Wine fund predicts double-digit rise in 2012

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Bermuda incorporated and leading fine wine investment specialist The Wine Investment Fund (TWIF) has predicted that the main wine index (the Liv-ex 100) will finish this year 10 percent above its 2011 year-end level.

Fine wine prices fell by 15 percent in 2011 as the market corrected from the sharp rises of 76 percent since the end of 2008, and some stockholders took profits and returned to cash given the uncertain economic conditions in the Eurozone.

Nevertheless on a long-term view wine has still proved itself to be an sound longer-term investment, with prices over five years rising by 66 percent compared to 0.9 percent on the FTSE 100.

Looking forward, the only two previous bear markets for fine wine in the last 25 years (1998 and 2008) saw the market hit a low point in December and recover sharply the following year. With graphical analysis also pointing to wine having been oversold, TWIF said that this could be the best time to buy into the market since January 2009.

TWIF also published the first ever ‘fan chart’ relating to the wine market showing the probability of various different returns over the next 12 months. This is in the same format used by the Bank of England to forecast inflation.

“Falls such as those in 2011 are extremely rare in the fine wine market and have generally been followed by strong returns for those investing at the right time. We believe now could be the ‘right’ time, with our prediction for double digit growth this year”, said Andrew della Casa, director of TWIF.

“Although wine has historically been a low risk asset, we recognise that there are a range of possible outcomes this year and that is why we have produced the wine market’s first ever ‘fan chart’ to help investors understand the risks involved and probability of a range of returns”.

Movements in fine wine prices tend to be uncorrelated with those for other assets such as equities, with the exception of periods of extreme stress in the financial system. 1998, 2008 and 2011 were the only years since 1988 (when reliable wine price records began) during which prices fell significantly in a calendar year and were closely linked to systemic financial difficulties (in 1998 the Asian financial crisis and the collapse of the American hedge fund Long Term Capital Management; in 2008 the banking/credit crisis and the collapse of Lehman Brothers; and in 2011 the Eurozone crisis and the possibility of a European government debt default and/or the break-up of the euro).

In 1998 and 2008 the bottom of the market was in December of the year and the next year saw a robust recovery.

Analysis from the fine wine exchange Liv-ex has also pointed to the possibility that the market may be close to a low point. Liv-ex estimated ‘support’ and ‘resistance’ lines for its main index, the Liv-ex 100, which are used by analysts to predict market turning points.

According to the fan chart, TWIF predicted that there was a 50 percent chance of growth in 2012 between five percent and 15 percent; a 35 percent chance of growth between minus 5 percent and five percent or between 15 percent and 22 percent; a 14 percent chance of growth between minus 15 percent and minus five percent or 22 percent and 30 percent; and a very remote chance (one percent) of growth being either below minus 15 percent or above 30 percent.

TWIF said that any downside risk came from the possibility of a failure of the Eurozone stabilisation plans or a significant slowing down of the Chinese economy, but despite this wine had two advantages over other assets.

First, it remained a consumable good which people will buy at some price to drink. And secondly, the fact that it is a physical commodity, immune from inflation and government debasement means that it is attractive to investors as a store of value in uncertain times, said TWIF.

The possibility of stronger than predicted growth comes from continued growth in demand from China which is now a large enough market such that even growth at relatively modest levels can impact prices, particularly if the Chinese currency strengthens as well, said TWIF. The return of Japan to the market following the devastation wrought by the 2011 earthquake and tsunami was also an important factor as was the possibility of positive net investment inflows, given the more attractive valuations, it added.

“Looking at the worst case scenario, it is very hard to imagine further price falls of more than five percent, while increases of more than 15 percent are by no means inconceivable”, said Mr della Casa. “That balance of risks will look attractive to many investors”.

TWIF saw a further five-year tranche mature in 2011, returning 13.1 percent on an annualised growth basis after all fees and expenses, compared to an average return of just 0.2 percent per annum on the FTSE 100 over the same period. Over all of the TWIF tranches which have matured to date, average returns have been 14.5 percent annualised after all fees and expenses. TWIF also outperformed its benchmark index in 2011, even though the index makes no allowances for the costs of trading and storing wine, while TWIF returns are net of all fees and expenses.

This outperformance was due to TWIF’s risk management procedures, according to the fund. For example, its portfolios include a lower percentage of Château Lafite than the main indices, and these percentages were reduced a year ago to reduce the risks resulting from the large rises in the price of Lafite in 2009 to 2010. These decisions proved to be justified in 2011 when Lafite was much the worst performer of the main Bordeaux chateaux, falling some 30 percent. TWIF also avoids younger wine, which tends to be more volatile: hence it did not suffer from the 45 percent fall in Lafite 2008.

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Published Jan 9, 2012 at 8:14 am (Updated Jan 9, 2012 at 8:12 am)

Wine fund predicts double-digit rise in 2012

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