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II. Market Summary
III. Diversification is the Word: A Broadening Market?
In The News
IV. The Rudy Kurniawan Trial
V. Noble Crus – Another Fund Bites The Dust
In commenting on the market over the last few months, it is worth dividing the commentary into two sections; Bordeaux and ‘The Rest’ as the fortunes of different sections of the market have fared completely differently. It would appear that we are witnessing a broadening of the market. As Mike Veseth recently commented in an interesting article on winsearcher.com, if this ‘recent trend to expand investment beyond Bordeaux were to grow so that Burgundy, the Super-Tuscans and Champagne became more than a niche (alternative alternatives, I guess you’d say), this might well help the entire market expand. This would be to the benefit of everyone, including Bordeaux, by making the category more attractive to investors who want alternative investment products but with mature market structures.’ I have therefore taken a closer look at the diversification route in Section III of this report.
II. Market Summary
If we look back on the Bordeaux en primeur period from May to July, it is clear that this has impacted general trading of Bordeaux beyond just the latest vintage. Historically, this period has been the key to the figures and fortunes of the UK fine wine trade. Concerns over price, or the ability to trade the just-released vintage, invariably lead to paralysis. So much of the trade is geared up to make hay while the sun shines, that when (to continue the metaphor) a rather cooler period ensues, it takes time for normal business to resume. There can be an overhang of inactivity or even a loss of confidence which can impact market prices for inventory held over the summer months as well as the volume of trade transacted. If we wind back the clock, this was certainly the case in 2012 after the anti-climax of the 2011 Bordeaux vintage. You will recall that a touch of panic ensued, the price of high value wines fell and ‘distress value’ stock was readily available in the market. This year, the market has been becalmed by the inability of Bordeaux château owners to engage with their market on the key question of en primeur price, but trading of back vintage stock has continued in a sustained - if pedestrian - fashion.
Crucially, we have seen greater resilience in the market this year. Although early year gains by leading Liv-ex indices have slipped a touch, this could not be termed dramatic. Could this be an indication that the market has found a solid base from which to build? The Liv-ex 50, an index of the last 10 physical vintages of the five Bordeaux First Growths, illustrates the difference in circumstance clearly if we look at its performance up until the end of August.
Comparison of the Liv-ex 50 : 2012 vs 2013 (January to August)
In the first quarter of 2012, we see positive growth leading up to en primeur, but the market’s faith was shaken as en primeur offers failed to ignite the trade. It is interesting to compare these periods as they portray entirely different trajectories. In 2013, the Liv-ex 50 has virtually maintained the same level; currently marginally ahead of its starting position in January.
As for the Liv-ex 100 (the broader index of the 100 most traded wines, not exclusively Bordeaux) it has run flat for five months now, closing August at 272.72 (down just 0.10% on the previous month). The Liv-ex 100 is a modest 4.58% up YTD, which is in line with all the major Bordeaux-dominated indices that Liv-ex monitor.
Liv-ex 100 – Four Year View
It has often been said that periods of growth in the fine wine market are driven by individual catalysts, but what is there on the horizon for the next few months to revitalise the fortunes of the Bordeaux market? This topic is expanded upon below.
III. Diversification Is The Word: A Broadening Market
There have been numerous flat commentaries on the wine market over the past few months and not without some justification. The major gauges of market sentiment do not paint anything other than a static picture if taken at face value. As commented above, the Liv-ex 100 is up a mere 4.58% YTD, gently ebbing but still struggling for positive direction. The Liv-ex 50 is not far behind, up 4.02% YTD. But does the performance of each of these indices shed light on what exactly is happening in the fine wine market?
There is little doubt that the fine wine market has changed over the last few years. After a dramatic peak brought about by Asian speculation and then speculation over Asia’s prospects as a wine market, things have cooled substantially. Market players will tell you that trade activity had to ease, as the rates of growth witnessed from 2010 to early 2012 were too high to be sustainable. I wholeheartedly agree. This cool-down had gained momentum from the global economic circumstance. Yet, whereas some degree of buoyancy has returned to many other asset classes, fine wine has, at face value, struggled to bounce back in any decisive manner. However, drilling into the data reveals that the simplicity of such sentiments is misleading.
Liv-ex remains one of the best data resources open to the industry. I would add that, while they do provide the best wall of data available, how visible to the public has it become? Just recently Liv-ex issued two graphs illustrating the fact that Bordeaux is essentially the source of malaise in the market, and by stripping out Bordeaux and, more specifically, the Left Bank of Bordeaux, the market could be deemed to be in rude health.
In an earlier market report I highlighted that the Bordeaux marketplace had been fuelled by excessive speculation. There were too many hoarders hoping to benefit from ever-increasing prices, relative to too few consumers buying with a mind to pull the cork one day. For the wine market to function, supply must diminish thereby forcing prices to rise. The private investor was not the only character in this drama to get carried away; the Bordelais took full advantage of a booming market and elevated release pricing to eye-watering levels that far exceeded the value of great, mature vintages. For a nascent market such as China, this proved to be a bridge too far. After an initial acceptance of the new status quo, Asian buyers started to question the value of purchasing expensive wines at an early stage when the wines were otherwise unproven outside of a critic’s score based on a barrel tasting.
Is it so surprising then to see that these nascent markets are being drawn to other wine styles? Value has become the focus and diversification has become the watchword. This scenario is not unique to new markets; Atlas’ sales data for the UK reveals the same trend. The Liv-ex chart below highlights how other regions have fared by percentage share of trade by value on the Exchange over the last four years (it should be stressed that we are only two thirds into this year and therefore the purple columns for 2013 are likely to move well ahead of the heights of 2012 by the end of the year).
Regional Percentage Share on Liv-ex
These percentages of trade may look modest next to the value of Bordeaux traded. At its peak in 2011, Bordeaux accounted for 96% of trade on the Liv-ex exchange but has now fallen to 83.4%. It should also be noted that the average case values will be far higher for Bordeaux than any of these other regions. For example, Liv-ex comments that the average case value for a Super Tuscan comes in at £1807 whereas the average for a Bordeaux First Growth is more than two and a half times that at £4658 per dozen bottles.
In addition, we can assess demand by looking at the bid/ offer ratios for the major regions. These ratios are calculated by dividing the total value of bids by the total value of offers, which then provides an indication of market direction, demand and liquidity as related to the Liv-ex exchange. According to Liv-ex, 0.5 is historically the point at which prices begin to creep up. As of July, the exchange registered 0.47, having peaked at 0.75 in January. As interesting as those statistics may be to the overall health of the market, they are still skewed by Bordeaux and do not illustrate market health of other categories outside the dominating region. To understand current trends, it is far more instructive to view the YTD ratios of the individual regions as per the graph below.
Bid:Offer Ratio by region – January vs July 2013
All current data points to a process of diversification, which is starting to impact the fine wine market. I have previously commented on both the Super Tuscan category as well as the surge of interest shown in vintage Champagne. If these buying habits are continual – and there is little reason to foresee the circumstance changing – then Bordeaux’s dominance will still remain, but in a marginally diminished state. Historically, diversification has occurred during turbulent periods, only for interest to centre on Bordeaux again when stability returns. With a new market such as China maturing at a considerable rate, it remains to be seen whether a broader market will prevail or whether this is just a heightened section of a cycle which we have witnessed before. Regardless of market share, categories such as Super Tuscans and Champagne have shown sustained growth over an extended period, as illustrated in the graph below.
Performance of Liv-ex 50, DRC, Champagne 25 and Super Tuscan 25
The last two Bordeaux en primeur vintages have been weak and may have further exacerbated Bordeaux’s woes. Yet one strong vintage backed by sensible pricing and euphoric critical acclaim and we would almost certainly see the region return to former glory. Presently general consensus would suggest that the majority of Bordeaux values are on a plateau and unlikely to move significantly in the foreseeable future. Investors and trade alike are questioning how long the movement will remain sideways, which is no doubt fuelling diversification into these other areas as no catalyst for change is apparent. It is far too early to pronounce on what the 2013 vintage might hold for Bordeaux but with a late vintage in prospect the weather pattern in October will hold the key to the quality. It will certainly prove a pivotal campaign for the merchants of the region.
IV. Drilling Into The Detail
It is difficult to illustrate that an index can mask performance within a specific category. The following table which reveals the component parts of the Liv-ex 500 highlights the difference in fortunes within the Bordeaux category. As I have commented previously, the Right Bank (St. Emilion and Pomerol) has proven a resilient category these last few years. The broader and lower-priced Right Bank 100 is leading the way, with a solid 11.3% rise year to date. In fact, it has posted its thirteenth consecutive monthly gain which may have gone unnoticed when lost in a larger index.
Here is a graph showing the component parts of the 500 index. Given that the major indices are under 5% up YTD, the performance of the RB 100 (Right Bank 100) is notable, when compared to the FW50 (First Growth index).
Components of the Bordeaux 500
This highlights the point that in general; Bordeaux may have fallen out of favour, but pockets of interest continue and buyers are continually purchasing from specific estates in specific vintages.
A random selection of Left and Right Bank Bordeaux also highlights this. Look at the growth in price for La Mission Haut Brion 1998 or Pavie 2000 for example. Both wines are entirely bucking the trend, a stark contrast to the LIv-ex 100 (included for reference).
As regards the selection above, I find it difficult to see value in Château Pavie 2000 at £4561 per 12 and yet it is still well-bid on the Exchange and in volume. The current state of the Bordeaux market will continue to throw up these anomalies.
Simon Larkin MW
V. Rudy Kurniawan – Trial Postponed
Rudy Kurniawan, who was indicted last year for sales of fraudulent wine, has bizarrely managed to push the date of his court case back four months after a surprising decision to change his defence council. There are suspicions that millions of dollars of counterfeit wines currently lie in US collections and that as a consequence of various auctions, high volumes are now circulating Asia as well.
On the new date for trial, set for the 9th December in New York, the Indonesian-born millionaire will be represented by Jerome Mooney after tension rose between Kurniawan and original attorney, Michael Proctor. Winemakers from Domaines de la Romanée-Conti, Roumier and Ponsot will testify by video as Kurniawan is charged with having sold fake bottles of wine under each of these producers’ labels (Wine Searcher, August 2013).
Kurniawan was an anomaly in the wine market; a young, wealthy and Indonesian ex-pat he was quickly absorbed into the west coast’s wine elite. He was well-known for his bacchanalian parties, well-attended by wealthy oenophiles and celebrities. It is estimated that since the early 2000s, he spent and sold millions privately and at auction. This is perhaps best illustrated by the two, single-cellar auctions he consigned to New York-based auction house Acker, Merrall & Condit, which achieved over $35 million (Vanity Fair, July 2012).
Kurniawan was arrested on the 8th March 2012 by the FBI at his home in California. A search revealed highly sophisticated wine counterfeiting materials including wax, stamps and labels. Further investigations connected Kurniawan to large purchases of inexpensive mature Burgundy from a major Burgundian negoçiant, which are thought to have been re-bottled, re-labelled and sold as more prestigious vintages and wines. At his arraignment last May, he pleaded not guilty; his lawyers argue that his house was searched illegally. If found guilty Kurniawan faces up to eighty years in federal prison.
Friend of Atlas, Laurent Ponsot, of Domaine Ponsot, has been at the centre of the controversy, having been among the first to voice concerns about fraudulent stock in 2008, just before 97 bottles from the domaine were put under the hammer at an Acker Merrall & Condit auction that April. The wines in question were a bottle of Clos de la Roche 1929 and 38 bottles of Clos Saint-Denis from 1945-1971. Oddly enough, the domaine did not produce the wines in any of these vintages; production of the former began in the 1930s and the latter in the 1980s, which surely says something about Kurniawan’s nerve, if not the auction houses own in-house checks. The twenty-two lots, valued at $1.3 million, were pulled dramatically from the auction halfway through the sale under the supervision of Laurent Ponsot, who extended travel plans to New York to ensure that the wines were not sold (Vanity Fair, July 2012).
A game of cat-and-mouse ensued and it was, for a time, unclear if Kurniawan was a victim or a culprit. He maintained that he had purchased the wines from an Indonesian oenophile but was unable to provide Ponsot with any contact details for the collector (the two phone numbers he provided were for a fax machine and a shopping mall!). It was Ponsot who discovered that Kurniawan was purchasing lesser wines from Burgundian négociants, which seemed uncharacteristic of Kurniawan given his declared penchant for expensive Burgundy. Ponsot has since been working closely with the FBI to unravel what is now deemed one of the largest wine fraud scandals in history.
VI. Nobles Crus – ‘And another one gone, and another gone, another fund bites the dust’
Nobles Crus, a Luxembourg-based wine fund, was suspended in May 2013 as it could not meet the redemptions requested. This has raised concerns as to how the fund will dispose of its holdings, which includes over 60,000 bottles – 35% of which are thought to be Lafite and Domaine Romanée-Conti.
The Commission de Surveillance du Secteur Financier took action due to the fund’s liquidity problems; Nobles Crus has been suspended from paying out redemptions or accepting new funds from investors. From September 2012 to March 2013, the assets dropped from €109 million to €91 million. Miriam Wilson and Michel Tamiser, partners of Elite Advisers, the fund’s parent company, notified investors of the suspension by letter, writing, ‘we are well aware of the importance, in the current circumstances to sell at market price and not too hastily sell in order to free up the necessary liquidity to honour these redemption requests.’
This need to ‘sell at market price’ raises an interesting point about the fund’s valuation system, which has come under fire by the fine wine market at large as we reported in this year’s Q1 Market Report. Since its inception in 2008, Nobles Crus has advertised 13% annual returns and consistent monthly gains since 2011, yet the Liv-ex Fine Wine 100 Index has fallen 23% during that same period.
Unlike many of its competitors, who use Liv-ex for an independent valuation of their holdings, Nobles Crus values the portfolio monthly on four prices; two from wine merchants in Europe and the UK and two from leading auction houses. While Nobles Crus argues that this is the only way to value rare wines which seldom have prices on the exchange, other fund managers have added that Nobles Crus would be unlikely to sell wines above any Liv-ex market price.
According to investigative reporting carried about the Financial Times, the profits made by Nobles Cru are from unrealised gains on inventory rather than from actual sales. Last year the FT engaged Liv-ex in valuing Nobles Crus’ 50 largest holdings of Bordeaux. According to Liv-ex, the stock – which represents one third of the fund’s portfolio – was worth €26 million, while Noble Cru valued that very same stock at €36 million – 37% higher (Financial Times, September 2012).
There are concerns as to how the fund will liquidate its 63,000 bottles and en primeur wines, primarily comprised of Bordeaux and Burgundy. The fund is unusual in that it holds pre-1970s Bordeaux and Burgundy, 23% and 9% respectively, which in itself raises concerns over provenance and the incidence of potentially fraudulent bottles being included in the collection.
Competitors, such as Wine Asset Managers hold approximately 5% of pre-1990s wines and the Wine Investment Fund holds nothing pre-dating 1990. Domaine de la Romanée Conti and Château Petrus, for example, will not authenticate older bottles as they do not have records for such mature vintages. The fund’s website states that part of its strategy is to include a selection of ‘highly liquid wines’ such as Lafite and Domaine de la Romanée-Conti, which make up 18% and 17% of the fund respectively, though such claims of liquidity would not easily apply to very mature stock lacking in provenance or verification.
This is one of a few recent blows to the fine wine fund arena, coming just as Andrew Davison, founder of the Vintage Wine Fund, announced its conclusion at the end of June. At the peak of the market in 2008, the fund was valued at €110 million but it has been unable to recover from a recent flood of redemption requests and forced sales. Additionally, the Financial Conduct Authority has just announced that, as of 2014, unregulated collective investment schemes (including traded life policy settlements, overseas property and fine wine), can no longer be advertised to ‘ordinary’ investors and will be limited to sophisticated investors, defined by an annual income of over £100,000 or having over £250,000 to invest.
Given the recent trend towards diversity, it is interesting to consider that the majority of leading wine funds focus on the upper echelons almost exclusively and seldom branch out beyond the leading dozen wines. Again, this is possibly further evidence of a broadening market, echoing the comments of Mike Veseth in his 2nd September article for Winesearcher, which we cited above. Interestingly, Veseth maintains that should this diversification persist, it could help to develop the more mature market structure that fine wine investment arguably lacks as the volume would not wholly be centres on such a small number of wines.
Hannah Van Susteren
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