The past year was a wake-up call for ultra-high-net-worth individuals (UHNWIs) and investors. Economic uncertainties caused a collapse in value of almost all mainstream asset classes, affecting assets such as equities, bonds, commercial real estate, and cryptocurrencies particularly hard as inflation re-emerged in major economies.
The latest Knight Frank Luxury Investment Index found that UHNWIs lost a staggering US$10.1 trillion (S$13.4 trillion) in wealth last year.
The deep correlation between different mainstream assets and their respective declines surprised many UHNWIs used to drops in equities being offset by rises in bond prices. However, in an inflationary world, this magical inverse relationship broke down with disastrous consequences.
If inflation remains elevated in developed economies, the old playbook of 60 percent equities and 40 percent bonds (with an overweight in mega-cap US technology shares) will no longer work. This alarming fact has made UHNWIs scrambling to find new strategies to grow and protect wealth in this unfamiliar paradigm.
Conceivably, turning to alternative assets with no (or minimal) correlation to the markets will be critical this year. Alternative and collectible assets have been attracting a lot of attention. They’ve been out-performing mainstream assets largely because of accessibility improvements and their long-term track record as stores of value in inflationary times.
Fine wine certainly showed its wealth-preserving credentials in 2022. It rose 10 percent in value and significantly outperformed mainstream assets. So, 43 percent of investors are now looking to include fine wines in their portfolio this year, ahead of other passion investments like jewellery, cars, and handbags.
Sir Winston Churchill said that to see the future, we must look back into the past. Recent research by Man Group PLC, one of the world’s largest hedge funds, and Duke University shows that tangible assets like commodities and wine outperform equities and bonds in periods of elevated inflation.
Fine wine’s record of capital appreciation is driven by its unique supply and demand characteristics. Production in the world’s top wine estates have strict limitations and what little supply there is decreases each year, thanks to consumption. It’s like collectors of original Andy Warhol artworks periodically throwing them in the fire!
This rapid reduction of the supply of top-quality wines pushes secondary market prices up. The older the vintage commodity, the less the remaining unconsumed supply, and the higher the price.
As the global supply of money and wealth rises, supply of the world’s best fine wine estates cannot be increased to meet the new demand. Yet, demand growth shows no sign of slowing. With buyers of fine wines today being newly enriched UHNWIs in emerging economies, many view owning a collection of super premium wine or spirits as a milestone on the road to success.
Knight Frank estimates that 170,000 new UHNWIs (defined by assets over US$30 million) will be minted between now and 2026. On average, this group invests 5 percent of their wealth in collectible assets. Assuming only 10 percent of this investment goes into fine wine, that is still over US$25 billion of additional demand for fine wine over the next three years. No wonder prices continue to soar.
But while much of the interest in fine wine as an alternative asset class is new, its excellence as an investment option is not. Since 1988, fine wine rose almost 2,500 percent in value and has handily beaten all mainstream equity and bond markets over that time period.
More importantly, the reason fine wine attracts UHNWIs is its minimal correlation with mainstream assets over a quarter of a century. It appreciates steadily over the medium- to long-term and keeps its value when mainstream assets fall.
Over US$7.5 billion of fine wine is now traded annually, with platforms like Cru World Wine transacting tens of millions of dollars across thousands of different wines and spirits each year. Cru World Wine gives access to the world’s most valuable and best performing wines and is democratising a market previously only preserved for well- connected and affluent insiders.
Through Cru’s online tools guide, collectors and investors now have access to undervalued opportunities and sub-sectors with the best prospects. Burgundy and champagne have been the best performers in the last few years.
Investors who do not have the time or inclination to research can now get professional managers to manage portfolios for them. In addition, the cost of owning a fine wine portfolio is lower than most people expect, and is even more affordable than holding onto physical gold or silver.
Beyond that, fine wines are also seen as an investment for the ESG-conscious younger demographic. They tick the boxes of millennial and Gen Z investors, many of whom will drive investment demand over the coming decades. The best fine wines today will last 50 to 70 years, and are super long- dated assets that help younger investors build wealth over the long term.
We believe demand growth for fine wines, with their great long-term track record as an asset for inflationary times, will increase significantly. This will mean higher trading and liquidity volumes.
