James Miles James Miles Director, Liv-ex Ltd , History and - - PowerPoint PPT Presentation

James Miles James Miles Director, Liv-ex Ltd ,

History and development of the History and development of the fine wine investment market Hong Kong International Wine & Spirits Fair Conference

HKIWSF 2009 1

d i Introduction

• Today we are going to look at:
• The history and importance of fine wine

investment and speculation. investment and speculation.

• How critics and transparency have

transformed the market. transformed the market.

• Fine wine’s investment characteristics.

S k d h

• Some weaknesses and what we can

learn from more established markets.

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h l f l i The role of speculation

• Speculation adds to liquidity and aids

Wine is for pleasure.

p q y price discovery.

• It ll

d t fi th i

p But speculation plays a vital role.

• It allows producers to finance their crop

which often isn’t consumed for 10 years

• r more.

plays a vital role. It has been linked to wine since the

• r more.
• For many collectors investment is part

wine since the beginning of time.

• f the fun and helps subsidize an

expensive pastime.

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d hi A potted history

40-60AD: First vines l d d

• Compared to fine wine, mainstream

assets are positively nouveau Wine

planted in Bordeaux 1100s: UK becomes major export market

assets are positively nouveau. Wine production dates back 6,500 years.

major export market 1663: Samuel Pepys: “drank a sort f F h i ll d •

Bordeaux has been producing wines for 2,000 years and London has been buying for 900+

• f French wine called

Ho Bryen that hath a good and most l

buying for 900+ .

• Today collectors store $2bn+ of fine

particular taste I never met with” 1855: the Left Bank

Today collectors store $2bn

• f fine

wine in UK bonded warehouses, Liv-ex members are offering $1.5bn for sale d f d h ld h $

1855: the Left Bank is classified 1978: Wine Ad t bli h d

and wine funds hold more than $300m.

Advocate published 1999: Liv-ex launches

HKIWSF 2009 4

au c es

d ’ k Today’s market

Liv-ex estimates that the fine wine •

The fine wine market is worth approx US$3bn annually

market has trebled in size in the last five years.

US$3bn annually.

• Auctions account for just $300m.

the last five years.

• Globally, merchants dominate: in Europe

they sell 40 times more fine wine than they sell 40 times more fine wine than auction houses ($2bn vs $50m).

• New markets, such as Hong Kong and

China, have had a dramatic impact.

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d fi fi i ? How to define fine wine?

• A wine with an active secondary market

that has potential to appreciate in value

The five First Growths plus

that has potential to appreciate in value and improve in bottle.

p Cheval Blanc, Petrus and Ausone account for 65% of

• Strong track record
• Critical acclaim

account for 65% of Liv-ex trade by value in 2009.

• In practice, this is a very narrow group
• f top Bordeaux and a handful of others.

Lafite Rothschild has accounted for

p

• A typical fund has 80-90% invested in

th t i ht b d

has accounted for 24% alone this on the back of Chi d d

the top eight brands.

Chinese demand.

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C i i d Critics and transparency

• Independent critical appraisal has

transferred pricing power from the

Traditionally the preserve of the

transferred pricing power from the producer to the consumer.

p European aristocracy...

• Price tracking and comparison websites

such as Liv-ex.com have transformed a traditionally opaque market

Critics and transparency have demystified the

traditionally opaque market.

• These factors have “democratised” the

demystified the market... d l

These factors have democratised the market and precipitated strong growth.

And massively increased confidence and participation.

HKIWSF 2009 7

h f k The power of Parker

4,000

Liv-ex trading history of Lafite Rothschild 2 0 0 8

Robert Parker releases score of 98-100

On the 29th April

3,500 l)

score of 98 100

On the 29 April 2009, Parker surprised the market with a 98

3,000 case (12x75cl

market with a 98- 100 point score for Lafite 2008.

2 000 2,500 £ per

The price leapt 75% overnight.

1,500 2,000 1,500 16/04/2009 23/04/2009 30/04/2009 07/05/2009 14/05/2009 21/05/2009 28/05/2009 04/06/2009 11/06/2009 18/06/2009 25/06/2009 02/07/2009 09/07/2009 16/07/2009 23/07/2009 30/07/2009 06/08/2009 13/08/2009 20/08/2009 27/08/2009 03/09/2009 HKIWSF 2009 8

ildi Building transparency

Liv-ex fine wine market data: Liv ex fine wine market data:

• Live bids & offers

Live bids & offers

• Merchant offer prices

T d t t d

• Trade-to-trade

transactions A ti h i

• Auction hammer prices
• Release prices
• Full price history

HKIWSF 2009 9

A lli i t t A compelling investment case

Liv-ex Fine W ine I nvestables I ndex

• Supply/ demand

dynamic: supply is

1024 2048 thmic)

Liv ex Fine W ine I nvestables I ndex

static (even falling), whereas demand is rising due to new

256 512 evel (logarit

rising due to new markets.

• Diversification

64 128 Index l

Diversification characteristics: strong annual returns low

I ndex/ com m odity CAGR1 Vol2 Corr 3 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

returns, low volatility and limited correlation with

I ndex/ com m odity CAGR1 Vol2 Corr 3 Fine W ine (LVX INV INDEX) 1 2 .6 0 % 1 1 .7 8 NA Equities (FTSE 100) 4 .3 0 % 1 4 .7 5

• 0 .1 2

mainstream assets.

• 1. Compound Annual Growth rate (Jan 1988 - May 2009)

Gold (London PM Fix) 4 .1 0 % 1 5 .7 1 0 .0 2 House Prices (Halifax Index) 5 .5 0 % 3 .1 6

• 0 .0 4

HKIWSF 2009 10

• 2. Annualised standard deviation (lower equals lower volatility)
• 3. Monthly correlation (Pearson) with fine wine: 0.5-1 is a high positive correlation, -0.5 to -1 is low positive correlation.

i i But it is no panacea

• Investors should never lose site of the

fact that wines must one day be drunk. The storage and opportunity costs should also not be discounted.

Private collectors face paying away

• Requirement for physical delivery to

transfer ownership contributes to:

face paying away 10-15% to their merchant or 20% + at auction

p

• Low liquidity

Hi h T ti t

20% + at auction.

• High Transaction costs
• Slow working capital cycle
• Systemic risk & lack of transparency

hamper en primeur trading.

HKIWSF 2009 11

S ibl l i Some possible solutions

The fine wine market could learn a lot from more established markets:

• A central depository of ownership would

allow for dematerialisation allow for dematerialisation.

• Electronic transfer of title would reduce

costs, cycle time and risks providing capacity for significant growth.

• Production/ sales volumes at en primeur

should be audited and published. Tasting samples should be independently verified.

HKIWSF 2009 12

C l i Conclusion

• Fine wine justifies a place in a

diversified portfolio for both pleasure and investment.

• The main themes

namely new

• The main themes – namely new

markets and transparency – are still in their infancy. y

• Efforts to modernise the settlement

i f ld f h infrastructure would free up huge capacity for growth and help the market fulfil its exciting potential market fulfil its exciting potential.

HKIWSF 2009 13

Slides and full text are available at liv-ex.com Come and see us at stand 3 CE3 2 . Come and see us at stand 3 CE3 2 .

HKIWSF 2009 14