Overview
Fine wine is gaining credibility among investors as an alternative asset, particularly for its low correlation to traditional investment assets and lower volatility profile. It is often considered by private investors seeking to diversify their portfolios, which tend to have meaningful exposure to well-known risk factors from allocations to traditional asset classes and even some other alternative investments such as hedge funds and private equity. In the fourth edition of the Factor InVe(nn)stigator, we will be interpreting the factor analysis results of the Liv-ex Fine Wine 1000 index1 using the Two Sigma Factor Lens.
How We Measure the Performance of Wine
We picked the Liv-ex Fine Wine 1000 index because it is the broadest measure of the global wine market. The index tracks 1,000 wines from across the world using the Liv-ex Mid Price, which is calculated monthly. It is made up of seven sub-indices which represent regions from around the world. The index’s allocation across the various regions is displayed in Exhibit 1.2
Exhibit 1: The Liv-ex Fine Wine 1000 Index Regional Weightings
Source: Live-ex as of July 1, 2020.
Fine Wine Performance Analysis
As a comparison, we use Venn’s global Equity factor 3 as wine’s benchmark for this analysis. As seen in Exhibit 2, fine wine (labeled “Investment”) has outperformed global equities (labeled “Benchmark”) before storage costs 4 by more than 2% annually over this 16+ year time period, realizing a Sharpe Ratio above 1.
Exhibit 2: Performance Summary for the Liv-ex Fine Wine 1000 Index and Venn’s Equity Factor
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data.
Wine’s outperformance is further demonstrated in Exhibit 3. Wine prices dropped by much less than global stocks during the Global Financial Crisis in 2008, and have generally delivered a smoother ride overall. However, wine has been underperforming since 2013, as global stocks have been on an incredible bull run, only recently experiencing a notable decline due to the COVID-19 pandemic. During this equity drawdown, the wine index did not suffer nearly as much as global equities (e.g., -1.3% for wine vs. -12.6% for Equity for the month of March 20205).
Exhibit 3: Cumulative Return for the Liv-ex Fine Wine 1000 Index and Venn’s Equity Factor
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data.
Not only have the annual returns of wine exceeded global equities over this time period, they have exhibited consistently lower volatility, as seen in Exhibit 4. Volatility in wine prices has been about a third of global equities.
Note that even though the wine index is calculated using actual bids and offers on the Liv-ex Fine Wine Exchange, transactions might not occur everyday (as indicated by reliance on a “14-day tier 1 list price” to derive the Mid Price in the absence of live exchange offers)6. It’s expected that the fine wine market is less liquid than the global public equity market, and this relative illiquidity and smoothing of prices likely dampens the index’s volatility.
Exhibit 4: Rolling Volatility for the Liv-ex Fine Wine 1000 Index and Venn’s Equity Factor
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data.
We have also used Venn to assess the correlation of the wine index relative to several global and regional equity indices. As seen in Exhibit 5, the wine index maintains a low, positive correlation with all of them, with the highest correlation being with the MSCI Emerging Markets Index (more on this later) and lowest being with the S&P 500 Index. This confirms the view from Sokolin (2008), that it is “outside America where the economic trends are really driving the growth in the finest wines. The rise of global wealth, particularly in Asia, Russia and other emerging parts of the world, combined with increasing awareness about wine, has spawned an unprecedented demand for what I call investment-grade wines.”7
Exhibit 5: Correlation of the Liv-ex Fine Wine 1000 Index with Several Major Equity Indices
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data.
Finally, in Exhibit 6 we break down the index’s performance by its seven regional components. The clear underperformer is Rhone, while the recent outperformer is Burgundy, especially since 2016. The reason for the appreciation in Burgundy wine prices is at least partly due to their rarity 8 and the excellent quality of recent vintages (e.g., a Liv-ex report called 2017 “Burgundy’s year” 9), which sparked renewed interest in the Burgundy market. In addition to the recent high-quality releases, collectors, especially those in China, have started buying older vintages (the index includes the recent 10 years). This increased demand is similar to that which created a price bubble in Bordeaux wines in the mid 2000s,10 which you can also observe in Exhibit 6.
This impressive recent price appreciation for Burgundy fine wines has caught the attention of investors who realize that the relative value has declined, notably when compared to some of the top wines in Bordeaux.11 That, combined with the changing tastes of wine consumers who are increasingly looking at markets outside France for fine wine, such as Italy and California, are suspected to have contributed to the recent decline in Burgundy prices.12
Exhibit 6: Performance of the Liv-ex Fine Wine 1000 Index Regional Components
Source: Liv-ex as of June 5, 2020. Time period: January 2004 - April 2020, using monthly data.
Fine Wine Factor Analysis
As shown in Exhibit 7, we found that the wine index has notable negative exposure to the Interest Rates factor, which is constructed using a 7-10 global government bond index. This negative relationship with the Interest Rates factor (i.e., global government bonds) indicates a positive relationship with global interest rates (because bond prices and interest rates are inversely related). This result is largely consistent with other studies, such as Labys (2002), which expanded the research on the relationship between business cycles and commodity markets. Interest rates were positively correlated with wine prices in almost every country examined.13 A theory behind this result is that periods of low interest rates were expansionary, encouraging new industry investments and technological advances, such as those found in agriculture, increasing commodity output, and lowering commodity prices.14
The index also shows a notable positive exposure to the Emerging Markets factor. The notable exposure to the Emerging Market factor is consistent with the relatively higher correlation with the MSCI Emerging Markets Index that we observed earlier.
Exhibit 7: Factor Exposures of the Liv-ex Fine Wine 1000 Index
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data and the GBP version of the Two Sigma Factor Lens.
While the exposures to the Interest Rates and Emerging Markets factors contributed in a statistically and economically significant way to fine wine’s risk and returns, the majority of its risk and returns are driven by its residual component as seen in Exhibits 8 and 9. According to Sokolin (2008), “there are a few risks unique to wine: breakage, theft, and spoilage.”15 There are also other unique factors that impact wine prices, including climate, storage conditions, supply and demand, vintage considerations, scores, consumer tastes, etc. that cannot be captured by the existing factors in the Two Sigma Factor Lens, which are mostly designed to capture risks inherent in more traditional asset classes.
Exhibit 8: Factor Contributions to Risk for the Liv-ex Fine Wine 1000 Index
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data and the GBP version of the Two Sigma Factor Lens.
Exhibit 9: Factor Contributions to Return for the Liv-ex Fine Wine 1000 Index
Source: Venn and Liv-ex as of June 22, 2020. Time period: January 2004 - April 2020, using monthly data and the GBP version of the Two Sigma Factor Lens.
Conclusion
After examining the Liv-ex Fine Wine 1000 index using Venn, we think fine wine is indeed an alternative investment with measurable risks and returns. It exhibits a low, positive correlation to the equity market and a lower volatility profile. It outperformed the equity market 16 during market crashes, such as the Global Financial Crisis and the recent COVID-19 pandemic, offering a diversifying option to an investment portfolio. It is worth noting the real risks with wine, as well as the unique factors that impact wine prices. While most investors have their eyes on the returns, some are buying for the sheer enjoyment of drinking it, as you always have the option to “liquidate” wine at your dinner table.
Cheers!
If you have candidate investments for the next Factor InVe(nn)stigator, please send them to invennstigator@venn.twosigma.com.
REFERENCES
1 Source: Liv-ex. https://www.liv-ex.com/
2 For more information on the index construction, see: https://www.liv-ex.com/news-insights/indices-old-edit/liv-ex-fine-wine-1000-indices/
3 Venn’s Equity factor is constructed using the MSCI All Country World Index, currency hedged.
4 Unlike public equities, fine wine can cost money to physically store. Storage costs are not taken into account when calculating the returns over the period analyzed in this post. According to Fine Wine Reserve, wine storage can cost around $3 (or ~£2.5 at current exchange rates) per case per month. These costs can eat into profit (by how much depends on the price of the case stored), lowering the outperformance of wine relative to the global equity market.
5 Source: Venn and Liv-ex as of June 22, 2020.
6 Source: https://www.liv-ex.com/wp-content/uploads/2012/10/midprice.pdf
7 Sokolin, David (2008), Investing in Liquid Assets: Uncorking Profits in Today's Global Wine Market. Simon and Schuster.
8 Source: Financial Times article “Investing in wine: has Burgundy’s bubble burst?” on July 10, 2019.
9 Source: The Drinks Business article “ANALYSING THE TRENDS FROM 2017’S LIV-EX POWER 100” on December 20, 2017.
10 Source: Infolio article “China’s Attempts to Avoid a Second Bordeaux Bubble: This Time, the Country Is Primed for Meaningful Change” on January 29, 2016.
11 Source: Financial Times article “Investing in wine: has Burgundy’s bubble burst?” on July 10, 2019.
12 Source: Financial Times article “Investing in wine: has Burgundy’s bubble burst?” on July 10, 2019.
13 See Appendix A of Labys, Walter C (2002). Macroeconomic Cycles and The Wine Industry. Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.184.8866&rep=rep1&type=pdf
14 Labys, Walter C (2002). Macroeconomic Cycles and The Wine Industry. Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.184.8866&rep=rep1&type=pdf
15 Sokolin, David (2008). Investing in Liquid Assets: Uncorking Profits in Today's Global Wine Market. Simon and Schuster.
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