Ella Lister looks at the second and third quarters of 2011 in the world of fine-wine auctions and trading, before presenting the last in her three-part investigation into wine-fund management

Has the bubble finally burst? Fine-wine prices, having climbed energetically for the past three years, reached dizzying heights in June, only to experience a bout of altitude sickness. The third quarter of 2011 has seen the Liv-ex fine-wine indices pause to catch breath. The carefully selected constituents of the Liv-ex 100 made a steeper, more perilous ascent after the global financial crisis and, thus, had further to fall, losing 10 percent over the six months from April to September. The slower, steadier Liv-ex 500 is holding on, up 1.8 percent over the same six-month period, despite losing its foothold and stumbling 2.4 percent downhill in September.

Comparative index performance, April to September 2011

Global stock indices have fared much worse, with Hong Kong's Hang Seng losing a full quarter of its value from April to September. Oil met the same fate, showing that commodities are not necessarily the safer bet in financially uncertain times. Gold, however, outperformed stocks and wine alike, up 11.3 percent over the period, and a new acronym has been coined in the investment world to refer to luxury tangible assets: SWAG stands for silver, wine, art, and gold. Watch this space.

Liv-ex 100 Lafite constituents’ price movement in the four months from June to September 2011

Liv-ex 100 Lafite constituents' price movement in the four months from June to September 2011

The fall-off in price of the Liv-ex fine-wine indices had a lot to do with their largest constituent part: Château Lafite Rothschild. Ten of the wines in the Liv-ex 100 are different Lafite vintages, which, being production-weighted, end up representing 28 percent of the index overall. In fact, every Lafite vintage in the Liv-ex 100 index decreased in price in the four months from June to September, by an average of 10 percent. This was more than the average of the past 30 vintages of Lafite (1980-2009), which lost, on average, 7 percent. The only two vintages of these 30 to see price increases over the period were 1982 Lafite (up 4 percent) and 1990 Lafite (up 6 percent).

Gloves are off

There are small signs of stuttering in the auction market, too. The auction houses always slow down in the summer months, and they pulled in 12 percent more revenue in Q3 2011 than in Q3 the previous year. However, year-on-year growth has slowed significantly from the 60 percent achieved over the first half of 2011. Weighted average sellthrough rates (weighted according to the size of each sale) were down to 94.4 percent in Q3 2011, compared to 96.9 percent in Q3 2010 and 95.8 percent in the first half of 2011. Chicago powerhouse Hart Davis Hart, in usual form, held the quarter's only 100-percent-sold sale.

The trend for weaker sell-through rates continued into Q4 2011, with Sotheby's two-year string of 100-percent-sold sales in Hong Kong being broken at the beginning of October. The first part of the two-day sale on October 1 was the eighth in a series of auctions from the collection of a "Great American Collector," the matt-gold hardback catalog featuring a red figure eight on the back cover and the lucky Chinese equivalent on the front. And lucky it proved to be, ending as another white-glove sale. However, on day two, which headlined wine consigned by the Bordeaux Winebank, the snow-white gloves were removed, with the end of Sotheby's extraordinary run of nine consecutive sales (held over 15 days) where every single lot had sold.

Gloves are off

Photography courtesy of Christie's

The last time Sotheby's didn't sell out in Hong Kong was on October 3, 2009, when the third in the series of the same unnamed "Great American Collector" was 99 percent sold. The auctioneer passed on only five lots (out of 689), which were then sold after the sale (hence Sotheby's counts its record from the previous sale in April 2009 and refers to each separate day as a new sale, claiming 16 consecutive white-glove sales). On October 2, 2011, exactly two years later, only 93 percent of lots were sold. While this is still a perfectly respectable percentage, the divergence from Sotheby's usual performance in Hong Kong is striking.

The unsold lots seemed to be overwhelmingly Bordeaux, including much Lafite, often in large format, and nearly all young enough not to have become super-rare-for example, 1990s vintages. Even ex-château stock went unsold- usually snapped up for its stamp of provenance. The trend was observed in Europe, too, with Steinfel's Marc Fischer noting, "In particular, interest in Lafite was lower, and prices were down. From what we hear, demand in China is lower also, due to the fact that Chinese authorities seem to be controlling the borders more strictly, so less wine can be smuggled into China." It seems unlikely that Lafite's lull is all down to Chinese import issues, however, since this has always been problematic. Rather, attention is turning elsewhere.

Burgfest

As torch-bearers for their respective regions, Domaine de la Romanée-Conti (DRC) has surged while Lafite has faltered over the past few months (Fig.3, above), representing Burgundy's growing popularity in Asia and, therefore, on global wine markets. Liv-ex's DRC index has climbed 32 percent since January, while the Lafite equivalent has lost 16 percentage points. Liv-ex saw trading volumes in Bordeaux fall to 88 percent in September-the first time since November 2009 that the region has represented less than 90 percent of turnover on the platform. Burgundy -usually floundering at or below 2 percent-grew its share to just over 4 percent.

Auction houses are also focusing less heavily on Bordeaux, with Burgundy garnering the attention. In Q3 2011, more than half the top auction lots were DRC, compared to less than 25 percent in Q2. Six of the top eight lots in Sotheby's October 2 sale were Burgundy, with DRC again leading the pack with four cases of 1988 Romanée- Conti. Other recent auctions in Hong Kong have also seen Burgundy stealing the show. Spectrum's two-day sale on October 4 and 5 saw 80 lots of DRC go under the hammer for HK$8.4 million ($1.1 million), versus estimates of HK$6.5 million ($830,000). Charles Curtis MW, head of wine at Christie's Asia, said in September that "results for Romanée-Conti, La Tâche, and Jayer's Cros Parantoux also point to the burgeoning interest in Burgundy."

To capitalize on this trend, Acker Merrall & Condit has planned a duo of Burgundy offerings from the cellar of Don Stott-"the greatest modern-day collector of Burgundy"- according to Acker's CEO John Kapon. The first sale, in New York on October 29, has been dubbed La Paulée de Stott (fitting, given its location is Daniel restaurant, part of Daniel Boulud's Dinex Group, of which the American La Paulée founder Daniel Johnnes is wine director). Part two, in Hong Kong on November 4 and 5, also features Burgundy consigned by Stott and will be attended by eight top Burgundy producers, including Dujac and Rousseau. Half an hour before Acker's September Hong Kong sale, I asked Kapon if he was concerned about the state of the market. "We're not going to see the rabid acceleration we saw in 2010 perhaps, but prices don't have to go up for markets to be healthy," was his balanced reply. He admitted to a "touch of first-growth fatigue" but claimed not to be too anxious. Over the course of that evening and the following day, 98 percent of lots were sold, bringing in total revenue of HK$92 million ($11.8 million), which was comfortably within the presale estimated range.

Eastern leanings

After a whirlwind, winefilled week in Hong Kong, and as I pottered distractedly toward my departure gate, my eye was caught by a Chinese man's T-shirt. It read, ironically, "unknown label." Perhaps the trend will turn-in fashion and in wine-away from the big names and label-flaunting to small, under-the-radar brands. Until it does, however, there is no reason why the latest must-have wine labels should not continue to see double-digit growth as their popularity soars. Investors will continue to turn to the current favorites in droves as a result, not least in the East.

DeRouge Fund-a wine fund approved in August by Chinese regulators-has boldly set out its stall, announcing plans to raise RMB 1 billion ($156 million). As Société Générale's 2010 intention to launch China's first wine fund seems not to have materialized, DeRouge is set to stake the claim for itself. With roadshows in Beijing and Shanghai in September, the fund has been on the lookout for minimum investments of RMB 1 million ($156,000) from private individuals, and RMB 10 million ($1.56 million) from institutions. It plans to invest in red Bordeaux and red Burgundy (though I suspect Bordeaux will dominate overwhelmingly) and 40 percent en primeur.

One fund that has successfully stripped off the Bordeaux-only straitjacket is Luxembourg-based Nobles Crus. More than 50 percent of the fund is Burgundy, with less than one percent each allocated to Tuscany, Piedmont, and "miscellaneous" regions, and the remainder in Bordeaux. Nobles Crus's investment manager Christian Roger arguably adopts a more hedonistic approach than some other funds' strict strategies allow. However, that is not to say financial experience has been forfeited: He is a former banker, albeit one with a great love of fine wine.

Roger targets 20 percent acquisition en primeur, whereas UK funds The Wine Investment Fund (TWIF) and Lunzer Wine Fund (LWF) shy away from investing in futures due to their volatility. Rather than sticking with rigid maturity windows and common bottle sizes, Roger also invests in very old vintages and large formats. In May, he added some 1811 Château d'Yquem, alongside some Latour '61 in Jéroboam and La Mission Haut-Brion '61 in magnums. In the Nobles Crus newsletter, Roger tells investors of a tasting of this last wine from magnum that "made such an impression that I vowed to buy the wine in this format if the opportunity ever presented itself." That month, the fund also acquired some New World wine: a series of Penfold's Grange Hermitage in magnum. (See the interview with Nobles Crus co-fund manager on p.200).

Passion play

Nobles Crus's general partner, Elite Advisers, coined the concept of Passion InvestmentsTM in 2007, when partner Michel Tamisier realized clients wanted more from their investments. After years in the fund industry, he was hearing grumbles about the virtual elements of investment products and the complexity of the financial world. The solution was to identify tangible assets that everybody could understand. Nobles Crus was launched in November 2007, "and then we saw what happened," says Tamisier, referring to the financial crisis that vindicated investors' worries.

Elite Advisers has now added a second fund to its Luxembourg SICAV (an open-ended collective investment scheme) to invest in watches (Precious Time), with ¤10 million ($14 million) of assets under management, and will soon add precious stones to its stable (Divine Jewels). Once the structure comprises three funds, a fund of funds will be created to allow investors simultaneous access rather than having to invest in each fund separately. Next on the list are art, collectible cars, and even horses, "mixing emotions, passions, and personal attraction with investment," explains Tamisier.

Mike Wigley is another example of a working symbiosis between enophilia and financial nous. He manages The Fine Wine Appreciation Fund (TFWAF), whose general partner is Minnesota's Bacchus Partners. This fund is more eclectic still, adding California and Rhône into the mix. "I like to find emerging investment grade wines; for example there are some in Australia right now," enthuses Wigley. A former McKinsey consultant and "turnaround guy," Wigley has bought 16 troubled companies over the past 20 years. "I've been a wine slut for 30 years," he declares, though he doesn't believe this gets in the way of his rigorous approach to buying, for which he employs Excel models that he has developed over the course of the past two decades.

Photography courtesy of Hart Davis Hart

Photography courtesy of Hart Davis Hart

When I spoke to him, he had been up until 3:30am that morning, "looking at a whole bunch of different metrics, trying to understand where the next six months are going to go." For example, he will look at the ratio of large formats to 75cl bottles, or the slope of the first growths compared to the super-seconds. He also uses second derivative models, which he admits are "pretty challenging" to help him estimate how the rate of change in price is itself changing. Rather him than me.

Once the fund manager has identified stock to buy, the practicalities are simple: Buy at a discount, and sell at a premium. Wigley claims that all purchases for TFWAF are at a 40 percent discount to the market-for example, he'll buy a case at $3,500 and sell it at $5,500. TWIF's Andrew della Casa points out that a wholesale spread (the difference between the bid and offer prices among market players) is around 10-11 percent, while the retail spread can be 25-30 percent more. He elaborates: "We have bought below the mid-price of the wholesale spread and sell increasingly into the retail spread."

Opacity advantage

So, funds do not only rely on net wine price increases; they also optimize returns by exploiting the market's inefficiencies. One example is the Bottled Asset Fund (BA F), which, according to its marketing materials, is "specialized in the wine markets [that] are less efficient and provide the most value, primarily Italy." The fund targets investment of 75 percent of assets in premium Italian wines, limiting its exposure to Bordeaux precisely because of the region's relative transparency.

BA F also invests in boutique Champagne, Burgundy, and selected producers from Spain, Germany, and Austria. Such regions, according to director Sergio Esposito, are "characterized by family-owned, boutique producers that are undercapitalized." He explains, "These markets lack transparency and display inefficiencies not present in other markets, providing compelling value opportunities."

BA F is an offshore fund based in the Cayman Islands, with offices in Geneva and New York. BA F I was launched in September 2010, with a second and final raise on June 15, 2011, taking total assets under management to some $10 million. Management expects to realize annual returns of 30-35 percent net of fees, by securing allocations from producers at significant discounts to the market price. BA F hopes to launch a second fund in summer 2012.

Unlike BA F, the funds I referred to in the last issue- The Vintage Wine Fund (VWF), The Fine Wine Fund (FWF), and TWIF-were entirely Bordeaux-centric in their stock-picking. "As soon as you start investing in Burgundy, valuation becomes difficult," says Miles Davis, partner in Wine Assets Managers (WAM), which runs FWF. Andrew Davison, of VWF, said Bordeaux was "comparatively liquid and transparent" next to other regions. So, how do the fund managers source stock at discounts and insure they sell at a higher price in the more efficient market for Bordeaux?

Between them, they acquire wine from a colorful array of sources, and most have a strong view on auctions. Wigley can often be found in the front row at a saleroom, even making frequent trips to Hong Kong in person to take advantage of the irregularity in pricing afforded by the whims of fellow bidders. He also usually sells at auction, as with Zachys in Hong Kong on January 8, 2011. TWIF, on the other hand, doesn't buy at auction due to the expensive commission. Della Casa has considered selling a whole collection this way, "especially with prices achieved in Hong Kong," but ultimately decided it's too risky. Shipping wine to Hong Kong means "losing money straightaway," through the act of removing it from bond, asserts della Casa, who instead lists wines on Winesearcher.com or sells directly to private individuals- "anyone who can pay the top price."

WAM has bought at auction but found it inefficient. "It's one case here, one case there," says Davis, who would "rather buy ten." As for selling, he admits that prices "can be fantastic, but it's tricky, since there's such a lead-in time to prepare for the sale, and then you're at the whim of the market when the sale takes place." Although selling at auction "looked like a brilliant idea at the end of last year," Davis believes he could have done better than some of the auctions so far this year through other methods of sale, citing, as an example, Sotheby's Hong Kong sale of part of Sir Andrew Lloyd Webber's collection. WAM also advertises wines on Winesearcher.com and sells "direct to anybody-certainly to Asia."

Modernizing the market

Ultimately, says Wigley, "price discovery in this industry is an extremely challenging thing," allowing "folks who do have price expertise to make a good living just by of Liv-ex in 1999 made the price evolution of investmentgrade wines more easily traceable, through its exchange and its indices. Many fund managers now use Liv-ex mid-prices to value their net asset value (NA V) in a selfregulating bid to optimize the transparency of their activities. This is a response to less rigorous outfits that have been suspected of setting a NA V at year-end that best impacts upon their annual performance fee.

Davison explains that, at VWF, "We replicate the process with our own administrators rather than take Liv-ex as gospel." Taking the lowest Liv-ex list prices, the administrator, Fastnet, analyzes the underlying data to arrive at a value. Though Davison admits that the final value "rarely deviates from the Liv-ex mid-price," he is skeptical about the methodology of the latter, stating that "the problem with Liv-ex is, it's a bunch of guys deciding the mid-price based on what's traded on their exchange, and sometimes they don't have much info to go on."

Other managers are more positive about Liv-ex's influence, Davis noting that trading on Liv-ex gives WAM's funds "extra liquidity." At TWIF, investment manager Chris Smith has "certainly seen an increase in transparency," which he puts down to Liv-ex. "It doesn't mean more trades are being done," he continues, "but more are visible." Davison, on the other hand, maintains that "the volumes through Liv-ex are extremely small compared to what we trade with négociants." He recounts how easy it is to manipulate the market, saying that if he wants a particular wine to be, say, £4,500 on Liv-ex, he can make it happen by buying a couple of cases at that price.

The total value of bids and offers on Liv-ex reached £20 million in September, having doubled over the past year. This may be a small market compared to financial equivalents, but Liv-ex nonetheless represents the largest pool of wine traders worldwide. Inefficiencies are still there for the taking, however, according to Peter Lunzer of LWF, who finds that "Liv-ex is useful because of its anonymity," as opposed to its transparency. "I have put La Mission Haut-Brion on Liv-ex at 40 percent above the market price," says Lunzer, who has had success with this opportunistic approach. The wine found a buyer, he says, because "somebody obviously just called the merchant and said, 'I need this tomorrow.'" He concludes, "The wine world is very strange like that."

Suits you?

Just about anyone should be able to find a fund they can invest in, whether directly as a private individual, through a private wealth-management firm, or as a larger institution. Most funds will help hopeful non-HN WIs (high net worth individuals) find a friendly independent financial adviser to facilitate the certification process. Minimum investments start from £10,000 ($16,000) upward, and published figures are often negotiable. For example, WAM might accept an amount under its £50,000 ($80,000) minimum if propositioned. TWIF's average investment from private UK individuals is £22,000 ($36,000), compared to Hong Kong investors' £50,000 ($81,000).

The latter "take more risk in terms of the first step," in della Casa's experience, but the fund also has investors from North and South America, the Caribbean, Europe, South Africa, Australia, and India. The fund has always attracted interest from Chinese, Singaporeans, and Koreans. WAM's private fund, FWF, has more than 100 individuals- mostly 40-plus white British males who work in finance. Other investors include Nigerians and expats living in Hong Kong and Singapore.

Would-be investors should consider factors such as whether they need short-term access to their money, since closed-end funds are, by nature, less suited to redemptions, while other, open-ended funds may charge redemption fees (see chart in WFW 32). Some also charge subscription fees, though this is increasingly uncommon. Management fees (payable come what may) are in the vicinity of 2 percent, and performance fees usually range from 15 to 20 percent (payable on any gains, sometimes over a certain threshold).

Why not DIY?

Investing your money directly into tangible cases of wine is one way of avoiding these fees and any lockup periods. This approach means you can control every last detail of your portfolio-from where you buy, to where you store, and when you exit. However, many investors may not have the time or knowledge to take this on themselves. Moreover, while funds' fees are in the region of merchants' margins and auction-house buyers' premiums, at least the bulk of fund managers' fees are performance-based.

Furthermore, a fund benefits from cost savings that an individual does not-for example, mass storage. It also has access to purchase and sale opportunities that probably wouldn't be open to an individual, allowing it to exploit the gap between wholesale and retail prices. More importantly, fund managers should possess a high level of expertise and are able to dedicate the necessary time to analyzing the market and picking the best stocks. One would hope they adopt a cold and calculated approach, not allowing passion to get in the way. "A lot of wine lovers I know thought they'd rather do it themselves and knew what they were doing, but [they] often cloud the difference between an investment and something they would like to drink," says Davis.

You may still be more comfortable investing sums of your choice in wines of your choice. If it goes wrong, you can always drink it. Come to think of it, FWF does offer in specie subscriptions and redemptions, so you could still drown any sorrows that way. Alternatively, a happy medium could be said to exist in the form of a managed account, created specifically and separately for each individual investor. These come in all shapes and sizes-for example, Berry Bros & Rudd's Cellar Plans for investment require a minimum monthly payment of only £250 ($400).

Lunzer Wine Investments offers tailored portfolios for HN WIs, who "may prefer to avoid all the perceived risks associated with allowing others to manage their money." This alternative to Lunzer's offshore fund-aimed at institutions-allows private investors to control the investment remit, including the lockup period, and to hold the portfolio in their own bonded warehouse account, under their name, for added security.

A similar model has been adopted by Vanquish Wine, which offers Managed Personal Wine Portfolios. The managed accounts were introduced earlier this year, subsequent to the launch of Vanquish's fund, Magenta Wine Investors, in 2010. Richard Brierley, head of fine wine at Vanquish, says the company already manages accounts to the tune of £1.5 million ($2.4 million), mostly in the region of £100,000 ($160,000) to £150,000 ($240,000) each. The minimum investment is £50,000 ($80,000), and the annual management fee is 1.5 percent. Brierley points out that there is no fixed term or obligation to sell through Vanquish on exit (thought there is a 10 percent disposal fee if Vanquish is chosen to execute the sale).

Lifestyle choice

The most recent addition to the arena of managed accounts is ENO Investments. Set up in March by former banker and WSE T-diploma holder Sabrina Belkadi, the company is designed to offer an alternative means of investing in wine for individuals who are wary of fund structures for whatever reason. "Coming from a capitalmarkets background, I tend to know what investors are looking for," says French-born Belkadi, who spent 16 years working in finance, latterly for Goldman Sachs in New York and London.

She manages three accounts so far, worth an average of £25,000 ($40,000), "the bare minimum" in terms of feasibility, she points out-and given that a single case of first-growth Bordeaux could use up the entire budget, you can see why. Belkadi charges a 2 percent maintenance fee and 20 percent performance fee. She builds and manages her clients' portfolios on a discretionary basis, within certain stated guidelines-for example, excluding en primeur purchases. "I haven't yet come across anyone who's said, 'I want you to buy this case of wine.'" Her strategy is much the same as that of the funds, in that she invests in Bordeaux wines, avoiding anything "too old" and always trying to identify and exploit pricing inconsistencies.

However, Belkadi has "philosophical reservations" about the way wine funds are structured. She identifies the primary restriction of wine funds as the need to aggregate the investors' money, meaning they "lose the ability to be the direct owner of the wine." That's fine as long as the market is progressing well, but Belkadi reminds me that there are no certainties in this world, with her former employer recently closing down its Global Alpha Fund, "the biggest fund on the planet!" Despite the impressive performance of many wine funds, Belkadi argues that "their concept is broadly untested, because the market has been one way," asking, "Who are the primary creditors in the case of a bankruptcy?"

The answer with most fund structures is that the investor is the ultimate beneficiary, though there may be certain hurdles to jump through first-a potential drain on time and money. In WFW 33, I told a few cautionary tales, including the closure of Arch Fine Wine fund. Around two years later, investors have eventually received returns following the sale of the underlying wine. According to Lunzer, they haven't lost money-a fire sale was avoided- but two years is a long time to wait anxiously with no control over the assets you own on paper.

In addition, to avoid capital gains tax, many wine funds are set up offshore, which Belkadi thinks sits uncomfortably with the typical retired-male demographic of potential private wine investors. She refers to perceived risks, specifying only "relaxed rules," but arguing that even the notion might be "over investors' heads." Furthermore, funds often mean tying up money for a number of years or incurring the associated redemption penalties. A managed account with ENO Investments is recommended for a minimum period of three years, due to the long-only strategy, but there is nothing preventing an earlier exit (other than potentially unsatisfactory returns).

Belkadi clearly believes that a managed account is a perfect halfway house, neatly addressing concerns about funds, while still offering expertise and convenience. "Even hedge funds are moving into managed accounts," enthuses Belkadi, citing Blackrock as an example. She points me to a quote from Peter Clarke, CEO of Man Group, one of the world's largest asset managers, who says, "An increasing number of investors are now recognizing that managed accounts are the best investment vehicle through which to access [...] heightened transparency, better liquidity, and greater control over invested assets."

As our conversation continues, it strikes me that all of Belkadi's misgivings seem to stem from the detached nature of a fund, at odds with the tangible nature of wine. If owning paper shares in an offshore fund structure seems to remove the investor at every step from the wine that first inspired investment in the asset class, then does a managed account involve more passion? "It's tough to strike a balance between a lifestyle and an investment product, because wine is both," replies Belkadi. "But the financial discipline is a lot more important than recognizing the structure of tannins in a St-Estèphe as opposed to a Pomerol."

Wherever you sit on the discipline/passion scale, wine certainly comes with bragging rights, whether you're investing through a fund, a managed account, or solo. What's more, assuming the recent modest correction of wine prices doesn't turn into a downward spiral, now might be the perfect time to invest. In John Kapon's words, "When the market has to exhale, that's the time to buy-and the market comes back faster than anyone imagines."