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The Top-Performing Alternative Investments: Fine Wine


Bottoms up: Premium, first-growth varietals have historically yielded a steady 12 to 15 percent annual appreciation.

Wine has been valued as a liquid asset since ancient times. Its market has only become more complex and far-reaching with time.

How It Works:
Traditionally, people who invested in wine did so independently. They researched the field themselves and either acted as their own agent or worked with a professional to buy and sell at auctions. These self-taught expert collector-investors dealt largely with high-value and high-return wines like Bordeaux, Champagne and Burgundies, those most likely to increase in value over time

But for the uninitiated, wannabe collector, another entree into the alluring world of fine wine investing is via wine funds. Once only based in Europe and the Cayman Islands, two such funds including The Elevation Wine Fund and The Wine Trust offer prospective collectors access with American companies. Acting like a mutual fund, investors pool their money, with typical initial investments running between $20,000 and $50,000, into a portfolio of investment-grade wine. The Elevation Wine Fund, however, requires $250,000 upfront. Managers then buy, hold and sell the commodity, most often cru classé Bordeaux for its consistent gains, into the closed-end fund.

Who's Investing and Why They're So Good at It: Successful investors zero in on old and very rare wines because they maximize profit. Lloyd Flatt, one of the country's most prominent wine enthusiasts during his lifetime, with a cellar once boasting 15,000 world-class bottles, concentrated his collection on priceless varietals and vintages dating to 1784. His cache of wine treasures included 1929 Château Mouton-Rothschild, 1953 Château Pétrus and 1806 Château Lafite Rothschild. He meticulously cared for the bottles in a temperature- and humidity-controlled "wine house" in New Orleans. After his death nearly three years ago, 1,500 of the bottles from his collection reaped over $1.2 million at a Sotheby's auction this past March.

The 1980s singer Chris DeBurgh has amassed a cellar of his own "ladies in red" after many years of collecting. Last fall, he announced he would be selling his most prized potables like a case of Lafite 1945, Latour 1961, Cheval Blanc 78, Margaux 1961, La Mission Haut Brion 1961 and a collection of Mouton vintages from 1945 simply because they were to precious to open.

Many professional golfers not only collect wine but produce their own wine labels. Fred Couples, Christie Kerr, Annika Sorenstam, Jack Nicklaus, Nick Faldo, John Daly and Greg Norman are all aficionados-turned-winemakers.

Earlier this month,
some $5.6 million worth of fine wines from the cellars of British composer Andrew Lloyd Webber were sold at Sotheby's Hong Kong.

What They're Making: As is the case with most investments, supply and demand of the market dictate what kind of returns to expect. That's good news for those in wine trading since supply of the liquid asset shrinks every time someone uncorks a bottle from one of an already-limited number of great chateaus. Bottles and cases of premium, first-growth varietals have historically yielded a steady 12 to 15% appreciation per year. However, Jeff Opdyke of investment advisory group the Sovereign Society expects Bordeaux's highly praised 2005 vintage to produce 20%-plus returns for investors buying now.

By the end of 2010, the value of Liv-ex Fine Wine 100 Index, the industry benchmark, saw record growth with a 40.5% jump while the 50 Index rose by 57%. Compare that to the S&P 500 Index and its relatively anemic 13% gains, or those made by a lackluster gold at 31%. The surge in the wine industry is directly attributable to China and it emerging class of wealthy people buying luxury goods.

Why They Really Do It: Collectors like Yahoo's former chief global marketing officer, John Costello, who saw a five-fold appreciation of his 1982 Château Margaux, told Food and Wine magazine, "I saw collecting as a great way to ensure the availability of my favorite wines." The fact that his cup runneth over with profit was merely a "very nice side benefit."

However, a relatively new crop of wine buyers, who aren't necessarily moved by the spirit, have entered the fine-wine game as a way to diversify their portfolios.

How to Get Started:
If you decide to go the non-investment fund, DIY route, the safest way to get into the market is by investing in first-growth and top vineyards. Opdyke advises new wine investors to start their collections with cases of 2005 Bordeaux like Ducru-Beaucaillou, Pape Clement and Pavie-Macquin, which run $2,000 and $4,000 per case. As a rule of thumb, the highest demand and quality are found in vintages touted by investors and critics and carry a rating of at least 95.

Amateurs Be Warned: There's no more sobering experience than finding out your prized new investment is a counterfeit. According to some sources, wine fraud -- AKA "new wine in old bottles" -- comprises 5% of second market trading. In one particularly egregious incident, a 100-point case of 1982 Chateau Mouton Rothschild was sold at auction for a £14,000 ($23,000), using empty bottles and a blended bogus vintage. Fraud is becoming increasingly common in China, where the empty bottles of prized wines are sometimes collected from bars and restaurants and sold to scammers who run a refill and re-sell operation.

Another hitch to investing in wine is cost. Like hedge funds, wine-index investing carries hefty fees at 2% of assets, 20% commissions and 5 to 10% penalties for redeeming within the first two years. However, early termination fees may be doing investors a favor since three to five years is the minimum investment commitment necessary to maximize profit.

Finally, if you want to avoid a "grapes of wrath" scenario, resist doing anything with your bottles. Don't disturb the original stamped container or remove even a single bottle from the collection, and never partake in your investment. As tempted as you may be to show off your Chateau Montrose 2003, don't display it in your wine rack. Don't even store it in your own cellar. In order to maintain market value, investment-grade wine must be kept in a professionally managed facility.
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