A wining alternative?

Structured more as a targeted vehicle to maximize the characteristics of wine as an asset class – rather than the customary wine-focused private equity or public markets vehicle that just seeks to invest in wine-related businesses – the Lunzer Wine Fund is one of the more complex, and convincing, efforts to capitalize on investors’ predilection for partaking of the good stuff along with high returns.

“The greatest difference between wine funds and other alternative asset classes is that over time the supply of each wine diminishes,” points out Peter Lunzer, founder of the fund and an experienced wine fund manager, who claims to have achieved returns in excess of 100% over a five-year period. “No other asset class exhibits this feature.”

Premier cuvee and investment grade

Unfortunately for hobbyist investors seeking a spread of vintages, grapes and flavors, the Lunzer Wine Fund invests only in one type of wine, whose characteristics are best calculated to deliver good returns as well as an excellent glass – Bordeaux. “The reasons that most serious wine investors follow Bordeaux are firstly, because the scale of production can support a truly global secondary market, and secondly, that there develops over time an eccentric demand for wines of the finest harvests,” Lunzer explains. As a result, he says, the fund: “focuses on buying stock where we know that over a five-year period the rate of consumption for the wine will increase, and the demand focused on diminishing supply will force up the prices.”

According to Lunzer, wine has outperformed most other benchmarks and commodities indices. The ‘pool’ of investable assets, also, is limited, but substantial. “After a good to great harvest in Bordeaux, the top 5% of Bordeaux wines – in other words, ‘investment-grade’ properties, add ₤1-1.5 billion [$1.6-2.4 billion] worth of stock,” he continues. “At any one time, we stock-pick from what remains of six to eight different harvests between 4 years and 18 years old, and since a considerable amount of the older target wines have already been consumed, we estimate the stock-picking pool to be worth up to ₤8 billion [$13 billion].” Also, post the crisis, wine prices have fallen and appear set to rise again, giving good cyclical upside; and investors are looking for diversification plays away from volatile stocks and other traditional assets.

Wine shares with private equity the characteristic that it is, in principle, a long-term asset class. “One of the keys to this investment opportunity is understanding that traditionally-made top wines of Bordeaux are often nearly undrinkable for the first 6 to 12 years of their lives,” points out Lunzer. “Amazingly, the maturation path is not only non-linear, but wines in their adolescence can go through phases when they taste as though they have lost their potential to develop. There is no substitute for experience in being able to judge what is happening to the wine, and to take advantage in terms of buying that stock.”

Even though the supply of investment-grade Bordeaux may be limited and finite, Lunzer adds, the actual formation of wine funds to capitalize on it is still very immature, with substantial room for further growth. “So far, there have not been any funds which have exceeded ₤150 million [$243 million], and the combined value of wine held by funds remains today at a relatively modest ₤300 million [$487 million]. There is potential for this to grow over time to three or four times this size without affecting the market,” Lunzer affirms. “We will cap each fund at ₤25 million [$40 million], and not close a subsequent portfolio until all cash is successfully put to work.”

Wine investing in London – and Asia

London’s established cachet as a center for the global wine trade and the financial markets makes it an ideal domicile for such a fund – not least as it has the trading volume and warehousing facilities to be able to handle the needed dealings in the commodity. Lunzer pointed out to AVCJ that Asia Pacific logistics centers with bonded warehousing and similar facilities could be suitable complementary venues for investors looking to take up the opportunity.

“It will probably not be long now before a wine fund is created to meet Asian demand where the stock will be stored in Hong Kong and so provide Asian investors with greater confidence in terms of access to the underlying asset,” Lunzer believes, though he adds, “this is of psychological relevance only, since the rules of most funds are that wine stock will be returned to cash before distribution to investors as the fund matures.”

According to Lunzer and other media reports, demand in China and other emerging markets for wine as an investment, as well as a luxury, is already picking up and is likely to increase further along with the region’s economic growth.

The Lunzer Wine Fund operates on a five-year lifespan, with a typical 2-and-20 compensation structure. For really dedicated investors, Lunzer can also put together individual portfolios, held on behalf of clients, who can benefit from – and even sample – this uniquely liquid asset.

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