Some investors may view alternative investments as assets that can diversify a portfolio. But some are more exotic and esoteric investments within the alternatives space than others. Think classic cars, fine art, bottles of whisky, some of which we have already introduced. Fine wine is one such investment, an emerging alternative asset class that benefits from two features – healthy demand and limited supply – that make it an attractive investment for long-term-oriented investors.

“Stable returns and low risk are the main characteristics of wine investment,” explains Lars Granat Jensen of RareWine Invest, a Danish firm offering individuals a platform for investing in wine. Fine wine’s attractive investment characteristics stem from attractive supply-demand dynamics due to its inverse supply curve. “The market is mainly driven by simple factors such as supply and demand,” says Jensen.

Three underlying factors are driving the fine wine market’s supply-demand dynamics, according to Anders Tang, the founder and CEO of another Danish company – Jero – providing services across the whole investment journey of wine. “First, there is scarcity of supply due to limited production,” starts Tang. Only specific vineyards in certain wine-growing regions have the qualities and recognition to produce top-quality wines. “The best vineyards in the world are at full production, so you have a limited supply,” says Tang.

“Production cannot be increased,” Jensen corroborates Tang’s observation. “Actually, climate change could mean even lower production of the best wines in the world in a longer-term,” argues Jensen. Another factor affecting the supply-demand dynamics is the consumption of wine, with supply actually decreasing as more of the wine is opened and drunk. “Over time, consumption will lower supply and prices will rise,” says Jensen. As time passes, there are fewer and fewer bottles in the fine wine market without demand falling, according to Tang of Jero.

The third underlying “supply-demand”-affecting factor is increasing demand. “Growing world population and the rise of ultra-high-net-worth individuals will increase demand for the best wines in the world,” says Jensen. The number of ultra-high-net-worth individuals is expected to increase by about 30 percent over the next five years, according to The Wealth Report by Frank Knight.

“Rising demand, stable to declining production, ongoing consumption provide optimal conditions for making supply and demand dynamics be the primary influence on the price development of wine.”

“More and more people are getting wealthy, with countries like India and China seeing more wealthy people every day,” confirms Tang of Jero. “As a result, the demand for fine wine either for consumption or for investment is increasing at a rapid pace,” he continues. “Rising demand, stable to declining production, ongoing consumption provide optimal conditions for making supply and demand dynamics be the primary influence on the price development of wine,” summarizes Tang. “This combination of factors makes wine a really attractive asset for long-term investment.” Jensen agrees, emphasizing that “wine investment is a long term investment.”

Investment Characteristics

Investible fine wines offer low correlation with traditional asset classes, attractive returns over the longer term and bond-like volatility. “If we compare to traditional assets, wine is somewhere in between government bonds and the stock market, though closer to bonds than stocks in terms of risk,” argues Lars Granat Jensen from RareWine Invest, an associated company of RareWine which has traded professionally in rare and fine wines globally for more than a decade.

“If we compare to traditional assets, wine is somewhere in between government bonds and the stock market, though closer to bonds than stocks in terms of risk.”

“Basically one can say that the returns are better than bonds and the risk is lower than stocks,” summarizes Jensen. “Certainly Champagne and Burgundy have been the best performing wine areas during the last 15 years, but if we look a the total market for fine and rare wine, one should expect approximately 8 percent return per year.” In the period 2005-2020, the broadest wine index on the wine exchange Liv-Ex had a higher Sharpe ratio than both gold and stocks. The Liv-ex Fine Wine 100 Index delivered an annual return of 8.4 percent with a volatility of 5.1 percent to reach a Sharpe ratio of 1.53, over the 0.57 Sharpe ratio for gold and 0.61 for the S&P 500. “If the story repeats itself, then it suggests that adding wine to a diversified investment portfolio can optimize the portfolio’s risk-adjusted return,” says Tang.

“Wine investments generally exhibit low correlation with financial markets as wine price formation is not determined by the factors driving broader markets.”

“Wine has historically been shown to have a low correlation with the financial markets, which makes wine as an investment asset particularly suitable for diversifying and reducing portfolio risk,” explains Anders Tang. “Wine investments generally exhibit low correlation with financial markets as wine price formation is not determined by the factors driving broader markets,” he elaborates.

“The demand for wine goes beyond the immediate benefits as an investment asset, it is also driven by passionate consumers,” according to Tang. “This does not mean that wine investment is without risk of loss of value,” he acknowledges, adding that “it is very likely that wine price formation will continue to be determined by internal factors and behave differently from stocks, bonds, etc., which fluctuate more based on general market sentiment and political intervention.”

Wine as an Inflation Hedge

In an environment of high and rising inflation, an allocation to fine wine can also fulfill the role of inflation protection, according to both Lars Granat Jensen and Anders Tang. “Rising production cost, inflation and more sustainable production methods will make production more expensive in the near future,” says RareWine Invest’s Jensen. “In addition to the development of the general supply and demand, the value of exclusive wine in the future is determined by the cost of production and the consumer’s ability and willingness to pay a higher price in the future,” adds Tang.

“Rising production cost, inflation and more sustainable production methods will make production more expensive in the near future.”

“The production of exclusive wine requires a high degree of manual labor, which is why the general wage development will have a natural impact on wine prices,” elaborates the CEO of Jero. “If prices for future vintages increase due to higher production costs, one can expect previously released vintages to observe a price increase as well despite being produced under different conditions.”

Main Risks Associated with Wine Investing

More exotic investments such as fine wine are characterized by lower liquidity than traditional financial markets or even other alternatives such as real estate. While this represents a significant downside for some investors, reduced liquidity can also insulate this type of investment from panic selling. “There is bigger liquidity risk compared to equities or other publicly traded securities,” says Tang. Although the sale processes are different in many ways, the timeline of selling a bottle of wine resembles an apartment or house sale, according to Tang. “If you want to sell today, you will not get the price you want. But if you have a little patience, you will get your price.”

“There is bigger liquidity risk compared to equities or other publicly traded securities. If you want to sell today, you will not get the price you want. But if you have a little patience, you will get your price.”

Lars Granat Jensen, meanwhile, argues that “it is not difficult to sell the best wines in the world, it is difficult to obtain them.” The success in wine investing, according to Jensen, hinges on “selecting the right wines for your portfolio.” Expertise, storage, fraud, insurance, and other aspects make wine a difficult to access asset class. Yet, RareWine Invest, Jero and perhaps other players provide a full range of services that can serve as an off-ramp investment program for wine investors.

“You do not need to be a wine expert to invest in wine. We handle the process from A to Z,” says Jensen of RareWine Invest. “We help investors select investment grade wine and build a portfolio with a certain risk diversification including well know wine areas such as Burgundy, Bordeaux, Champagne, Piedmont, Tuscany, Napa Vally and more,” he elaborates. “Besides building the portfolio, we also take care of logistics, insurance and storage at our own warehouse facility, Nordic Freeport, which is a bonded warehouse for wine and spirits located in the Denmark. Being a bonded warehouse means that the wine portfolio is stored without VAT and excise duties.”

Anders Tang’s Jero is on a mission to democratize the fine wine investment market by building a platform that enables wine reselling to private investors and wine lovers without the need of professional merchants. In addition, Jero is “delivering services throughout the investment process by seeking attractive investment opportunities (focus on smaller top-quality wine producers that are often lower priced and can deliver good returns), as well as taking care of import, insurance, storage, reporting and divestiture,” according to Tang. While there is a different set of risks associated with wine investing such as lower liquidity as well as storage or insurance costs, many investors will likely turn to wine investing for returns, low correlation, enjoyment and social currency.

This article features in HedgeNordic’s “Private Markets” publication.

Special Cars Invest’s presentation and website are certainly appealing to the eye, including pictures and descriptions of some of the most beautiful and spectacular cars. But while the team around founder Theis Gerner Stanek Strand, CEO Ulrik Larsen and asset management veteran Frederik Mørkeberg are true car buffs and petrol heads, they are as sober as a Volkswagen Golf Rabbit when it comes to their fund and their pursuit of investment returns.

“Who wouldn’t like to own a 1973 Porsche 911 Carrera RSR, or a 1988 Lamborghini Countach? Perhaps a 1992 Ferrari F40 or the historic 250 GT Berlinetta as well? All beautiful, fantastic cars, but as investment objects, we don’t find the risk-reward particularly compelling; there are many pitfalls when investing in vintage cars. What is the history of the car, how has the maintenance been, has it been damaged and if restored, has it been done accordingly or has there been cut any corners? The costs of documentation quickly escalate, which weighs on the returns on the invested capital (ROIC) – and ROIC is a key focus for us,” explains Frederik Mørkeberg.

“Who wouldn’t like to own a 1973 Porsche 911 Carrera RSR, or a 1988 Lamborghini Countach? Perhaps a 1992 Ferrari F40 or the historic 250 GT Berlinetta as well? All beautiful, fantastic cars, but as investment objects, we don’t find the risk-reward particularly compelling; there are many pitfalls when investing in vintage cars.”

The team, therefore, focuses exclusively on brand new supercars. A supercar is a car that the manufacturers have built to the very best specifications, and for which no compromises have been made. They are extremely expensive to develop, are often hand-built and only a few examples are made.

Supercars appeal to a narrow, but extremely wealthy customer segment and are much less sensitive to economic fluctuations than shares and real estate, for example.

The Fewer People Touched the Car, the More it is Worth

“With a car just out of the factory, there are no such issues, headaches and risks.”

There are funds that invest in vintage cars, or those with a specific pedigree, historical relevance, or of prominent owners. “A 1973 Porsche RSR is an exceptional car. But when you go to inspect it, you may find out this one has a ‘75 chassis or a ‘72 engine and it all gets messy. Gathering all the right documentation is an enormous hassle and there is large risk to buy a vehicle under the wrong premises. With a car just out of the factory, there are no such issues, headaches and risks,” portfolio manager Theis Gerner Stanek Strand explains.

In the spring of 2020, just as Covid was starting to impact the world, Frederik Mørkeberg was starting to structure the legal setup of the to-be-founded fund. “Talking to seed investors, the question we were repeatedly getting was “are you really sure you can get your hands on the cars?” It became obvious we may have a perception problem in this field. While individually we have a track record to show, as a fund and manager, we are new,” he recalls.

The opportunity arose to partner with Selected Car Group, which was founded by fellow Dane Torben Østergaard-Nielsen, who is widely recognized for having one of the most complete car collections in Europe. Part of the group is Selected Car Investment, which already has funds for vintage car investments and therefore makes a nice compliment to their own investment vehicle. “It all turned out to be a perfect fit,” Mørkeberg says.

The hardest part in this segment is sourcing the cars, and that Mørkeberg believes is one of the key strong points giving his team a competitive edge over peers and a high hurdle for new players to overcome. Especially Stanek Strand can fall back on many years of building relationships with manufacturers and dealers in Italy, Germany and the UK. “I probably travel to Germany 80-100 times a year to polish relationships with manufacturers and dealers,” he reveals.

“We only own some cars for a short period, others longer, and some for several years. What’s important is to ensure that short-term profit is not made at the expense of long-term prospects.”

“We only own some cars for a short period, others longer, and some for several years. What’s important is to ensure that short-term profit is not made at the expense of long-term prospects. Our focus is on optimizing the return on our investors’ capital, and short-term prospects cannot put at risk long-term relationships with the manufacturers, for example.”

But indeed, the biggest source of disagreement among the team is the timing to sell the cars. A Ferrari F40, for instance, came to market in 1987 at around $1.5 million and peaked at probably $6 million in 1992. Today they trade for less than a million and a half dollars again. In addition, there may be minimum holding periods agreed with the manufactures as they are keen to have their cars spread around the globe. “They don’t want 20 cars of their series of 25 standing in the desert in Dubai.”

“There is this sweet spot period when there is a “must-have” urge in the market and sometimes we’d like to hold on longer, but you want to be feeding the ducks when they are quacking.”

“There is this sweet spot period when there is a “must-have” urge in the market and sometimes we’d like to hold on longer, but you want to be feeding the ducks when they are quacking,” says Mørkeberg. Once having decided to sell, there is no shortage of buyers, be it at auction, from collectors and collections or simply individuals who “have to have that car.”

The portfolio currently holds three mouthwatering positions: McLaren 765LT, an Aston Martin Valhalla and a Bugatti pur Sport, which were all purchased in the last year. The cars are kept in one of Selected Car Group’s facilities, and the cost for maintaining the cars may be lower than for your family stage coach. “The insurance, for instance, amounts for approximately 0.3% of NAV, the infamously high Danish taxes on cars don’t kick in until the number plates go on and with Bugatti for instance, the car purchase includes a maintenance agreement.”

“We have a pretty good understanding of which cars will be coming to the market over the next 18-24 months that we would like to add to the portfolio.”

As the team is growing assets under management from humble beginnings, being able to allocate invested capital despite the thin market seems of no great concern: “We have a pretty good understanding of which cars will be coming to the market over the next 18-24 months that we would like to add to the portfolio.”

The fund is set up as a Danish alternative investment fund, in an all-Danish structure with a €100.000 minimum ticket size with a 2+20 fee structure. Sadly, there are no fringe benefits included for investors such as getting one of the cars for a long weekend. I checked.

Private, investable markets stretch a wide range spanning from private equity, private debt and many other things that are rare, of value and collectible. Fine art, exotic cars or rare coins and currency are just some examples where investors and collectors alike can participate through fund structures. Another market that barrels up for such an investment strategy is whisky, and it took a group of specialists from Sweden to get it on track.

“The Single Malt Fund is the world’s first regulated whisky fund, under supervision of the Swedish FSA, and listed on a regulated market, NGM in Stockholm”, Mats Ohlson, the portfolio manager for the Single Malt Fund claims.

The Single Malt Fund invests in rare and limited edition whisky, both casks and bottles – a product with a remarkable historical yield.

The whisky-investment industry even has its own index to which it can refer, and could benchmark too. Rarewhisky101 APEX1000 tracks the best performing 1000 bottles of rare whisky. Since 2010, and as of December 2019, a total of 49,572 bottles have been included in the APEX 1000, out of a total of 509,873 data entries. Since its inception 9 years ago, the APEX 1000 has grown by over 551%. 2019 saw a” pause for breath” in the first half (due mainly to profit taking of The Macallan), while the second half marked a return to healthy grow that a level of 15% on a per annum basis. And the whisky investment market has shown resilience even through the Covid-crisis.

According to Rarewhisky101, the prices of rare whisky have increased by 7% YTD by the end of September.In April and May, key lockdown months, the RW101 Apex 1000 index increased by 0.32% and 0.59% respectively. Astonishingly, the average price per bottle has increased month on month, every month, since Jan 2019. In fact, the whisky investment market is thriving. In late August 2020, a 55-year-old bottle of Yamazaki whisky sold for a world record price, for a bottle of Japanese whisky, of $795,000 at Bonhams Hong Kong.

Structural, Exponential Contango

“Strong growth of demand, slow production, limited supply and diminishing supply creates structural,contangofor the rare and limited whisky market”, explains Ohlson. This is arguably, where much of the value and appreciation stems from. After all, the liquor must remain in the cask for no less than three years by law, and normally twelve years by choice, before it is ready for bottling. This lag from the start of production to when the whisky comes tomarket makes it hard to react to trends, fashions and shifts in demands – the only way this captured is through the price mechanism.

“Strong growth of demand, slow production, limited supply and diminishing supply creates structural,contangofor the rare and limited whisky market”

The purchasing strategy for new stock at The Single Malt Fund focuses largely on Scotland (70%) and Ireland (20%) with the US and Japan making up the bulk of the remainder. Just over two thirds of  the stock is purchased in bottles of single malt and other collectible whiskies and a third in casks.

Purchasing and pricing strategy indeed is an important factor to the funds’ overall success. The aggregated mark up for assets purchased thus far by The Single Malt Fund is 32% – this after less than 1 year from investment date.  “On average, TSMF has received substantially higher trade discounts on their  purchases than anticipated and budgeted. With a larger AuM (capital), we believe we can further strengthen margins.” Ohlson is convinced. Part of being able to maintain or extend the impact of favorable margins, especially also when selling stock will be the funds’ own e-commerce platform, that will allow trading inventory while cutting out expensive channels, such as auction houses or wholesalers. Ohlson expects that around 45% of inventory will be the annual turn-over ratio, while  55% will follow a buy-and-hold strategy, to fall into hedge fund lingo.

Limited supply though, one of the key drivers of price, is of little concern to Ohlson: “In Oct 2020, we will take delivery of our first exclusive bottling; Irish Distillers, owned by Pernod Ricard, have sold us a cask of Redbreast 22YO, the only cask they have sold to private clients this year. They will bottle this cask for us, in full Redbreast livery. In 2019, Redbreast 12YO won the coveted IWSC award for the best whisky in the world. We have accounts open with about 70% of the Scotch whisky producers / distributors and 95% of Irish producers.”

The fund has a six year lock up (the first of which is already ticking down), aims to return above 10% per annum. It has a 2.5% management fee and the fund manager will retain 20% of the net profits at the end of the fund´s lifecycle.

Picture by Jag_cz—shutterstock.com