Everybody wants to get rich quick but nobody wants to break a few eggs, or a bank. In light of such laziness (and legal complications), one usually turns to standard investment models — shares, bonds, insurance, and the even commoner, “An uncle’s son’s start-up idea”. Sadly, not many rags-to-riches tales start with the term, “Mutual funds”.
I speak to Suman Bannerjee, CIO at Hedonova (an AIF firm that invests in alternative assets like wines, NFTs, crypto, and P2P lending), to understand how wine investments work. Yes, it is a first world thing, to invest in things that we mostly consider indulgences or whims, but people are curious about how it works (online through exchanges or through companies like Hedonova), whether it is more lucrative than art and watches (yes, it can be and less risk of fakes), and can it outperform equity markets (21% return on wines vs. 16% on equity markets since 1998). What follows are the questions which came after that exchange.
Two glasses of red wine on a wooden barrel in the vineyard buzz | Photo Credit: Rostislav_Sedlacek
How does wine investment really work? Wine investment involves purchasing wines expected to appreciate over time due to their rarity, demand, or aging process. Hedonova acquires bottles and collections through auctions, direct purchases from wineries, or secondary markets, focussing on wines with proven appreciation from reputable vineyards. The wine is then stored in optimal conditions— maintaining the right temperature, humidity, and light exposure — to preserve and enhance its value. When market conditions are favourable, the wine is sold at a higher price to other investors, collectors, or through auctions.
If I invest in wine, do I have to pay duties and taxes in India for it?
We structure wine investments by pooling funds from investors into securities of a syndicate or a special purpose vehicle (SPV) that holds the physical wine. The advantages: firstly, investors do not directly own the wine bottles, simplifying the process and reducing individual responsibilities. Secondly, it provides tax efficiency as investors own shares in the investment vehicle, not the wine itself, thereby avoiding duties and taxes on the physical wine. Lastly, investors still enjoy the capital appreciation of the wine as if they owned the bottles, benefiting from potential profits when the wine is sold while mitigating risks associated with storage, transportation, and market fluctuations.
Friends drinking wine in restaurant, having fun | Photo Credit: microgen
Should one only buy aged wine for investment? Should the houses all be famous and historic, or can new wines from new regions also be considered?
When considering wine investment, deciding between aged and new wines involves weighing factors like reputation, demand, and risk tolerance. Aged wines from renowned and historic houses often present a safer investment option, as they typically have established track records of appreciation and enduring demand. These wines are prized for their quality, rarity, and, often, their storied history, making them less susceptible to market volatility.
On the other hand, investing in new wines from emerging regions offers the potential for higher returns but comes with increased risks as these wines may showcase innovative techniques and flavours but their market success and longevity are less certain. Investors keen on diversification and willing to accept higher risk levels might consider allocating a portion of their portfolio to new wines. Still, aged wines from prestigious houses remain preferred in wine investment for stability and reliability.
What is the maximum return that you have seen wine give as an investment product? How did gold perform in the same period?
Hedonova has generated an average return of 20.9% since its inception, showcasing the potential of wine as a lucrative investment vehicle. This performance highlights the benefits of investing in carefully selected fine wines, which can be appreciated significantly over time due to their rarity, demand, and aging process. In comparison, gold has provided a compound annual growth rate (CAGR) of approximately 14% over the same period. While gold remains a stable investment, often used as a hedge against inflation and economic volatility, its returns are generally lower than those of wine investments... Both investment options offer unique advantages, with gold providing stability and wine offering the potential for substantial capital appreciation.
Examining barrels in aged cellar. 13mp_istockwine | Photo Credit: ArtistGNDphotography
How does it compare to products like fixed deposits and mutual funds?
Fixed deposits are among the safest investment options with low risks and guaranteed albeit low returns. Mutual funds provide diversified exposure which mitigates the risk but their value is prone to market fluctuations. While potentially offering higher returns, wine investment is considered a niche and alternative investment. It involves specific risks related to market demand, storage conditions, and liquidity. However, fine wine can significantly appreciate in value and has a low correlation with traditional financial markets, making it a valuable diversification tool in an investment portfolio. Despite the risks, the potential for high returns and the unique benefits of diversification can make wine investment an attractive option for those looking to enhance their investment strategy beyond conventional methods.
Why don’t people invest in whiskies, considering they have grown a lot too?
Whiskies have demonstrated significant growth as an investment, but people might be more hesitant to invest in them than fine wines for several reasons. The market for collectible whiskies is relatively less mature, lacking the transparency and liquidity that fine wines offer, which makes it more challenging for investors to buy and sell confidently. Due to their deep expertise and established networks, wine investment firms often specialise in wines, allowing them to better predict and manage investments by leveraging their knowledge of wine quality, provenance, and market trends. In contrast, the whisky market has fewer specialised firms with the same level of expertise, making reliable guidance harder to find.
Additionally, fine wines have a long history of appreciation. They are often associated with prestigious vineyards and vintages with proven track records. In contrast, despite their growing popularity, whiskies do not always have the same historical pedigree or market recognition, resulting in higher perceived risks and uncertainties. Therefore, the relative immaturity of the whisky market, the lack of specialised expertise, and the established nature of the fine wine market contribute to why more people might prefer investing in wines over whiskies.
Young artistic woman with red wine in hands | Photo Credit: MarijaRadovic
Lastly, why don’t you invest in new upcoming brands with more growth potential?
Investing in new, emerging wine brands requires a thorough evaluation of risk, trust, and growth potential. While these brands may hold promise for rapid expansion and innovation, they inherently carry higher risks due to uncertainties surrounding their ability to establish a solid reputation and consistent demand in the market. Unlike established brands from renowned and historic houses, which offer more reliable investment opportunities backed by proven track records and enduring market presence, new brands lack this established credibility. While the growth potential is enticing, investors must navigate the challenges associated with the lack of a track record, making it difficult to predict long-term success accurately.
Other ways to invest in wine
1. Liv-Ex: This is one of the most popular platforms for people wishing to trade in wine. It works pretty much like any standard trading platform, no bottles exchange hands, one is merely buying and selling online for quick (or long-term) returns.
2. Winging it: There is another way to learn about wine investment aka the hard way. It involves one going out there and buying wines from wine houses directly and then storing them the right way till the time to sell them at a higher value comes, at which point, one goes and tries to find buyers for their ware. If negotiated right, one can make a tidy sum this way but remember, it takes (a long) time to build credibility in the trade so don’t hold your breath while waiting for your juicy return.
3. Vinovest: A popular website which does the identifying, buying and subsequent selling for you, all, I am assuming, for a fee. It may feel a bit like Liv-Ex but wine bottles will physically be moved here to warehouses depending on what you purchase and decide to hold.
4. Berry Bros. & Rudd: They will be the first to tell you that they are not financial advisors but have tremendous experience in helping identify the kinds of wines and spirits that a client would be happiest to own, both for consumption or holding long them. Their advisory service is a hybrid between investing in wine for profit and buying wine at the right time to build a commendable cellar collection over time.
Published - July 12, 2024 03:48 pm IST
