Alternative investments may be well worth considering for a balanced portfolio. Should you find a home in your portfolio for art and wine? asks Natasha de Teran

Two of the more appealing alternatives to straight equity and bond investment are art and wine. Both shield investors from the vagaries of the stock market and the long arm of central bankers – but neither is an appropriate vehicle for either short-term investing or the bulk of one’s portfolio allocations. While corporate mishaps, shady reporting and economic policy can do serious damage to stock, bond and deposit-based investing, the even less predictable whims and quirks of fashion can seriously affect wine and art. And, if a quick trip round a national museum or the fine wine cellars of an upmarket restaurant suggests that some names are just always popular, forget it: their value can rise and fall as quickly as any stock’s can, and there is even less rationale behind the swings.

Investing in wine

Apart from the obvious attraction – namely that in the worst event it can actually be drunk – wine’s particular appeal to onshore investors lies not least in its fiscal treatment: the Inland Revenue views wine as a ‘wasting chattel’, meaning that gains are exempted from capital gains tax. Banking on such attractions, there are now even a couple of online wine exchanges, which enable investors to trade wines online much as stocks and shares are bought and sold through electronic exchanges.

One of these, the World Wine Exchange, is a UK-registered company, which operates internationally through offices in Bordeaux, the USA, the Far East and the Middle East. Through WorldwineXchange.com the company offers secure trading in fine wine to international buyers and sellers on a real-time, first-come-first-served basis. The look-only service is free, but a 5 per cent commission of the total transaction is levied on both purchases and sales. The purported benefit of trading this way – as opposed to through auction houses or independently – is that you have continual access to prices and stock availability information without having to wait for auctions, or negotiate and contract separately with each trading partner.

In conjunction with the above service, World Wine Exchange also offers an advisory service, called the Wine Portfolio. The portfolio group’s team of Masters of Wine offer a full management service, helping customers to build up their portfolio through the exchange. There is no upper limit to what you can invest, but the minimum investment is £2,500 or $4,000. As an investor you physically own the wines, which are registered in your own name, with a personal account number. Investors are advised by the firm to keep the wine for at least a five-year period, and store it in its UK Customs-controlled bonded warehouse, where it is both secure and maintained in the correct conditions to mature. The wines are insured at replacement value, and cannot be removed from the bond without your consent. For the portfolio management there is an annual charge of 1 per cent of the portfolio value, and if funds are taken out of management, there is a commission charge of 5 per cent.

A rival service is offered by Uvine, a UK-based outfit with offices in the US and Australia. The company is led by Christopher Burr, a Master of Wine and a leading figure in the wine industry. Burr previously worked in the fine wine shipping businesses, at Bass Brewers, and most recently as International Head of Wine at Christie’s.

A global exchange, Uvine is open to all tiers of the wine distribution chain, from producers through to private and corporate consumers. Like the Wine Exchange, there are also transaction fees, Uvine’s being slightly higher. A 5 per cent levy is charged to both buyers and sellers on purchases over £25,000, and a 10 per cent levy on smaller transactions. The 24-hour, 7-day-a-week trading facility assures both anonymity and security, and the firm also arranges free storage and insurance for wine traders.

Boosting the appeal of investing in wine are its historical performance and the solid projections made on its future value. A wine index, compiled by Fine Wine Management, outperformed equities by 97 per cent from 2000 to 2002 – a period that was admittedly characterised by strong stock market falls. But the outlook is good: sales and value of red wine worldwide are set to increase by up to 30 per cent over the five-year period beginning in 2002, according to market analyst Euromonitor. And the Bordeaux Index, an internet-based advisory wine-investing service, predicts that investors will see returns in the range of 12 to 18 per cent per annum over the next two years.

For a minimum of £10,000 investment, the Bordeaux Index’s specialist team advises investors on building portfolios, stores the wine, provides monthly reports with portfolio breakdowns, and charges no management fees. It does, however, invest from its own chosen portfolio of suppliers.

In addition to Bordeaux Index, Wine Exchange and Uvine, there are also a small number of fine wine funds that benefit investigation – one of which, the recently established Cayman Islands-based Amphora Fine Wine Fund, is in fact run by Uvine’s Christopher Burr. But if the plethora of investment routes is wide, there are strict limits to what is worth investing in. First-growth or Premier Cru Bordeaux and Burgundy are considered the blue-chip stocks, but even within these two categories it is important to select your vintage carefully. Experts advise investors to stick to the top wines such as Château Margaux, Petrus and Mouton Rothschild.

Investing in art

Investing in art has a more immediate benefit than investing in wine – you can enjoy it immediately and still reap the rewards. But like wine, it is risky. The authenticity of a painting or print needs to be verified, which requires a high level of expertise – and even such a verification is not always a complete assurance. Like wine, investors should not consider art to be a short-term investment and be prepared to hold a painting for the long haul – a minimum of ten years, according to experts.

But the rewards are clear. Old Master painting sales regularly achieve record prices. In July this year a recently discovered Rembrandt self-portrait dated 1634 sold at Sotheby’s in London for £6,949,600 – the highest price ever achieved for a Rembrandt self-portrait and the fourth highest price ever paid at auction for a work by the artist.

Old Masters may be out of reach of most of us, but outside the privileged world of the dedicated collector there are gains to be made, as investors can realise good profits, even by acquiring and holding on to lesser artists. Auction houses regularly sell smaller or lesser-known Old Master sketches, drawings and paintings for under £2,000. According to the Artprice index (artprice.com), even prints are worth a look. The index group says prints under £700 are growing at 16 per cent a year: a healthy return for a relatively small outlay.