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California Wine as an Investment

Columnist: Tim Carl
March, 2019 Issue
Columnist

Tim Carl
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When investors in the stock market become uncertain, they often switch to safer investments such as gold, silver and bonds. More and more, however, savvy investors are looking to wine as a hedge against uncertainty, with a few California producers showing impressive consistency. Yet with the upcoming release of aged red wines for the California 2017 vintage—a year that saw an unprecedented heat spike followed by devastating fires—California-fine-wine investors may be wise to sit on the sidelines until the recent smoke settles. In 2018, Liv-ex—a London firm that tracks the fine wine market—launched a “California 50” index, which tracks the combined value of 10 vintages of wine from five select wineries. (More on that later). Historically, Liv-ex focuses on wines from France and Italy, and tracks the fluctuation of a wine’s value on the secondary market.

Trading wine like stock


How can wine be traded like a company’s stock? To illustrate, I’ll use an analogy: When a private company—let’s say Uber—wants to raise capital it might choose to become a publicly traded company. If so, the company releases an initial public offering (IPO), which is the very first sale of a share of the company to the public. In the case of a wine, the “IPO” moment is when the wine is sold from the winery to an individual or institution.

Keeping with our analogy, when a company goes public, it issues securities (a proof of ownership—e.g., shares) that can then be traded on a secondary market, such as a stock exchange. A secondary market is one where investors trade previously issued securities without the issuing companies' involvement. In our analogy, wine bottles are typically the equivalent of securities; however, there are wine brokers now who sell paper “shares” of particular wines or collections of wines that they then hold in trust. These wine shares or actual wine bottles are then resold to other investors at auctions, or purchased by private collectors.

In the case of Liv-ex’s California 50, they’ve deemed that the most “actively traded” California wines are Screaming Eagle, Opus One, Dominus, Harlan Estate and Ridge Monte Bello. All but one of the five indexed wineries are located in Napa County (Ridge Monte Bello is in the Santa Cruz Mountains), and two of those listed are French-owned (Dominus is owned by Christian Moueix, who also owns famous Bordeaux vineyards such as Château Petrus. Opus One is co-owned by Constellation Brands and Baron Philippe de Rothschild SA, which also owns Château Mouton Rothschild, first-growth Bordeaux.)

In September 2018, the Robb Report wrote that, “…the brands in the California 50 tell an optimistic story about both long-term stability and recent gains in the Golden State market. Tracked from the end of 2003, overall returns on the California wines (207 percent) were slightly behind returns on the Bordeaux 500 (220 percent), but in only three of the 14 years did the California 50 dip into negative territory, compared with six negative years for the Bordeaux 500. Narrow the snapshot to the last year, and the California wines outperformed Bordeaux—up more than 15 percent since July 2017.”

In the report, the author expressed caution; reminding potential investors that, like the Dow or S&P 500, secondary wine markets can go both up and down. Publicly-traded companies must provide projected earning and issue warnings when future hopes are dimmed, but in the case of fine wine these warnings typically come in the form of vintage variations and wine-critic scores.

And this is where the 2017 vintage may take some steam from what has been a steady increase in the valuation of the California 50. Whereas the influential wine critic Robert Parker Jr.’s Wine Advocate was bullish on the 2016 vintage, they seem mostly bearish on 2017. Does that mean that all the wines of the 2017 vintage will be awful? Absolutely not. I predict that like the California 2011 vintage that was panned by many wine critics, there will be some amazing standout wines that display wonderful nuances and character, showcasing the winemakers’ talents as they coaxed out the hidden wonders of what was admittedly a challenging year.

What will the secondary market say about 2017? We shall get our first indication when the reviews, auctions and other results showcasing the vintage begin to trickle out over the next few months.

 

 

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