Peter Lunzer of Lunzer Wine Investments explains the role and application of wine in an investor’s portfolio, as well as how to discuss investing in this commodity with clients.
Date: Dec 2011
Tags: Wine, Asset allocation, Portfolio construction, Liquidity, Commodity
Some wine indices have seen a certain amount of volatility, given that they focus on the 50 or 100 wines in highest demand and therefore those which react more abruptly to market conditions.
However, he said, looking at the top 500 wines gives a more reliable performance measurement, and these have shown steady growth – the sorts of investments that can potentially be worth double in five years’ time, and therefore good portfolio content.
In addition, Lunzer said he has seen some consistent patterns in wine investing over the past 30 years. For example, wines which have emerged as the vintage of choice result in rising prices, which in turn leads to more consumption, lower volatility and then further price rises. And he said that these types of patterns will continue.
Wine within portfolios
According to Lunzer, wine should form part of most peoples’ portfolios, to perhaps a maximum of 3%. This is for two reasons, he explained: first, it is likely to be the best-performing 3% of their entire portfolio; and secondly, it’s what they will likely talk about more than anything else.
Also, because wine generally represents a small percentage of a portfolio, if there is economic hardship, wine is often that last thing which is sold – which Lunzer said is probably one of the strongest reasons for the low correlation with other asset classes.
The trouble with wine, however, is that it’s difficult to measure liquidity in any meaningful way, said Lunzer.
However, there is a London-based wine exchange, which shows a lot of detail about recent transactions in wine stocks and about prices. Also, in late 2008, the wine exchange had a greater number of trades than at any other time, which Lunzer said addresses some of the skepticism which exists around the ability to get in and out of this asset class.
At the same time, however, he said that it is important to manage investors’ expectations in terms of liquidity.
For example, Lunzer said that when he is liquidating a portfolio, he generally allows between three and six months to do so, because he doesn’t want anybody to know how much of any specific stock they are trying to put back to the market at any one time, and he also wants end-users to pay a high price to ensure his investors get a good return.
Yet if investors do need cash within a fortnight, the exchange has proved it can be done, he explained, even if the price has to get compromised by the speed of execution.
Discussing wine with investors
Lunzer said that talking to private clients about wine as an asset class, especially in Asia, can be a minefield, given that it isn’t a well-documented asset class and that there are few products available which resemble other assets they are used to buying. However, this is starting to slowly change.
One thing that can also be done is to take the word “wine” out of the equation – given the imagery it creates in investors’ minds, and the psychological impact this has – and instead just refer to it as a commodity investment.
