Fine wines have proven to be less volatile than other major alternative investments, and offer superior risk-adjusted returns as part of traditionally diversified portfolio, according to a new report by wine investment management specialist Cult Wines.
The Alternative Investment Report 2019 benchmarks the financial performance of fine wine against a range of alternative investments including hedge funds, real estate, commodities and fine art. As a tangible asset sharing many of its characteristics with major alternatives and un-correlated with the core financial markets, fine wine was shown to be a very attractive investment option.
Between 2015 and 2018, a portfolio which included fine wine as an alternative asset would have delivered a higher risk adjusted return of 8.63 per cent when compared to one that did not include fine wine. When both hedge funds and fine wine were included as part of a portfolio comprising multiple alternatives, the Sharpe ratio more than doubled from 0.4 to 0.93, making it the best portfolio for risk adjusted returns. The return for this portfolio increased to 8.20 per cent versus 5.05 per cent for a traditional portfolio.
Over a 10-year time horizon, the risk adjusted return remained the highest at 8.88 per cent for the portfolio including fine wine as the only alternative asset. Comparatively, the Sharpe ratio for the portfolio, including both fine wine and hedge funds, stood at 0.77 with a risk adjusted return of 8.40 per cent. A Sharpe ratio of 0.75 and return of 9.00 per cent could have been achieved when including both real estate and fine wine as alternatives within a portfolio.
The report also found that, whilst most alternatives performed negatively in 2018, fine wine performed strongly and delivered a return of 9.2 per cent; in stark contrast with the -13.8 per cent and -4.8 per cent seen by commodities and hedge funds respectively.
Fine wine outperformed both the S&P 500 and commodities during the equity market downturn of 2008 demonstrating that fine wine, as an asset class, provides diversification, reduces risk and increases returns. In an investment context, the lower the correlation to other asset classes, the higher the diversification benefits an asset offer. Correlation between commodities and equities has varied dramatically over the last 10 years, ranging from 0.34 to 0.61, whereas fine wine’s correlation is consistently low, between 00.09 and 0.12, suggesting fine wine can provide very effective diversification benefits for investors.
Olivier Staub, Investment Director at Cult Wines, says: “Alternatives allocation has become more common in the wealth management industry, though it may have mixed results depending on the objectives. Our research makes a strong case for the addition of fine wine to more traditional portfolios. Its low correlation to other asset classes (including other alternatives) and the excess returns generated indicate that exposure to fine wine provides resilience in tough market conditions combined with the opportunity for capital appreciation.”
Simon Black, Head of Investment Management at Dolfin, adds: “As part of a prudent portfolio diversification strategy, Dolfin looks to include a range of alternative investments for many clients. Fine wine has a low correlation to equity markets, has historically shown strong capital appreciation, and secondary market liquidity has improved significantly in the last decade.”
