Alternative assets: Investors turn to Swag

By:
Peter Lee
Published on:

Fine wine shows an attractive Sharpe ratio; Investors must be wary on valuations

Silver, wine, art and gold, the so-called Swag assets, have been attracting more attention from high-net-worth investors, family offices, private banks and smaller institutional investors, as dissatisfaction with the risk and return of conventional financial assets grows.

Although prices of fine wine have fallen this year, as measured by the index of Liv-ex, the London-based wine exchange that executes trades for many of the world’s biggest wine merchants, that follows an impressive run-up through 2010 and 2011, partly driven by increasing demand from Asian consumers.

Given the low volatility of fine wine compared with financial assets and its double-digit long-run returns, return per unit of risk is impressive. Fine Wine PCC, one of the leading collective investment schemes for investors wanting exposure to fine wines without incurring the hefty brokerage commissions – typically well over 10% – in the private wine market, tracking the 24-month historical volatility of wine versus other assets plots a Sharpe ratio of around 0.9, ahead even of gold at 0.7 and way ahead of the dismal levels for the main equity markets.

Chris Smith, investment analyst at Fine Wine PCC, says: "That Sharpe ratio is what catches the attention of institutional investors. And while correlation with financial assets was evident at the worst moments of the financial crisis in 2008 and 2009, wine did not fall as sharply as equities and recovered further and faster."

But investors need their wits about them. In late September the Financial Times ran a report on the holdings of the Noble Crus wine fund managed by Elite Advisers, after asking Liv-ex to value its larger holdings of Bordeaux wines, using mid-market pricing from actual transactions rather than reports from auction houses or wine merchants. Liv-ex says: "In total, we valued the top 50 holdings at €26 million, as opposed to the €36 million stated by the fund itself. Nobles Crus’ valuation is 38% higher." The fund was valuing 500 bottles of Lafite 1996, a regularly traded wine, at double the valuation derived from the Live-ex price.

Manuel Cuervo, partner at Stratus Capital, promoter of Fine Wine PCC, draws a distinction with that fund’s more robust governance. "We designed a structure that a sophisticated investor would recognize, with assets controlled by an independent custodian, Bank of Butterfield, and independently valued by Liv-ex in a process in which the fund manager plays no part. The fund also has an independent administrator." So investors can relax with a glass of Lafite Rothschild 1982, perhaps, while waiting for the credit markets to implode.