WINE 40-41

THE BIG QUESTION 42-44

INVESTMENT TRUSTS e;

ETHICAL (] GOLD 49-50

USA 52

40 1 lnveslmentWeek 111 April 2011 www.investmentweek.co.uk www.lnvestmentweek.co. uk

WINE

ASIAG S TASTE FOR FINE WINE fts Asia's love affair with fine wine grows, Joanna Faith looks at how it is affecting the asset class as a whole

The success of wine as an asset class is hard to refute - the numbers speak for themselves.

At the end of March, the Liv-ex Fine Wine 500 Index was up 2.61% from the previous month and had increased 23.84% year-on-year, while the Liv-ex Fine Wine 100 Index was up 34.26% year on year.

With few asset classes currently deliv­ering such attractive returns, the case for investing in wine is well versed: fine wine prices are largely uncorrelated to other asset classes; investors can see returns of up to 30% a year from some bottles; and demand is exceeding supply.

A wave of demand from As ia - more specifically China, whose love of luxury products such as jewellery and designer handbags, has been well documented- is to thank for this new dynamic.

Five years ago the Chinese were hardly buying any fine wine, according to Miles Davis, partner at Wine Asset Managers, a specialist manager of wine funds.

The impact since they started buying wine three years ago has been so signifi­cant that Davis attributes 36% annual returns from his funds last year to the maturing China market.

"Our average long-term performance has been mid-teens; normally you would expect to see 15% a year. So 36% was a very good year. Without the Chinese it would have been a much lower number," Davis says.

However, jumping on the back of what some would describe as a momentum trade, should be

"Historically, Europe has been the more knowledgeable market but over the last 10 years Asian markets have started enjoying and appreciating wine" David Roberts, Goedhuis & Co

approached with caution, according to Mark Pignatelli, manager of the Euro­pean Growth fund at Smith & Wil­liamson.

He says since the Lehman debacle there has been a greater than 90% corre­lation between the Fine Wine index and the following assets classes: copper, gold, the Thai stock exchange and the share prices of Louis Vuitton and Volkswagen.

"The fact they have all performed in exactly the same way might at first sight seem odd as there is not anything obvi­ously linking the price of copper and the fortunes of Thai companies with the world's drinking habits," he says.

"The answer is that all liquidity (which ultimately drives the risk premium on speculative assets) is coming from China.

"As such the real and perceived wealth of the region is the principal

Investment Week 1 11 AJ:Jri1201 1 1 41

WINE

TOP 1 0 WINES FROM UV~EX FINE WINE INVESTABLES INDEX

Vintage Feb 11 Feb 10 % Change

lAFITE ROTHSCHILD 2007 7,500 3,475 115.80 I

2 HAUT BRION 2004 3,450 1l60 96.00

3 lAFITE ROTHSCHILD 1997 7,638 4,002 90.90

4 MARGAUX 2004 3,800 2,012 88.90

5 HAUT BRION 2001 3,450 1 ,850 86.50

6 MCXJTONR01HSCHILD 1996 5,126 ' 2,750 86.40

7 MARGAUX 2001 3,775 2,050 84.10

8 HAUT BRION 1996 3,975 2,212 79.70

9 LATOUR 1998 4,048 2,253 79.70

10 LATOUR 2007 4,250 2,385 78.20 By 12-roonm perfllffllilrt:e. Source. Li~Ex

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gauge by which investors will jump on a momentum trade.

"Given credit growth of 20% in China and uncomfortably high inflation, these momentum trades are likely to be called into question as the Asian credit cycle turns."

Meanwhile, Gary Boom, managing director, of Bordeaux Index, a trader of fine wines, says one of the biggest risks to the wine industry is if "China goes into meltdown".

However, Davis says despite certain economic headwinds, wine demand from the country is only set to rise especially among its half a million millionaires .

"China's interest in wine has 01ily just begun. The Chinese love brands. It is a brilliant way of demonst.rating wealth and over the long time it will only grow," he says.

David Roberts of Goedhuis & Co, a fine wine merchant, agrees. "The popu­larity of wine in Asia is a new phenom­enon. Historically, Europe has been the more knowledgeable market but over the last 10 years Asian markets have started enjoying and appreciating wine."

He notes the difference between the two cultures: in Europe, appreciation comes with age. "People mature and store their wine." In Asia, people drink it with friends as a way of demonstrating wealth.

While wine is being consumed in Asia "at a rate never seen before", Roberts notes supply over the last 15 years has gone down because the greatest estates are more quality conscious than ever.

"Fine wine 10 years ago was a rela­tively cheap commodity but because it has become an important status symbol and replicas have entered the market, prices have been driven up," he says.

Mar10 Sep 10 Man I

Meanwhile, Paula Golding of Premier Cru Fine Wine Investments says if China fell out of love with the commodity, only certain wines whose prices the Asia market. has pushed up, would fall.

The price of Chateau Lafite, for example, has escalated, she says.

"Before Asia exploded into the market, Lafite was a blue-chip wine but now it is no longer low risk thanks to an incredible marketing campaign which has seen prices go up."

Wines from the Lafite est ate have surged by 124% since December 2008. Chateau Lafite changed the label for the first time, for 2008 bottles, and included the Chinese symbol for 8 , a lucky Chinese number. Overnight the va lue of the wine increased by 20%.

Golding says Europeans will now have to pay a premium when buying the wine.

"There is only so much Lafite 2000 in the world and when it has been drunk, it is gone. Asians are drinking it much younger which means when Europe is ready it will have to pay a premium as there is not enough around."

However, Golding says the Asia boom has not sent all prices through the roof. For example prices of Margaux and Latour have not been pushed up as much.

The result of Asia's entrance is that. portfolio diversification is more impor­tant than ever. "Top of the market. is high risk because of prices," she says.

"You'd need to balance out with some 2010. You can't put. all your eggs in one basket."

Overall, she believes the entrance of Asia has had a positive effect. on the wine market. "While they are drinking it we are making money on it."