At its most basic a wine fund aims to buy blue chip wines, mainly investment-grade Bordeaux, at a good price, and then sell it profitably. The profits are used to buy more wine and/or to pay out fund members or shareholders.
Sadly, since the 2011 implosion of the mainly China-driven bubble in wine prices, there’s much less profit about and some funds, particularly those that bought at the top of the market, are foundering.
String of reversals
The most recent one to face problems, perhaps unsurprisingly given that it was launched in 2011, is the Chinese Dinghong Fund. “The investors bought some of the 2011 vintage, but really the 2011, 2012 and 2013 vintages have not been ideal for wine fund investors. And nor has the wine market or the global economy, so the fund is on hold for now,” said Bordeaux negociant Philippe Larché, who was asked to manage the fund’s wine buying.
He added that the fund, set up by Ling Zhijun, a wine lover and manager of the Beijing-based Pacific Asset Management, is retaining its holdings for possible sale at a later date. Larché would not provide a current value for the wine held, but said it was a far cry from originally reported amounts of €22m ($30m) a year over five years.
The Dinghong news follows a string of wine fund failures, including the closure earlier this year of the Bordeaux Fine Wines Ltd fund, amid allegations it was a Ponzi-style scheme that paid one set of shareholders with money from another set.
Prior to that, in 2013, the Cayman Island-based Vintage Wine Fund, worth a reported €110m in assets at its peak, was wound down following poor performance and a spate of shareholder sales, while trading at the Luxembourg-based Nobles Crus was suspended by the local regulator in 2013, following an admission it was unable to pay investors and questions over how it valued its wines. Nobles Crus says its wine assets, which were worth about €120m in 2012, now stand at €53m, after sales to enable investor payments.
Funds that cannot sell their wines to meet payouts and/or buy more wine are obviously in a difficult position, said Kristian Nooitgedagt, the business development manager for Eleanor Wine Index. “The only way out is waiting for better times, but will prices reach those levels of the ‘golden years’ 2004 to 2011 again?” he asked. Nooitgedagt recently visited a number of funds to introduce the new business he founded with his brother in 2012, the Eleanor Independent Wine Index. The Index allows members to see, and buy from, fine wine stocks currently held by Bordeaux negociants.
Some remain strong
Funds that do well, like happy families, appear to have a few common elements. “They are transparent and singularly focused, with no conflicts of interest or side-businesses going on,” said the co-founder of wine trade index, Liv-ex, Justin Gibbs, a fund watcher. They also have regular, independent valuations that investors trust, he said. “That was the problem for Nobles Crus – their valuation methodology lacked clarity and to many, didn’t reflect the reality of the market.” Finally, he said, good funds are run by financial people “who can be dispassionate about wine”.
On the differences between open-ended funds, which allow investors to choose the time of sale, versus closed ones that make them wait and cash out after a fixed period, Gibbs said there are pros and cons.
Investors can lock in and forget about closed ones until the time period is up, he said, which may or may not play out well. Open-ended funds need a “more nimble” approach if they are to take advantage of market highs and lows and they can be vulnerable to sudden large-scale investor sell outs, known as redemptions, as was the case for the Vintage Wine Fund. The lesson here, said Gibbs, is don’t rely on one or two large institutional investors who may need to pull out suddenly. Instead, make sure the client range is broad and, even better, private. An example of an open-ended fund that has survived bull and bear markets, Gibbs said, is Wine Asset Managers, which runs two funds. One is institutional and one private, and are, according to the fund, worth about $20m together.
Another survivor, this time close-ended, is the 11-year old Wine Investment Fund (TWIF), which says its assets are currently worth about £35m ($58.8m). The sentiment here, about both the current downturn and the last three poor Bordeaux vintages, is sanguine. “The soft market has cleaned out a lot of the noise from the wine fund sector, which is good for us,” said founding director, Andrew della Casa. “Plus the relatively poorer recent vintages have increased the scarcity value of the vintages we hold - which are limited to the 10 best vintages of 35 Bordeaux châteaux, within an age range of five to 25 years.”
For those considering an investment, or wanting to get rid of one, Gibbs said he sees the wine market bouncing back over the next five years. “Perhaps a bit too optimistic for some, but I feel the market low is drawing near.”
