Fine wine investment looking strong for 2011 as returns hit 40%

Fine Wine returns reached 40% in 2010 and are forecast to hit 21% in 2011 as experts believe it is going to be a great year to invest in wine as Asia leads new demand.

Leading fine wine investment specialist The Wine Investment Fund (TWIF) is predicting that the main wine index will finish 2011 at around 407, a rise of 21% compared to its 2010 year end level.

Using the benchmark Liv-ex 100 index, fine wine returned 40.5% in 2010, with very limited volatility. Eleven of the 12 months of the year showed rises, with just one small fall in July.  The returns compare favourably to equity markets; the FTSE 100, rose by 9% over the year and FTSE All-Share by 11%.

Looking back at the last year and forecasting for 2011, there were, according to TWIF, four main influences on the fine wine market: The economic performance of the main wine purchasing countries, particularly China; the ‘pull up’ effect on back vintages of the high prices for the 2009 en primeurs; the increasing attractiveness of wine as an asset class, particularly to institutional investors; and the effect of exchange rate movements between the Chinese Renminbi and Sterling.

‘A year ago we said that returns of 40 to 50% in 2010 were possible and that has proved to be correct. It was another great year to be invested in fine wine,’ said Andrew della Casa, director of The Wine Investment Fund.

Prices of older vintages were pulled up by strong Asian demand and by the extremely high prices asked for the latest vintage which came to market. ‘Demand from China doesn’t look to be going away any time soon, and with inflationary pressures rising, investors are increasingly turning to physical assets. So we believe that another good year could be in prospect,’ added della Casa.

The star performer in 2010 was once again Château Lafite, with most vintages increasing by between 60% and 100%.  But the year also saw a broader based recovery than 2009, with strong price rises across many wines, a reflection of renewed demand in the traditional wine consuming areas of Europe and North America and of maturing palates in Asia.

‘Our market forecast return for 2011 of 21% is above the long-run growth rate in fine wine prices, but it might still be conservative. Fine wine has a great internal dynamic whereby supply falls over time as each bottle is consumed, which naturally causes prices to rise. But external influences look promising too,’ explained della Casa.

One factor which could lead to much higher growth is a strengthening of the Chinese currency, predicted by many forecasters. This would mean that Asian buyers could pay more in GBP to acquire the wine at no extra cost to themselves.

Wine as an asset class is seeing greater familiarity amongst private and institutional investors as the market matures, and as inflationary pressures lead to rising demand for physical commodities which cannot be devalued.

‘Fine wine has historically showed lower volatility than assets such as equities, oil and gold, and also very little, if any, correlation with these other assets. Adding wine to an investment portfolio can therefore reduce the portfolio’s overall level of risk,’ he added.

The Wine Investment Fund saw two of its five year Tranches mature in 2010, returning an average of 15.2% annualised growth after all fees and expenses, compared to an average return of just 0.06% per annum on the FTSE 100 over the same period.

‘Our central forecast would be for a small but positive effect from the fact that the 2009 prices are likely to be reinforced by similar or slightly higher 2010 releases. TWIF’s central forecast is for fine wine prices to rise 21% over the course of 2011, with a bear scenario of 0% to 5% and a bull scenario of 30% to 40%,’ concluded della Casa.