Wine glimmers like gold as a store of value in uncertain times

A global rally in stocks is driving some investors to drink, but not in the way you might think.

Prices for fine wines have climbed to their highest levels since October 2011 on speculation that equities near record highs are poised to drop. Wines and the funds that buy them are being viewed much like gold — as a store of value in uncertain times — after the UK voted to leave the European Union and the US elected Donald Trump as president.

“Favourable macroeconomic conditions, constrained supply and robust demand will continue to drive the market,” said Chris Smith, an investment manager at the London-based Wine Investment Fund. The fund returned 17 per cent in 2016, boosting its net asset value to £248 million ($310 million). “Prices to most buyers still look cheap in historical terms.”

A weaker pound is helping to make sterling-based wine contracts cheaper for overseas investors and boosting the value of indexes, which are denominated in the British currency and track the value of the most sought-after wines. Chinese investors have also returned to the market after overstocking when prices were rallying in 2010, only to be followed by five years of losses.

The Live-ex 100 Benchmark Fine Wine Index has gained in each of the past 14 months, its longest winning streak since June 2010. The gauge returned 25 per cent last year, beating the 19 per cent made on the FTSE 100 Index of the largest companies on the London Stock Exchange. The wine index has room to rally another 18 per cent before hitting its mid-2011 peak, according to Smith.

To be sure, wine funds aren’t for everyone and not typically the type of products generally open to retail investors because of the risks associated with them, said Charles Boulton, UK market head of HSBC Holdings’ private-bank unit, which has about $315 billion under management. The funds are targeted at experienced investors, he said.

They are not without their risks either. The Cayman Islands-based Vintage Wine Fund, which in 2008 held 110 million euro ($117 million) of assets, closed in 2013 after a poor performance prompted investors to pull their investments. A year later, Luxembourg-based Noble Crus Wine Fund was shut down. So was Bordeaux Fine Wines, which had one of its directors banned by the British government from running a company after money meant to buy wine was spent on race horses, sports cars and private jets.

Demand from China is rising after a crackdown on excess and bribery dissuaded investors in the world’s second-largest economy from making purchases. Bottled wine imports to China jumped 21 per cent to $1.66 billion in the first nine months of 2016, according to the China Association for Imports & Export of Wines & Spirits.

The 10 million euro Malta-based WSF Sicav’s Wine Source Fund, which also invests in whisky, has gained 32 per cent in net asset value since it started in 2012, according to Chief Executive Officer Philippe Kalmbach. He is also the founder of Wine Source Group, which buys wines from among the top producers in the world for distribution to restaurants and hotels.

The fund attracts investors with a service that offers reservations on private jets and yachts, sommeliers on demand for your dinner party and last-minute seats at more than 500 of the world’s best restaurants. It buys 60 per cent of its wines on the open market and the rest directly from producers, then stores them in bonded warehouses to age in optimal conditions, he said, adding that it trades about one-third of its portfolio a year to ensure it remains liquid and meets all its redemptions.

London-based Wine Owners that builds individual wine portfolios for investors as opposed to a wine fund, saw trading increase to £662,000 in the fourth quarter of 2016, from £263,000 a year earlier, manager James Sowden said.

Kim Carter, 63, wants to increase his allocation to the Wine Investment Fund to about 5 per cent of a portfolio he owns, declining to give details on his current holdings. He started his investment pool by selling a brass-fittings manufacturer to Hanson in 1989 and also invests in private equity in the UK and Canada and co-founded Wishing Step Pictures, a documentary film company in Toronto and Hamilton, Bermuda.

“I like wine, but I’m in it for the investing,” he said by phone from Contadora Island in the Gulf of Panama. “It’s always done incredibly well for me.”