The stock market may be a roller coaster, but wine investors still anticipate steady returns. Writer Paul Sullivan examines the new wine funds.

By Paul Sullivan
Updated March 31, 2015

Most wine collectors become investors by accident. When their cellars become too crowded, they sell a few bottles and, in the process, reap sizable and often surprising gains. But as the price of fine wine has risen dramatically in recent years, a new group of wine buyers has begun acquiring cases of first-growth Bordeaux strictly as investments. And, in the latest twist, Wall Street types are putting money into one of the growing number of so-called wine funds—akin to mutual funds.

All these investors love top Bordeaux, Champagne and, to a lesser extent, Burgundy, because of the wines’ “noncorrelation to other asset classes” (to put it in finance-speak), meaning prices do not rise and fall with stocks, bonds—or even mortgage defaults. “Wine investors are seeking bondlike security with stocklike returns,” says David Sokolin, author of Investing in Liquid Assets. “People invest in wine because they think it’s interesting.”

Many investors in wine funds have no desire to actually drink any of the great bottles in their portfolios, preferring that they remain in a professional, temperature-controlled storage facility that can keep them in pristine condition, and thus protect their value. Some of these investors may not even know the difference between Bordeaux and Burgundy. To them, wine isn’t something to be enjoyed; it’s an asset class.

“Our clients are not necessarily interested in wine but in investments,” says Miles Davis, who co-manages the London-based Fine Wine Investment Fund, one of a dozen or so funds that were created in the past few years to capitalize on the growing interest in wine as a financial commodity. “We’ve had very little luck with wine enthusiasts. Very few people have been able to divorce drinking wine from investing in it.”

These new wine funds offer would-be investors a way to buy into a collection of hundreds or even thousands of cases of wine. And the initial investment is relatively small; it can be as little as $20,000, though $50,000 is closer to the norm. An exception: The Elevation Wine Fund, the first U.S.–based wine fund, which launched in August 2008, requires a lofty $250,000 initial investment.

Most wine fund portfolios are comprised predominantly, if not entirely, of cru classé Bordeaux; it’s fairly easy to track Bordeaux prices over several decades’ worth of vintages and to see that the wine has consistently gained value. Peter Lunzer, a director of the Wine Investment Fund, also based in England, buys only cru classé Bordeaux because, he says, it has the most consistent returns of any wine category.

The profits, so far, have been quite respectable. The Wine Investment Fund has seen annual returns of about 14.5 percent, and even in this otherwise economically dismal year, Lunzer says he still expects the fund to return about 12.5 to 14 percent. That’s about the same figure that Wine Asset Managers (which operates two wine funds worth some $21 million) reports as a return on all fine wine.

Investors in the Wine Investment Fund receive their payment in cash (“They give us cash; we give them cash,” says Lunzer), but other funds offer investors a choice between cash and wine. The Elevation Wine Fund will pay dividends in either cash or wine, says Elevation CEO and founding partner Leon Dreimann: “Investors can pick and choose wines from the collection that they’d like as part of their return.” Investors will receive regular updates on the contents of the fund and can withdraw the wines that they like as dividends.

Dreimann, a veteran of the financial markets, insists that he and his three partners got into the fund business because they love wine and believe that it’s a great investment. In fact, the partners spent about a year and around $1 million putting together a collection of wines for their fund, which is heavily skewed toward top Bordeaux. But, defying conventional wisdom, their port-folio also includes some top Rhône wines from great recent vintages, as well as cult California Cabernets like Harlan Estate and Screaming Eagle. One of Dreimann’s partners is a Napa vintner, and the fund’s wines are currently stored in his winery’s cellar.

Professionally managed storage is of paramount importance for bottles intended for investment, whether the wine is owned by a wine fund or an individual collector. Bottles cellared in a personal storage space may lose potential market value, because verifying their provenance becomes more difficult. Advisers of wine investment funds keep the wines they’ve purchased in professional storage spaces at all times: “Most of this wine will change hands three or four times, and yet never move from a professional cellar, such as Octavian Vaults,” says Simon Littler, chief executive of the Global Wine Company in Sausalito, California, naming one of the premier wine-storage facilities in the world, located in Wiltshire, England, a couple of hours outside of London.

One tool accessible to individual investors and wine fund investors alike is the relatively new London International Vintners Exchange, which operates the Liv-Ex 100, an index created in 2001 that allows wine investors to track the prices of 100 of the most sought-after vintages. Currently, the index is almost exclusively focused on Bordeaux, although it also tracks Champagne and a bit of Italian wine. Although the Liv-Ex universe is limited, given the number of regions that produce great wine today, investors who have focused on the index’s top wines have seen solid annual gains of around 16 percent. (By contrast, the S&P 500 was up a mere 5.5 percent in 2007.)

If there is a drawback to investing in wine funds, it is their fees: usually 2 percent of assets under management, plus 20 percent of the profits. These kinds of fees are closer to what hedge funds charge, and while this may be fine when the returns are hedge-fund size (as much as 80 percent in good years), when the returns are only 12 percent, it becomes a rather sizable bite. The Fine Wine Fund also has a 10 percent early redemption fee in the first year and a 5 percent fee in the second intended to discourage investors from making a short-term investment. Fine wine, after all, requires patience and, most of all, time to mature.

Another issue may be the small size of these funds. The largest is the Vintage Wine Fund, with $153 million. By contrast, the Vanguard 500 Index Fund has around $100 billion in assets. But according to Andrew Davison, a former derivatives trader at Deutsche Bank who launched the Vintage Wine Fund in 2003, “Wine is a little bit like buying gold. It’s always going to be a niche product. We have endowments that want to put in 50 million euros, but we can’t do that. The market isn’t big enough.”

And yet, according to Davison, this is a good time to invest. “The world’s great vineyards are limited in size,” he observes. “So the price is going to hold up over time.”

After a prolonged rally, many investors sold their holdings beginning late last year to take advantage of the run-up in prices.“There’s been profit taking, but consumption is up,” particularly in Asia, he says. “We’re on the threshold of the resumption of a rally.”

But that rally, if it comes to pass, will exist almost exclusively for the best wines. And those who invest in lesser wines, like second- and third-growth Bordeaux, are assuming a much greater risk, according to Jamie Ritchie, head of the Sotheby’s North American wine department. “We’ve seen investors who wanted to make money, and they’ve done very poorly. They bought less good wines in the hope that they would appreciate greatly, and they haven’t. The safest area of the market is in the first-growth and top producers.”

Of course, even investors who do everything right aren’t making a killing. And in light of that, perhaps the old, haphazard way of collecting wine in order to eventually drink it is still best. Consider the example of John Costello, an old-guard collector and the former chief global marketing officer for Yahoo!. He bought 1982 Château Margaux, one of the great Bordeaux from one of the most famous recent vintages, for less than $300 a bottle 12 years ago; it is now worth around five times that amount.

Costello’s approach, however, has been simple: He buys what he likes, and he stores his collection of 2,000 bottles in his own cellars, a cardinal sin in wine investing. “I saw collecting as a great way to ensure the availability of my favorite wines,” he says. “And I find the price appreciation on a first-growth Bordeaux to be a very nice side benefit.”

And if the price falls, well, he can always open up a bottle and drink it.

Paul Sullivan writes for the New York Times, the International Herald Tribune and the Financial Times.