Investing in fine wine can be immensely profitable, and this asset class deserves consideration for your portfolio. It is a more complex market than some other types of liquid assets; however, there are pitfalls that you need to avoid. Rather than risk buying cheap wine with no value, potential investors should get to know the business first. Here are some questions to help you make a successful venture without getting conned.alphacell / 123RF Stock Photo
Is the company legitimate?
Make sure that any company you’re considering investing with is a legitimate operation. They should have a real physical office address, not just a mail drop or call answering service. Visit the office in person if you can reasonably do so.
The company’s legal structure should be transparent, with names of officers, lawyers, and auditors. All documentation should be issued by a firm authorized by the appropriate government body (in the UK, the Financial Conduct Authority). If these pieces are in place, you know you’re not dealing with a fly-by-night scam operation.
What’s their management style?
Not every legitimate company turns a decent profit, so you need to validate their management and performance before investing. Look for a management team, to avoid the risks when just one or two people run an operation. Look for a clearly delineated approach - what do they invest in and why? They should have a strategy they can explain easily. Finally, look for a track record of at least five years of acceptable returns.
Are there any conflicts of interest?
Make sure that the interests of your investment manager are fully aligned with your own interests. If they have other business dealings, then it may create a conflict. If you’re considering purchasing through a wine merchant, consider the fact that their interests may be diametrically opposed to your own - they make more money by selling to you at inflated prices.
What and where is their portfolio?
Make sure that the company has physical possession of all the wine in their portfolio, and find out where it is kept. All wine should be stored in a bonded warehouse with proper temperature controls. If you are able to visit the warehouse in person, that is ideal. The wines held should fit with management’s investment approach. Less risky portfolios will contain the top chateaux from Bordeaux, and wines less than 25 years old. Higher risk portfolios will contain wines from other areas, or wines that are very young or very old. All wines in the portfolio must be insured for full replacement value.
How are the holdings valued?
Incorrect or inconsistent wine valuations can drastically impact your financial results, so it’s crucial that all valuations be carried out by a recognized, independent authority. Liv-ex, an industry exchange for fine wines, is a recommended source for reliable pricing. All wines held must be valued and reported on regularly.
What are the fees?
You can expect to see costs of buying and selling fine wines as well as costs for managing the holdings. Your total costs should not exceed industry norms for similar investments. A good rule of thumb is that you should pay no more than 5 percent upfront fees and 1.5 percent annual fee for management. There may also be a performance fee on returns over a certain amount. All fees should be transparent, and clearly explained before you make any investment.
If you're a rookie investor with little experience in the field you are advised to invest in "liquids", sufficient volumes of supply and liquidity wines are excellent choices. If you're choosing to spend money on wines with less financial liquidity (en-primeur for examples) the risk of getting conned will increase, are you willing to make a sensible investment? Although wine can often be a tricky business domain, it's also an extremely rewarding one.
You don't have to be wine aficionado to make money; you just have to know people who speak the wine language. They will help you learn the business, understand the market, and invest the smart way. Never forget that in this industry seeing believes, so the company you have chosen to do business with should have enough palpable proof to convince you they're the real deal.
About the Author-
John Smith is the author of this article. He is a freelance writer who likes to write about current investment trends and financial issues.