Before taking a drink, many revellers will clink their glasses and make a toast. This could be cheers in Britain or saúde in Portuguese, santé in France and salud or salute for the Spanish and Italians. These celebrations are simply a way to wish your companions good health and happiness.
It is thanks to the Greeks and Romans we have this custom. During big banquets, it was a tradition to make an offering to the gods, which always included alcoholic beverages. This commonly took place during a feast to commemorate the death of a family member, subsequently evolving into a toast to the health of the living.
Whilst wishing your fellow drinkers sante may not strictly comply with current day health guidance, on alcohol consumption, we all know that good health is about balance. The same is true of a trustee’s responsibilities when considering the investment options, for the assets under their control.
A trustee has an obligation to, so far as is reasonable, preserve and enhance the value of the trust property. With the current low levels of interest rates, meaning holding cash is unattractive, some form of active investment is essential in order to meet these requirements.
An effective trustee will spend time understanding and assessing the needs of the beneficiaries, such as a need for income or financing a particular event in the future. These considerations, when coupled with the beneficiaries’ expertise and preferences, are key inputs into the decision with respect to investing the trust’s assets.
More often than not, a trust’s investment portfolio will include equities, bonds and property - all of which are generally appropriate to meet the needs of most beneficiaries. So what about ‘passion assets’, such as art, cars and wine?
The primary purpose of passion assets is enjoyment but, nonetheless, they are playing an increasingly pivotal role in the alternative investment landscape. In considering these, a trustee should apply the same analysis they would for traditional investments, namely assessing the risk, return, income and liquidity profile. Passion assets carry their own set of risks, as they are often less regulated than mainstream markets; have shorter track records or less data available for transparent decision making. They also commonly require higher entry points than traditional investing. It is of the utmost importance to conduct rigorous research before selecting which alternatives match the specific requirements.
Let’s explore this further with a bottle of wine! The fundamentals of fine wine investing come down to two factors: supply and demand. As fine wine matures and improves with age, it becomes more desirable – and therefore valuable. Over time, the consumption of fine wines increases the rarity of certain vintages, pushing the price up as more investors seek out fewer bottles.
Fine wine investing shares some characteristics with private equity, such as relying on an expert for guidance, no income, the discipline of spreading your holdings over a number of different vintages and letting the investment mature. Trustees should seek the advice of a specialist in the research and selection, who can lever their networks of producers and merchants, as well as protecting the investment through suitable storage and insurance. This helps ensure the correct price is paid - whether buying or selling - the portfolio is appropriately diverse and the quality and provenance assured.
Executed well, the addition of fine wine, alongside a more traditional investment portfolio, has a number of benefits. Importantly, the return profile is largely uncorrelated to macro-economic conditions, providing a more defensive asset during financial market downturns.
Of course, performance is a key component. The Liv-ex Fine Wine Investables Index tracks the most ‘investable’ wines in the market. From its inception, in 1988, and across any ten year period, the compound annual growth rate averages 11.6% and has never experienced a negative return. All this with an annualised volatility of just 4.1%.
According to Cult Wines, fine wine returns display remarkable stability compared to a range of other asset classes during market downturns. For example, when the COVID-19 pandemic hit in early 2020, fine wine’s downturn was both shorter and less severe than most mainstream financial assets. At its 2020 low, on 21 March, the Liv-ex 1000 had only declined by 4.0%, compared with double-digit losses in most equity markets.
Things looked similar during the Global Financial Crisis (GFC) of 2008-2009, when the same index dropped circa 10%, from its peak in August 2008, to a low in December. At this point, it began a steady recovery, recouping all its losses by the end of 2009. By contrast, major equity indices plummeted by over 30% and took much longer to recover.
Keeping an open mind to alternative investments is a characteristic to be encouraged in trustees. Real assets – such as wine - can be particularly attractive amid expensive equity and bond markets that are susceptible to shifts in government and central bank policy – the very environment today. Moreover, as a real asset, they provide a natural hedge to inflation.
Affinity supports a number of clients - though their structures - in fine wine investing, collaborating with experts in this space. This asset class has proven to be attractive in a number of ways – cheers to that.
Please do contact us with any questions.
