these three criteria – enjoyment, showing off, and sharing – they can be used to identify potential hotbeds for future wine collectors. For example, in China these are the top three motivations cited for owning treasure assets, while Brazilians’ reasons include enjoyment and sharing. We already know that fine wine has taken off in China and is becoming more popular among the wealthy in South America, so these motivations seem to fit.
Respondents from China say that 52 percent of their treasure assets are partly collected in order to show others, while the figure for India is 75 percent. "The social motivation is particularly strong in key emerging markets," the report states, euphemizing that "in countries where there are large quantities of newly created wealth, there may be a propensity to demonstrate status through treasure." Interestingly, the figure in Mexico and Brazil is far lower, at 24 percent and 15 percent respectively, implying that culturally Latin Americans are less inclined toward braggadocio.
Indians and Saudi Arabians are the only collectors for whom enjoyment does not enter into the equation. In Saudi Arabia, the top motivations are "pure investment," showing off, and sharing, but prohibition means wine collections cannot feasibly be the chosen outlet. In India, collectors want to show off, invest, and "earn respect." As readers of this column well know, wine is a viable asset to hold purely for investment purposes, and the notion of earning respect is not dissimilar to that of showing off. Could it be, then, that Indians, after Chinese and Latin Americans, will be the next big wine collectors?