Amidst rising inflation and a looming recession, investors will be keen to diversify their portfolios to mitigate today’s uncertain economic landscape.
Furthermore, the collapse of Silicon Valley Bank (SVB), America’s 16th largest bank, and favoured partner of the tech industry, has disrupted markets on a global scale, with bonds being sold at a significant loss causing distress to customers and investors. SVB was also a frequent backer of California wineries, providing loans and financial support to over 400 winery clients.
Traditionally, investing in property, equity shares and stocks have been popular avenues to combat inflation. However, according to new data released fine wine showed a return of 82.32% from the beginning of 2014 through the end of February 2023, equating to a compound annual growth rate of 6.77%.
The past few years have highlighted the inherent risks that exist within the financial system. Fine wine’s performance over different market backdrops demonstrates its ability to generate alpha and improve risk-adjusted returns in a diversified portfolio due to its stability and low correlation with the equity market.
However, fine wine investments do also come with unique investment challenges such as lower liquidity for some of the higher value wines and storage. It’s best to approach it as a long-term component of a portfolio through shifts in macroeconomic conditions.
An October 2022 report from Preqin, a research and analytics company, expects the global market for alternative investments to grow to $18.3 trillion in five years, well above its $9.3 trillion size in 2021. The collapse of SVB and rescue of Credit Suisse has shaken investor confidence and further amplified this trend away from traditional investment towards safe-haven assets like bonds and gold.
The Knight Frank Wealth Report 2023 recently reported that nearly half of all UHNWIs (Ultra High Net-Worth Individuals) are likely to invest in wine this year, further noting that “…interest in alternatives is on the rise and will be where wealth is grown over the coming decade.”
Fine wine ended 2022 with a 20.54% annual return, outperforming both traditional financial assets and alternative assets like Gold, which ended the year with a 1.55% return.
In addition, according to the Liv-ex 1000 index, fine wine offers investors an average annual return of about 18%, while gold has a 10.6% return.
Fine wine has also appreciated by over 320% between 2004 and 2021. This equates to an average return of approximately 18.8% over the past 17 years, meaning investors doubled their initial investment every six years.
Gold, on the other hand, saw a value appreciation of about 330% from 2005 to 2020, although has lagged well behind wine in recent years, generating a negative return of 4.3% in 2021.
In 2022, fine wine outperformed Bitcoin (-39.93% return), FTSE 100 (4.70% return) and the Bloomberg Commodity Index (-64.22% return), further solidifying fine wine’s status as a stable investment.
Alternative investments like wine are not completely insulated from market risks, but their different market dynamics could provide a degree of insulation in the event of a sudden shock to the macroeconomic environment, as seen with the collapse of SVB.