Vintage instruments

Chateau Lafite-Rothschild 1982 has increased fivefold in price over the past six years in auction sale rooms all across the globe. This startling performance and other examples of a similar nature have focused the attention of investors everywhere on the idea of wine as a separate asset class, and recent research has shown that wine investment not only yields high returns, but can also reduce volatility in difficult times by improving diversification.

Trading in December 2009 was up 20 per cent on the previous year, according to the Liv-Ex fine wine electronic exchange for traders and collectors, and their chief index rose 15.7 per cent, driven by gains posted by top Bordeaux chateaux such as Lafite, Ptrus, and Mouton-Rothschild. A diverse array of vintages from 1982 to 1989, 1995 and 1998 all showed strong gains, bolstering the confidence of those who would hedge their market positions with commodities that do not index closely to traditional financial markets.

In principle, while the idea of investing in wine sounds exciting, it is not as easy as stopping by the wine shop on the corner on the way home from work. A brief examination shows that there appear to be significant barriers to entry for new buyers. It can be difficult to decide what wine to buy, how to choose a vendor, and how to time the purchases. With a bit of research and patience, however, these obstacles can be overcome, and the new wine investor will be well on his or her way to profiting from this new exotic investment and hopefully celebrating with a glass of the best.

WHAT TO BUY
One initial hurdle for the novice to overcome is the temptation to equate investment grade wines with those one drinks at dinner. Few among us regularly uncork wines worth $2,000 to $3,000 (Rs 93,890 to Rs1.40 lakh) a bottle at dinner, yet this is where one will find the greatest appreciation. Banish this confusion, and then choose wines from the best properties in only the finest vintages.

Ensure that the provenance of the wine is sound, and that it is in impeccable condition and has been well stored. Insisting on these common-sensical precautions will ensure the liquidity of your investment and the potential for appreciation. In terms of wine types, claret (the red wine of the Bordeaux region) will always be the gold standard. These wines account for 70 to 80 per cent of the turnover in an average auction since the level of production is sufficient to allow a reasonably good amount of the wine to change hands on a regular basis.

The wines have been produced by the same chateaux in many cases for centuries, and the market is solid and well-established. It is here that the new investor can find wines that will reliably and reassuringly, increase in value. Trading is most lively in those wines that I think of as 'The Big Ten'. These are the most prestigious wines of the region and those which appreciate in value most reliably. This group includes those recognised as first growths in the classification of 1855, along with their peers.

There are five first-growth chateaux: Lafite-Rothschild, Latour and Mouton-Rothschild in Pauillac, Chateaux Margaux in the village by the same name, and Haut-Brion, the oldest of the group, which is located in the suburbs of Bordeaux itself. In addition to the first growths are those properties that are located on the other side of the Gironde river (known as the Right Bank), which are their functional equivalents in quality and in price: Cheval Blanc and Ausone in St-Emilion and Petrus, Le Pin and Lafleur in Pomerol.

A serious wine collection will almost always include a strong representation from the group of chateaux mentioned above. Of course, there are many producers below this level who make delightful wine that would also fit in well; particularly those known as the 'Super Seconds' in the Mdoc. These include Chateau Loville-Las-Cases ('the first of the seconds') and the other Lovilles (Loville-Poyferr and Loville-Barton) in St-Julien, as well as Montrose and Cos d'Estournel in St-Estephe, and the two Pichons in Pauillac (Pichon-Lalande and Pichon-Baron).

Many would also add the third growth Chateau Palmer in Margaux into this group, as well as Pavie and l'Eglise-Clinet from the Right Bank. The wines of the Burgundy region can also be a very good investment, but quantities are limited and the overall situation here is much more nuanced, given differences in terroir and the greater vintage variation than that found in Bordeaux. Burgundy can be a bit complicated, but when someone is hooked by the urge to collect Burgundies, they are really spoiled for anything else. It recalls the much-touted old English adage: 'Burgundy for kings, port for lords, and claret for gentlemen'.

In the world of Burgundy, one estate stands above the rest in terms of rarity and price: the Domaine de la Romane-Conti, known to its millions of fans by the abbreviation 'DRC'. This is the one producer in the region whose every bottling in every vintage is a certain delight that can only improve in the years to come. A significantly expensive delight, but a lovely experience all the same. Another producer who approaches the same quality (and typically at a similar price) is Domaine Leroy, which is operated by a former owner of DRC. Other names to look out for in this category include Henri Jayer, Christophe Roumier and Armand Rousseau.

WHICH YEARS ARE BEST?
Once one has selected a producer, it is important to decide when to buy, because vintage variation leads to widely differing rates of appreciation. While it is normal for all wines to dip in value immediately after release, eventually the tide will turn towards profitability. However, flipping wines immediately on release is seldom an effective tool for asset appreciation. For the wines of Bordeaux, the vintage that has shown the best appreciation is 1982. More recent years include 1990, 2000 and 2005.

All are highly collectible vintages, and ones that will appreciate further over the long term, in spite of the fact that they were relatively expensive upon release. In Burgundy, the picture is quite different. Here, 1978 was a dream vintage, along with 1985, 1989, 1993, 1999, 2002 and, more recently, 2005-all these are appreciating sharply.

CONDITION, PROVENANCE AND STORAGE
Whenever one buys at an auction, the questions that pop up regarding the wine are much the same as those pertaining to art and jewellery, such as condition at the time of purchase, storage, maintenance and carrying costs. The condition of the wine being auctioned is, but naturally, everyone's foremost concern. In the evaluation of wine, the most important factor is the ullage or level of the wine in the bottle. This is explained in the back of all wine auction catalogues, but essentially a higher "fill" is better, although lower fills are appropriate for older wines.

Another important element is the seepage of wine from under the capsule. No seepage is good seepage, but not all seepage is catastrophic. Buyers should also be aware of the storage conditions at inspection: the information is normally printed in the catalogue. Here the gold standard is professional storage, with a good home cellar running a close second. It is also important to be aware of the provenance of the wine, which should be from a reliable source. A quick call to the auction house will clear up any questions, and specialists are happy to chat with prospective buyers.

Another important consideration for wine investment is the carrying costs, which can be an important factor in buying decisions, since concerns over the quality of storage would lead the list of anyone interested in investing in fine wine in a significant way. Most urban areas (at least in the more developed world) have professionally-run wine storage warehouses that keep the wine at 13 to 16C and 80 per cent humidity, but the costs can vary from $1 to $4 (Rs 46.76 to Rs 187) per case each month, so it is important to do this research before one buys.

In an auction, however, the most important caveat is to have an idea of what one hopes to buy, what that wine is worth, and what the market will pay. In order to obtain an idea of what a wine is really worth, do a bit of research by comparing auction estimates with prices found online at wine-searcher.com and wineauctionprices. com. These websites are feebased but are very helpful, and much more useful than ratings sites such as erobertparker.com. Success in investing in wine really depends on three factors: doing the research, deciding on a strict budget and then having the willpower to stick to it.

Given today's uncertain investment climate, diversifying your portfolio is not just hedging your bets-it's absolutely essential to guarantee growth. Research has shown that using wine to do this will yield greater gains with less risk than other alternative asset classes, provided that careful research is carried out and costs are managed effectively. Wine is a serious investment, but learning about it is a wonderful adventure, and one that is best undertaken with a glass of your favourite chateaux at your side.

(The writer is Head of North American Wine Sales at Christie's New York)