The Case for Fine Wine is Getting Stronger
The turmoil in financial markets in 2022 has merely highlighted the exceptional long-term price performance of Fine Wine.
Today, we publish updated analysis of the long-term price, volatility and correlation trends of Fine Wine versus mainstream assets over the past 25 years. Our new findings underline just how valuable Fine Wine can be in generating exceptional absolute returns over a long period of time.
Our analysis reveals four critical facts:
- The price appreciation of Fine Wine has been significantly higher than most mainstream assets over 25 years.
- Fine Wine has had lower volatility than equities and commodities.
- Fine Wine has a higher Sharpe Ratio than comparable assets.
- Fine Wine has exhibited little or no correlation with mainstream assets.
What follows below is a brief summary of our major findings. We will be looking in detail at each aspect of Fine Wine’s performance in forthcoming notes and videos.
Watch the video version of this note here.
Fine Wine Price Appreciation – 25 Years of Outperformance
The price performance of Fine Wine has been exceptional over the past 25 years.
Since January 1988 (when independent and high-quality index data began), Fine Wine has returned a staggering 2,400%, easily outpacing mainstream equity, bond and commodity indices.
In annualized terms, Fine Wine has achieved a compound annual growth rate of +10.2% over 25 years, a remarkable performance over such an extended period of time.
If you had put US$ 100,000 into Fine Wine in January 1988, today your portfolio would be worth over US$ 2.5 million*.
Adjusted for Risk, Fine Wine Returns are even Better!
Fine Wine prices are less volatility than equities or commodities.
This lack of volatility is caused (we believe) by the lack of leverage in Fine Wine markets; and because Fine Wine isn’t widely used in speculation. If Fine Wine prices weaken, most holders elect to commune rather than sell. This ‘dual use’ is critical in dampening volatility and limiting ‘drawdowns’ (price falls). There is also no institutional participation in Fine Wine markets currently (although how much longer this will prevail given the asset class’s excellent performance remains to be seen).
The combination of high absolute returns with low volatility gives Fine Wine an excellent Sharpe Ratio (which plots returns against risk):
Fine Wine’s Correlation with Mainstream Assets is Minimal
Correlation is uppermost on sophisticated investors’ minds right now.
Standard financial theory tells us that equities and bonds should move in opposite directions. The assumed negative correlation underpins the 60% equities / 40% bonds portfolio which has dominated investment theory for 40 years.
But there is a problem. At times of elevated inflation … the 60/40 portfolio doesn’t work! Once inflation rises above about 5% equities and bonds start to move in the same direction (generally down). This is a disaster for the 60/40 portfolio, as many have discovered in 2022.
Fine Wine has exhibited almost no correlation with mainstream assets over the past 25 years, and the strong performance of Fine Wine in 2022 (as most mainstream assets have cratered) merely underlines this fact. We argue that Fine Wine’s lack of correlation with mainstream assets can and will continue, even if inflation turns out to be higher and longer than anticipated.
The case for Fine Wine gets stronger with each passing year.
New demand from the rapidly swelling ranks of High-Net-Worth and Ultra-High-Net-Worth individuals around the world is meeting supply which in many cases is actually falling (witness Bordeaux 2021, and certainly the Burgundy 2021 vintage - which is shaping up to be the most unbalanced demand / supply equation in history!).
There are numerous other factors driving prices for the best wines and spirits ever higher, which will be the subject of forthcoming notes and videos. But the data we publish today just underlines that none of the current outperformance of Fine Wine (and Spirits) should surprise us. This performance is being driven by structural imbalances in the market (excess demand relative to supply) none of which is likely to unwind in the foreseeable future.
*This number is gross of storage costs. But as we show elsewhere, the ‘cost of carry’ for Fine Wine has fallen dramatically over the past two decades and is no longer a major drain on performance.