Can fine wine deliver a return for pension investors?

A case of wine to illustrate story on pension pots

Financial planning in association with Scottish Widows bannerAs the prospect of unlocking savings built up over many years becomes a reality for around half a million pension savers, many are already caught up in the process of deciding what to do with their pension pot.

According to a survey by pensions consultancy Avacade Future Solutions (AFS) over 92 per cent would consider alternative investment products, including gold, silver, forestry, power – and fine wine.

The research was carried out among the firm’s own database of 10,000 individuals, average age 49, who are considering how best to ensure they have adequate pension provision when retired.

So, why would someone who is releasing funds from their pension choose to invest in wine?

It has had its ups and downs but, over the long run, wine has consistently outperformed the stock markets. Comparing the markets over the past ten years Forbes investment journalist Carl O’Donnell found that between 1993 and 2013, a diverse portfolio of investment grade wines would have returned 13.62 per cent, more than double that of the S&P 500.

Serious investment

Fine wine, by definition, improves in the bottle. It is the only luxury good to get better with age, so consequently desirability and demand increase over time. At the same time, supply decreases. Fine wine is finite, and the offering from a given vintage cannot be replaced.

David Jackson, director at fine wine investment advisers Amphora says: “Unlike other physical-asset classes, which tend to have a single homogenous price, the wine market is broad and deep, with many producers in many locations offering their wares over multiple vintages. In many ways, these are like sectors and stocks, and a portfolio approach can be employed to manage and mitigate risk.”

What, traditionally, has held back intuitional investment, is the perception that pricing is still in the wild west, which is in fact untrue.

“The major merchants, in effect, act as competing market-makers. From an ‘offer’ price perspective, the market is incredibly efficient,” he says. “The caveat is very old wine, where pricing is rather more like the art market, so novice investors are well advised to stick to young wines, which are fungible and most frequently traded.”

A bigger challenge for wine investors is the absence of a meter to understand ‘fundamental’ value. In fact, there is no ‘fundamental’ value as the underlying product is simply a consumable drink.

“What is therefore essential, is an arbiter of ‘relative’ value – something we address at Amphora with a complicated algorithm developed over many years. Without such a tool, investors are just shooting in the dark,” explains Jackson.

Investors beware

What should those releasing their pension funds be aware of? In a nutshell; scams.

“Sadly, the unregulated nature of the market has attracted more than its share of rip-off artists,” he says. “Scams tend to fall into two camps; being sold, arguably, the right wine, but at a horrendously hiked price, thereby preying on the ignorance of the buyer, or not receiving their wine at all.”

Buyers can check prices by way of price comparison website, while a call to the warehouse can add comfort regarding the second problem, although this not a failsafe measure.

Companies displaying the Wine Investment Association kitemark have been subject to an annual stock audit by Mazars Accountants to ensure good practice.

Prospective investors should seek good advice, ideally from a company employing modern, sophisticated qualitative techniques.

Wine should be stored in a bonded warehouse, say experts. Nothing will upset your investment return more quickly than taking the stock home.

Due diligence is imperative. Investors need to understand fees, commission, and most importantly spreads, and check they are being offered a fair price

“And if it all goes wrong, contrary to the all too familiar sign-off from the popular press, you can’t drink it,” warns Jackson. “This is a serious investment; treat it as you would your share portfolio.”

Taking regulated financial advice before making any significant investment decisions is always a sound move, while many employers are providing financial education programmes for employees who need help in planning their retirement finances.

At the very least they can avail themselves of the new Pension Wise service being offered by The Pensions Advisory Service and the Citizens Advice Bureau, says Mark Smith, partner and head of Pensions practice at law firm Taylor Wessing.

He adds: “If nothing else, they should remember the old adage: if something seems too good to be true, it probably is.”

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