fine wine to diversify your investment portfolio?

A recent IMF working paper has generated wide-ranging debate on wine investment , both from within the trade and, interestingly, a number of opinion-forming media, such as theFinancial Times or the Economist newspaper online, as-well-as trade actors, Liv-ex, the fine wine exchange and the drinks business, a publishing company.

Two recurring themes have emerged in these debates, the value of wine as an alternative investment and whether or not extreme price fluctuations among commodities remains supply-side, that is climatic conditions, scarcity and Parker points, or has become demand-driven, ‘a recent phenomena’.

Something that is not quite so apparent in these debates is that the paper’s brief, in fact, was to analyse the factors contributing to price-formation – in the shape of extreme price fluctuations over the last two decades – by comparing two very distinct commodities, and not to look for a correlation between oil and fine wine, per se. 

Where fine wine is explicitly referred to as a potential alternative investment asset, the paper concludes that this is a particularly interesting question.

Modern portfolios would typically consist of stocks and bonds and would not have substantial exposure to commodities. The value of fine wine as a diversifier in this context is not being questioned at all. Indeed, one of the most notable findings is by how much the respective commodity prices came off in the sudden turbulence of 2008: oil by 70% as compared to fine wine by 42%.  This is further illustrated in the FT article, which reports that, according to the paper’s findings, a 4% reduction in industrial output in emerging market economies would induce a 22% fall in real oil prices and a 15% decline in fine wine prices

Whereas, if the IMF and the Economist economists are correct and fine wine has started to behave like other commodities, i.e. it is exposed to macroeconomic shocks; it is not derivatised and therefore has to be inherently less risky. Each of the above observations support this theory, that fine wine is less volatile than oil or other commodities and, therefore, is an appropriate tool for portfolio diversification.

In our view, all the recent data does suggest that fine wine is a worthy diversifier because it is not positively correlated with stocks and bonds and it’s less volatile than other commodities.

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