Why this asset class (fine wine from Bordeaux)?

Because it has very strong absolute performance with low levels of risk relative to equities, gold and oil and low or even negative correlation with equities.

Strong performance.

The main index for the fine wine market, the Liv-ex 100, has risen at a cumulative annual rate of 14.1% since it was initiated in 2001.

This high growth rate derives from the unique supply and demand dynamics in the market. On the supply side, once a wine (for example Château Lafite 2000) has been bottled, no more of it can be produced and the quantity available throughout the world can only go down - as it is consumed/drunk. Moreover, the total supply of Bordeaux wine will not increase significantly as the geographical area where these wines are produced is fixed. Other regions compete with Bordeaux in the fine wine market place but none has the prestige and brand and market liquidity that Bordeaux has. On the demand side, fine wine - and here completely uniquely - actually improves with age.

The fine wine market is also benefitting from increased demand for consumption resulting from the rise of the wealthy classes in emerging markets, particularly China. In recent years this has added to traditional demand to drive prices upwards even more rapidly than the established long term growth rate; the Liv-ex 100 index, has risen 53% since the end of 2008, and 38% in the first eleven months of 2010.
 

Low levels of risk

Although fine wine is often classified as an alternative investment, this does not mean it is high risk - quite the opposite. Volatility measures show that wine is actually a much lower risk than equities, gold and oil. (please see page on Statistics)

It is possible to combine ‘risk’ and ‘performance’ into a single measure (such as the Sharpe ratio, quantifying return per unit of risk), which is a key statistic for investors. Here, wine significantly outperforms gold, oil and equities. (see chart)

Again, recent performance bears this out – wine prices rose in 21 of the 23 months since end 2008, with the remaining two months seeing falls of less than 1.5%. During the market recovery, wine has outperformed equities with much lower levels of volatility and risk.

Low correlation

A number of studies have looked at correlations between fine wine returns and those of other assets, particularly equities. The consensus is that there is a very low correlation; The Wine Investment Fund’s calculations suggest a coefficient of -0.04 between wine and the KOSPI, for example.