RALLY GUIDE TO WINE
03/14 – Words: Will Stern
What to look for when investing in wine.
When it comes to investing in the world of fine wine, there can be a bit of a learning curve. Fancy words and long-standing traditions look intimidating to the many investors unfamiliar to the asset class.
But like sports cards, video games, or other alternative asset classes, there are some basic terms and fundamentals that anyone can use to get a handle on the category to make more informed decisions.
HOW TO MEASURE PERFORMANCE
In order to measure the performance and historical trends in fine wine, a database of standardized transactional price data called Live-ex is the industry leader.
Liv-ex creates indices that help illustrate the performance of the market as a whole as well as more individualized sectors. One of the most important of these is the Liv-ex Fine Wine 1000 which gauges a broad measure of the market using a basket of 1,000 wines from around the world.
Using this index one can compare and contrast the performance of various regions which make up the broader index. For example, the market for Burgundy has outperformed all other sub-indices over the past few years while wine from Rhone has fallen far below the market.
THE MARKET AT A GLANCE
The fine wine market has a long track record of stability, steady returns, and a low correlation to equity markets.
From 2007- March 2021, fine wine was a less volatile investment compared with assets like Gold and the S&P 500, while producing competitive annualized returns.
As an instrument for diversification, fine wine has shown to have a lower correlation to the S&P 500 than other alternative investment classes like US Real Estate and high yield corporate bonds.
Before we dive in, here's a list of some key terms that might be new to many investors.
Appellation: An Appellation is a method by which countries define their growing regions. Each Appellation can differ drastically from the next, with many requiring certain standards for wine producers.
For example, one of the most famous and prestigious Appellation categories comes from France, which has used its "Appellation d’Origine Contrôlée/Protégée (AOC/AOP)" since 1937. By knowing the particular Appellation, investors can be sure that producers have adhered to their particular region's standard for grape variety, alcohol level, aging guidelines, and more.
Tannins: Commonly used in the tasting notes of wine critics, a wine's tannins are naturally occurring compounds that come from grapes and can have a powerful effect on the ultimate taste profile of a wine. It is generally believed that wine with more tannins (a tannic wine) will exhibit more complexity and color, as well as stronger aging potential.
Terroir: A key factor that can be gleaned from a wine's region, particularly their precise vineyard, is the terroir of the land. Terroir refers to the quality of the soil, climate, and altitude of the parcel of land. These factors are known to create dramatically different yields and are the jumping-off point used by wine critics to evaluate the strength of a particular vintage.
Does the wine have notes of dark fruit? Hints of sweetness? Much of this is attributed to the unique terroir of the winery.
Vintner: Simply put, a Vintner refers to a winemaker or merchant.
Keep an eye out for these terms as we look at the different contributing elements that make up an investment-grade wine.
All wine is first and foremost identified by its region. Some like the Burgundy and Bordeaux regions of France are familiar to many wine drinkers. The importance of a wine's region of origin can tell you a ton about a wine's flavor profile, tannic structure, and aging potential.
In addition to the appellation of the region, keen observers can glean a ton of information from a wine's region before even tasting a glass.
Burgundy is known as the home to some of the most expensive and prestigious wines on the planet. The region's vintners are most likely to use Pinot Noir and Chardonnay grapes, and smaller wine-growing areas within the region are each known for their own strengths and specialties.
This is the case with every region. While wine-growing areas within a region share broad characteristics, the further you zoom in to a region the easier it is to hone in on hyper-specific identifiers based on terroir and geography.
Around the world, different wine producers have accumulated levels of status in the wine community that may have an important impression on the reception of their wine. Many wineries like Domaine Leroy, Domaine de la Romanée-Conti, or Château Mouton Rothschild have earned a reputation over decades that adds a premium to each vintage they produce.
These reputations are bolstered by designations such as "Grand Cru" (the highest tier in the hierarchy of Burgundy), “First-Growth” (the highest tier in the hierarchy of Bordeaux), and other lauded classifications determined by long-running organizations seeking out the highest quality producers.
Each vintage comes with its own story — a dry rain season, a transition in ownership, or perhaps a new method of harvesting. These differences are recorded and judged by the myriad wine critics who painstakingly taste and review many of the most famous vintages each year. To add a wrinkle to the review process, ratings may often change based on the timing of the tasting, with some vintages needing more time than others to reach maturity.
Some of the most acclaimed and influential reviews in the world of wine come from Robert Parker's The Wine Advocate magazine. Parker's tasting notes hold so much sway in the world of wine that industry insiders have even adopted a term for his impact on the value of a particular vintage: "The Parker Effect."
Other voices in the industry come from the French magazine La Revue du vin de France, renowned critics Bettane & Desseauve, British critic and journalist Jancis Robinson, and Antonio Galloni's Vinous website.
Most reviews include a numerical tasting grade, notes on the experience and description of the flavor profile, as well as general thoughts on the vintage overall and its anticipated date of maturity.
Not all wine is created equal, and not all wine is created in equal quantities. The relative scarcity of a particular wine producer's vintage can affect the price of the wine for obvious reasons. Beyond its obvious implications on the supply in the market, there are also corresponding philosophies concerning the total production for a given year.
Some vintners believe in smaller yields as a method to produce the highest quality wine possible, while other producers may produce a far greater number of cases.