Inside the World of Wine Investment: In Conversation with Rostislav Petrov & Matthew Small

Welcome to the Aurene Global Podcast. Aurene is a global research and action institute for the future of fine wine. In this series we bring you conversations with thought leaders in and adjacent to the fine wine world to discuss how we as an ecosystem can ensure the collective future of fine wine. Welcome to this new episode of the Aurene podcast in conversation. For this week episode we explore the hot topic of wine investment with Rossi Petrov and Matthew Small, respectively associate director and senior portfolio manager of the London based company Kru Wines established in 2013 and awarded with a Queen's Award for Enterprise for International Trade in 2020. Kru Wines were also repeatedly quoted as an influential actor when Felicity and I were studying the Singapore wine market for our latest report. So we decided to contact them and ask them all of our question on a fascinating topic that's tears up so much passion in the wine world. Kru's bring up the world wine investment and you will for sure witness a lively debate between the poetic drinker accusing wine investors of dirty speculation resulting in terrible price increase and depriving them of their favorite nectar while the Savi investors will tell you all about the slow risk investment providing stable returns good counterpart to other assets and tax efficiency in many countries. Many trade members will also argue that wine investors actually don't exist and that the secondary market is simply fueled by a collector who happened to buy too much. Behind the scenes we've met many producers who dreamed to position their wines in the investment worthy category and wonder about the levers that will help them get there as fast as possible. So how does wine investment work? What are the fundamentals that a wine must have in order to represent an interesting investment? How does one measure risks and potential return? Is wine just another financial asset? What role can wine investment play in the future of fine wine? I am your host, Pauline Bicare and this week we are debunking a cliche or two on wine investment. Hi Matt, hi, Brottis loves. Thanks so much for being with me today. I'm quite excited about this conversation because we are going to talk about wine investment and investment wines today but before we take a dip dive in this two fascinating topics I wanted to talk about crew first and your and your company. So can you briefly tell me you know when and why you were founded and what's your core expertise? Pauline thank you very much for having us and it's a pleasure to be here with you. Of course happy to to talk a little bit more about the crew wine so the business was founded back in 2013 by Gregory Swodberg. Wine lava was an entrepreneurial mind, Gregory sort of gap in the market. Even today the wine industry is considered to be quite traditional old fashioned old school in a way so the idea was to create slightly more modern approach to buy and collect finest wines in the world and this is where the wine was born. And so what did you do in a nutshell essentially? So we cater mainly to private individuals whether it's people who collect wines for drinking or have ability to build bigger collections with some of the wines being resolved in the future. We very much focus on a high end of the market so the average bottle value of the wine would be just under 200 pounds that's in bond before taxes and this is probably since day one the company was very much focusing on the segment and again when it comes to region we very much traditional in a sense that we work mainly with French and Italian wines in Bordeaux, Baguendi and Champagne in France and Pimond in Tuscany in Italy would be kind of the main regions where we focus. So if it can be the devil's advocate for a second you mentioned that the you know the company was founded because Greg seen the opportunity for a more modern approach to collecting and you know investing and recommending wines to private individuals. How is crew maybe a bit more modern that what was found before is it because of the digital platform because of the way you engage as consumers like what differentiates you from your competition? Exactly that so we very much rely on a digital world these days on a digital platform that we built in house we don't want to take the authenticity of the wine and you know the history the long history of this amazing estate that we're working with but to be one rather to give a more accessible way for the consumer to approach those fine wines without making it you know very complex and confusing in a way. But does it mean that you have less of a personal approach because I mean my understanding again I wasn't I was in the UK 20 years ago collecting wine but my understanding was before it was very much a one-to-one kind of relationship that you would have with your advisor that you would meet you know for a coffee a glass of wine and you would talk about your option into investing and you know when you had something great you would phone you and ask you if you if you were interested do you still have that relationship with people or does the digital space allow you to to scale it's up in some way? We totally do have that one-to-one approach and every client has the individual tailor-made portfolio so collection when we build for them what we do differently is we use the technology more to produce the data to provide the information to the consumer to make those decisions much better and much wise. So it's keeping the core service of personalised approach but having the data to back it up into I suppose maximize investment we're going to talk about it a bit but also to give more options for collection. At this stage of the interview I've got to ask you because when we we are going to talk more about wine investment and you know buying and resale on the secondary market as I was prepping for this interview I asked several people their own definition about what the secondary market was and I had at least five or six definition so I wanted to ask you you know what's your definition of the secondary market and how do you fit within that secondary market what's your place in it? Thanks to the question Pauline and I think it's important to also then define the primary market so for us the primary market is direct from the shadow or the domain or the producer then the secondary market is anything that's trades subsequent to that. So would a supermarket be the secondary market for example or a cavist or I think the supermarket to get an example unless they have their own bakery on site that would be the primary market. So if it's not direct from the source of production then for you it's the secondary market. I agree. Yeah because in some definitions that I collected it had to hit the consumer first so the secondary market was when the wine went to a consumer and then back on the market after that but that's not your definition. The finished product originally sold from the producer. And so how do you fit into that secondary market what's your place? So we actually are in both markets so we get allocations from the primary market that demands the shadows. So for example we're kind of towards the end of burgundy EP 22 so we had direct allocations from a number of the shadows there but then we also trade in the secondary market so we would look at back ventures that are maybe will price them based on our kind of fundamentals and then see are they underpriced versus where we think they should be or where we think they could go in the future. So I understand that you know live X is not your competition live X is one of the platform on the which you buy and you buy and you source your wine on the secondary market right? Sure so we would use live X as both buy and sell liquidity. So it would be a one of our sources but then we speak to merchants all around the world we get wines as I said from the producers so we've many different sources of both entry and exit liquidity. And auctions as well is that something that you source from as well? I mean we don't do much buying from auctions but we may use it as an exit channel for certain products if it's appropriate. Okay and restaurants and private sellers from people as well. We would do both of those yes. And one of the questions as well that I was thinking is when you deal in your part of the secondary market how do you measure your operation? Is it in terms of how many clients you have, how many bottles you sell, how much revenue you make? What's what's the best way to measure an operation like yours? I mean investments the best way is actually return to clients. Okay. So that would be the main metric that we would look at what kind of return are we generating to clients and another way to look at that return is how is it versus your benchmark? So thankfully because of the live X we now have a number of indexes. Are we in benchmark that we use is the live X 1000 and the reason why it's the most broad-based investment index? That's the closest fit to the wines we buy and sell for our investors. And for collectors I suppose and we're going to spend a bit of time differentiating both of those aspects investing and collecting. But for collectors, I suppose it's a bit more classic in terms of number of clients in bottle that you sell every year. Like if I was, you know, a retailer of some sort, or a private merchant. Exactly. I think the UK market is very spoiled in the sense that, you know, we have such a great exposure to wines from all over the world and it's a market that very developed, very kind of intellectual when it comes to a fine wine. So there is a lot of competition. That means that consumer would regularly would like to be offered something new, something unusual, something different. Obviously the course still would be probably classic regions, as we mentioned before. But there is always that interest in something new, which grows their number of SKUs and number of bottles. And we're going to talk about your customer now in your clients and who they are. But I just had a question that pops into my mind because you said there's more and more wine as well in the UK market and we are really spoiled. They are wines from everywhere. Consequence of that is that the consumer themselves are spoiled for choice and sometimes a bit confused by the choice. That's the increase of choice and the increase and the diversity of the wine market and the premium wine market that we've seen over the last 20 years. Does it mean more client to you? I mean the multi-verse and complex the market, the more work you have is at a direct relation to that. From an investment standpoint, the diversification in the markets, very, very good. The reason why that is, I mean we only have to go back to 2012, where 95% of the wines traded in livex were Bordeaux. Then we had a crash in the Bordeaux market because the kind of ramp up prior to that was due to China demand and tariffs imposed by that government caused a restriction in the demand for the Chinese market. And then the market didn't crash after but it definitely corrected. So when you have 95% of a market based in one region, that's a risk. Of course. Yeah. And then if we then diversify or even step forward to today, I think the market for Bordeaux is now around 40%. And as me at room for other great wine regions like Burgundy, Champagne, California to really step in and fill up. My question at that stage was more because there are more diversity and complexity of wine, it can mean that it requires more knowledge. Because before you had to know your 60, you know, first, you know, clicklancy of Bordeaux and now you kind of have to know so many things. And I was wondering if that necessity for knowledge for all this wine meant that you had more business because people need more and more help making sense of all the choices that they have. Or if that doesn't impact because they already have a certain level of knowledge and they just need to adjust. We have of course here to advise our clients, you know, to give them direction, to let them try new wines and explore different new regions. It does mean that we have to, you know, sharpen our knowledge and go and visit Austrian producer and taste the wines and perhaps organize the tasting with some of those clients for them to discover this specific wine region. So it's definitely have changed in the last 20 years but in my view only in a positive way because, you know, wine world was, it's always been, you know, such a great place to be but a little bit undiscovered. And then now, again, we keep in repeating technology but it definitely helps to push some of those up and coming regions into clients portfolios in Assellas and to get that acknowledgement of the quality of the wine from the wines which we never really tasted before. We've mentioned your clients and your clients help for, let's dive into that. And my first question is who are there? Who are your clients? What type of people are you working with in terms of gender, in terms of age, in terms of geography? Who are they? I had courtesies in London and naturally majority of our clients are UK based. We also provide services to a number of collectors and connoisseurs from around the world especially when it comes to a full portfolio management. However, most of the wines will still remain professionally stored in the UK so in our professional. Do you store them yourself? I mean, is that part of your service? Yes, we do offer the storage service. We work with a third party provider, professional bonded warehouse which is the oldest company in the UK to provide such as services. So the temperature control warehouses which is perfect for wine. I think the wine industry is very traditional and it remains male dominated. However, if you do see more and more women getting involved in wine, which is I think is great. When you say more and more is that they've gone up from 5 to 7% or do they represent, are we talking 10, 25, 50? Because depending on the market, we've seen very different data on the women in fine wine. I don't want to make up numbers and give you the wrong. I was in the company for last four years and I do have more and more female clients. I mean, rightly so because statistically women are much better tasteers when it comes to wine. So I'm very, very happy with that. Is there any way we can segment your client? I mean, would the best way to segment them would be their motivation coming to you? Would be their age? I mean, what differentiate them the most from one another? Sure. So I think motivation would be the best way to segment them and there's maybe a spectrum there. So people who just want to drink and then people who just want to invest, but then majority are somewhere in between. They're investing a little bit or they're collecting and we may go into that definition later. Maybe we want to drink some later, but looking for wines to drink now and we tailor the service to basically specifically make that clients' needs. And how do you know if they want to invest or if they want to collect or if they want to drink? So whenever we acquire, speak to a new client, we kind of work out what their needs are. There's different ways to become a client crew either through the website where you make click on the link to learn more about investing or contact us directly or by via the eShop. And depending on the route our new customer comes to crew, depends on which part of the business contacts and first, but we'll have that initial discussion to client and see what exactly they would want and what part of the business is fitted to suit that client's needs. The other thing is well, internally we all kind of speak to each other. So I mean I specialize more in the investment side, but then I regular speak to the private client team and vice versa if they need some information in the wine market. They are very clear up themselves, but if something very specific they come to me. And we just really want to provide the best service possible for the client. There's a lot of cliches or like idiosphere as we say in French on wine investors like people project a lot about wine investors and who they are. Are they people that are, you know, the one that you deal with at crew? Are they people that are not interested at all in wine and they're here for the return? Because we've seen over the years, there's certainly an interest in terms of purely financial return. There's a lot of people that hate wine investors because they see them as people that absolutely have no interest in wine. Is that the case? There's definitely a real spectrum of clients we get here. So we do get people who solely buy wine to invest. As part of their investment portfolio, is it could buy gold or, you know, equity and that would be exactly the same for them? Exactly like that. And they've obviously been attracted by the low volatility, no capital gains tax, fairly consistent returns, high sharp ratio. And that is their pure focus is this is an investment for them. But then the majority of our clients are a mixture of both. They enjoy wine. It's a past time of theirs. And that's maybe what's attracted them to wine investing as a kind of a follow-on from their hobby. So it's a real mix? Yeah, so there is a hundred percent pure investor players out there because, you know, there's also that other idea that, you know, no one is a pure investor because everyone collects and sell because they've bought too much, but every profile exists. Well, and I think that's the interesting thing. What is the difference between a collector and an investor? Well, I'd love to have your definition of that. My kind of impression and definitely high wine investing seemed to start was it was quite a lot of rich aristocrats and businessmen in the UK bought and stored wine for their own consumption, but also potentially to profit. So is that investing or is up collecting? And then most of our clients that store wine will sell some and drink some. So I think that the definition between collecting and investing is a little bit blurred. Now, if it's a hundred percent to make money at the end, maybe that's pure investment, but is that collecting? I don't know. Yeah, and then for collecting can be diverse as well and there's several definition of collectors. So it's a fascinating spectrum. Yeah, I think a lot of people who invest in wines, like Matt said, it's difficult to draw the line. It's a bit of a gray area. A lot of people who invest the wines, they do enjoy a very good bottle of wine. But what a UK system actually helps to do is that, you know, bonded warehouses, you don't have physically access to those wines, meaning that when you store them and you see the prices are going up, you know, you can't just open the case and get one of the bottles out of the case and drink it. So that's a benefit from that. Yeah, yeah. Yes, for sure. So wine investors, we've seen that it wasn't that easy to define who they are because they're a bit of everything and everyone there's really a mixed bag of profile there. But is there a definition for wine investment? When we look at an investment wine, they're definitely in what people would probably regard as the fine wine bracket. So the upper end of the kind of diversification between the different areas. Now, we look at things I call fundamentals. So there'd be a number we would look up to satisfy as kind of an entry. The classifier is an investment wine and something we would offer to our clients. So the first thing would be brand. So that would be a producer that is well recognized and had consistent production over a number of years. Do you have any kind of measure? Like how would you measure recognition? Do you have anything in place? So, I mean, for example, the first growth classification would be one, the well known right banks, the top domains in Burgundy, Grond, Croube, Premier, Croube. We have an idea of who those top producers are often by price but not always. Another way we'd look at it is live X provide a live X 100-power rankings, which have their own way of identifying based on trade value and a number of other things. The top producers in wine investing. And then we kind of our own individual metrics that we track to check momentum of brands based on price performance. So we can kind of track which brands have strong momentum and which don't. So, reputation is one of them. You were saying for what makes an investment wine a wine worthy of investing? Yeah, absolutely. So, for example, a maternal-lefeet Rothschild of Fim's name throughout the world, even to Peebby, new people into wine. And it takes a long time to build up that type of reputation. And that's definitely something we would look for. When I kind of break down the things that have the most impact on price. And similar to other luxury goods, brand name is the biggest determinant of price. You were mentioning when we prepped as well. So, Brent, the power of the Brent based also on the consistency, the history. But you were mentioning the quality as well in the critic school, because that's often a question that we get is like, how important is the critic school in all of that? So, the quality would kind of break down into two parts. First off, would be critic score and the second is vintage. And the reason why we look at both is if we were to have 100.1 from a good vintage or a well-regarded vintage and 100.1 from say a last-regarded vintage. The good vintage predominantly will be more expensive despite having the same critic score. And although it's a subjective score, it gives us some measure to quantify the wine. And we can't actually then break down the accuracy of critic scores as well, based on if we look at the market price versus the critic score of say the last 10 vintage, you can then kind of work out how accurate they have been in the past and whether that's the best critic score to use to identify the value of the wine. How good are they? How big is the discrepancy between what the critics have predicted and what the market has shown? Well, I think the first thing to look at is how it's kind of changed over the last 15 years. And how many critics I suppose, because that was going to be my next question, I suppose, that 20 years ago that would have been three people. Exactly. Robert, Parker and maybe Jensis and some other respect. But how many people are you tracking today? So, we kind of have our preferred critics for certain regions. So, for example, if you're looking at Italy, we'll look at Antonio Gleone and Monica Lerner would be two of our main critics for that region. And we can then track basically how their scores have, as I said, correlated with price. And then we have kind of a good idea which critic we should be using for which region in the morning. Okay. And same thing for border, I suppose. But you might have a bit more critics that you follow in border. I think the border probably has a little bit more. The biggest fine wine region in the world. So, there's a lot of people who professionally taste things or Jane Anson, James Sarkling, obviously, wine advocate. William Kelly. Yeah, William Kelly from Wine Advocate, Neil Martin and Antonio Gleone from Venus. So, it's a little bit more people who analyze that region right. So, because of the size of it. Anyone from outside of the Anglo-Saxon sphere that has some influence? No. Nothing can be minding immediately. But I think there are probably critics probably in Switzerland and Germany who would specialize more in their local, you know, when a Germany comes to recent things. Yeah, yeah, but they're less impact. But I was, you know, we're going to talk about this a bit later. But the fact that the fine wine market is still, you know, the British bound being still the currency of reference for the market, even in today's world. Well, we've already brought some explanation about this because, you know, the in-bond warehouse is still such an amazing tool for wine investment. And also all the critics that are influencing the market are still very much Anglo-Saxon. I know that some of them are American or working for American publication, as you've said. But we can still see the influence of the UK market on everything. And I'm not that surprised that it's still in pounds. But I just wanted to go back to the fundamentals for an investment grade wine, which is if I summarize the power of the brand or the producer, the quality that is both assessed by critics school and the industry recognition of the vintage, how does scarcity fits into that? Because that's also a question that we often, does a wine need to be rare in order to be an investment grade wine? Well, to every rule there are exceptions. So, Dom Perignon, for example, would probably be a good exception. However, by and large quality and supply go hand in hand. And low supply tends to be a fundamental of top investment wines. But I mean, that supply value will change from region to region. And also, it's a low supply, but it's relative, right? Because it's always the fact that the wine needs to have more demand that it can supply. But that can still work for a big number of bottles, like you were saying, Dom Perignon can still produce millions of bottles a year. But still, the demand for Dom Perignon is still higher than the supply that they can supply, even if the supply is rather big from the beginning, right? I think price point does have an impact here. I think branding of Dom Perignon is probably one of the greatest in the world, not just in the wine industry, but the marketing is very, very strong. But then again, if you compare to the main ceremony conti, it's tiny production. Some of them are producing 300 cases. However, the price point is completely different, but there is always demand for those wines, even at, you know, so much higher prices, a thousand sub-bottle. There are many attributes in your investment grade wine that are similar to the fine wine attributes that we've defined. One of the attributes that we have in our definition that we haven't explored yet is the wine capacity to age. Does the wine need to be able to age in order to be investment worthy? Or is it more like a consequence just because it's good quality than it's going to age? For sure, the quality of the wine is often linked to its potential to age, kind of very simple rule as to why the price of the wine goes up is because 20 years later, out of 10,000 cases, they were produced, 8,000 were drunk. And the whole market is only left with 2,000 cases, meaning the demand for, you know, is so much greater. So the ability for the wine to age is definitely very important. And all of those fine wines have that ability, again, depends on the quality of the vintage, but, you know, we're talking 20, 30, 50 years plus, kind of. And so we've seen your definition of an investment wine. Now, how many wines do fit into that category? How many wines or how many brands or skews? How many wines are you dealing with when it comes to wine investment? I mean, we would be in the hundreds, and I think if we look at the live X indexes, the sub-indexes of the 1,000, you get a good idea of what investment grade wines are, because the majority of the wines on that index would fit our criteria and meet our fundamentals. I had a question, and we've discussed that when we prep the podcast, but I think that's a good question. But when you look at those investment wines and I don't have the live act list in front of me, but it's easy to see that the majority of them come from Pinanoare Cabinets, with the Neon Charges, and they are whites. And I was really wondering that's a 100% curiosity question and an exploratory question. But why is that? Because we've seen a diversity in the origin of investment grade wines, and they are from outside of Borsar in Burgundy. We've got Neonapere, you've mentioned it to Lee. There are a couple of other regions and wines that could fit into that, some in Chile, some in Argentina. But even when they come from outside of Borsar or outside of Burgundy, they are still made out of Cabinets of Inlluan, Pinanoare or Chardonnay for whites. And I was wondering why, if there's any explanation for that. I see, there are two main reasons for that. So Cabinets of Inlluan, Pinanoare, Chardonnay, and I would probably add Merlo as well. The great varieties that are easy to understand. They are more predictable and deliver joy to the consumer, even if the drink doesn't have that great deal of experience tasting that fine wines. This means that when the young professionals getting on their wine journey, these great varieties would be more appealing to them. Syra, Grinache, or Nebiolo for that matter, is more difficult to understand. The last one, for example, that Nebiolo has. A lot of similarity was pinanoare when it comes to aromatics. However, tan structure Nebiolo is completely different. But more similar to Bordeaux, which also explain why if you've been enameter of Bordeaux and Burgundy, I mean, at least to me, that's why I like Nebiolo because it's a bit of both. Yeah, even, I think it's even greater than tan structure. And then what I was trying to say, that, you know, if you novice to the wine world, and then you have sort of Nebiolo in front of you from a great vintage, the tan structure might put you off, because he just not used to such a sort of dry sensation. But the second reason is that the great varieties like Cabernet and the one you mentioned, Melo, Pinanoare, Chardonnay are more adaptable to different climates compared to the Syra and the Nebiolas again. You know, then Nebiola again, as an example, producer tried to grow it in USA, in Australia, and it just never produces the same quality wine that it does in Camont. And the great varieties almost became their own like a branch for themselves. So the Melo, it's just so well recognized as a link to the fine wine. Yeah, it's also the reputation of the grape. And we see that in the question as one, and in the conversation, when we have with fine wine buyers, is that when we talk about reputation, it's the reputation of the brand, the reputation of the region, but also the reputation of the grape. And all those three reputation comes together for consumers when it comes to what makes a fine wine. I like this part of the interview to, you know, get quite geeky about finance and investing, and you know, revise my economics from 20 years ago when I was at uni. And once you understand, you know, what it is about investing in wine and not, you know, investment wines. But first of all, how much do you need to know about wine to invest in it? I think you kind of enter that. You can go into wine investment, not knowing much, right? Because we've got you to advise us. Yeah, pulling up. That's an interesting question. I think, yeah, first off, if you're going to get into wine investing, do your research, speak to a number of different brokers, and then find someone you can trust because wine investing has evolved quite a lot over the last 20 years. So for example, maybe back in the day, it was just a small number of brands as we talked about. And the experience you needed, both maybe from a wine knowledge, but also from an investment knowledge, as an as vast as you need. Now, while the way we look at wine investing is a lot more kind of like how traditional assets would be valued by institutions. So say we were a new company or a new customer was to wish to invest or ask questions about the fine wine market. We would ask similar questions. So what a wealth manager would ask in the same way as what's your time horizon, what's your risk profile, and then also kind of what's your budget. And then we will basically tailor a portfolio, rind those kind of requirements. So just to give a bit more detail on that, we track the volatility, I think what's standard deviation amongst the returns of each of the wine investment regions, to see which have the most volatility. So volatility, if I just pose here, that means that the price are very is quite a lot, so that the price can go up and down very quickly, right? That's how you define volatility. Exactly or even a pedal reel simple way, risk, what's more risky? So then when we're building a portfolio for a client, say they're traditionally very low risk with what they do in their other investments, well then we might do a lot more border heavy, which traditionally has been the lowest risk region. If they want to take on a bit more risk, we would look maybe at regions like Champagne and Burgundy. But then we don't just look at risk, we want to look at return as well, or what we look at as a thing called sharp ratio. I was going to mention that, yes, because I've spent quite a lot of time studying it. Sorry about that, Pauline. No, no, that was fascinating, because I had no, I mean, I had no idea about it, and actually I had no idea it could apply to wine, right? Because I don't look at wine that way, but it's another very interesting way of looking at wines. And as everything in finance, those ratio are usually based on reality of things, so that's also what was very interesting for me to study. So please tell us what the sharp ratio is. Sure, so I think one way to look at it is having worked in markets for financial institutions before pension funds, hedge funds, these type of clients are a lot more focused on risk. While now working with retail investors, their focus is a lot more on returns, and I think the best way to kind of demonstrate the differences, we're all quite familiar with the boom and cryptocurrency two or three years ago, where you got these coins that were producing 100, 200, 300 percent returns, but then they could also go down by the same amount in a month or a week or a day. And then the reverse would be, for example, gold that has price that stays relatively stable, right? But one of the lowest volatility in the market. Exactly, but if we look at the performance of the live-exit thousand, being our benchmark wine index, it's standardization of the return risk is lower than gold. So wine as an asset cost tends to have very low price volatility and comparison to mainstream assets. And it has quite an interesting return, because I think I read from an article you wrote a couple of months ago that the return is around 7.2 percent, something like this on average. So yeah, if we look at the average return from the inception of the live-ex, I think it's around 7.2 percent, but even, I mean, I looked more recently comparing it to the S&P 500, which is an index, which has performed very, very well, and its standard deviation has been about 18 percent. If we compare that to the live-exit thousand, it's anywhere between four to five percent. And then if we look at the return of the S&P, it's an average around 8 percent over the last five years. Wine, even though we've had a corrective phase there for the last year, we're still at around 4 percent average return. And then if we look at return per unit of risk, so basically return over it, the live-exit thousand actually has a higher sharp ratio than the S&P 500. So a better return for a lower risk. Better return per extra unit of risk the investor takes on. So I'm not saying go sell all your S&P index funds, but it's a nice extra asset cost to have in your portfolio. A reason why it's quite good in that regard is we look at another thing called a correlation coefficient, which is basically hard as one asset cost, perform or relative to another. So if one asset goes up, does the other asset follow it or does it do the opposite, or is there no correlation whatsoever? And wine basically is no correlation to the S&P 500 or equities in general. So it just makes it a great diversification investment for anyone's portfolio. But there's a correlation with currency, but I'll go back to this in a second because there was so much to impact on what you said. So wine is interesting as an investment because the level of risk is relatively low compared to any other things. And it's still of a very substantial return, which is slightly lower than benchmark like the S&P 500, but very, very similar. My first question is like, why is the volatility so low compared to other things? What makes wine a stable investment? That's a good question. The volatility is lower because I think it trades on different fundamentals than say equities, right? So. Equities are still based on the quality of a company more or less, right? Because it's based on its performance. So it's how good a company is. Sure. I guess then it's the data and the liquidity as well. So maybe fewer people are investing in wine, which maybe makes it less volatile. The price is also maybe held more by merchants, right? So the sales price is more stable as it's not as exchange-traded. Is it linked to the fact that it's. Is it linked to the fact that it's something that it's, you know, it's destroyed? So the amount is kept in balance because it happens to be drunk at the end because that surely is one of the biggest difference from wine to other rassets. So the things to compare wine to would be super low liquidity assets like art Watches things like that because I guess equities are all treated on the exchange the very tight bit off for spreads and things like that I would like to answer this question properly though because I don't think I'm giving it a great answer But there's a lot of factors why wine is less volatile But if they're very new I look forward to the article that you're gonna write about that I think that will be my next one actually give me a good idea there. Please send it over I linked it to them to the podcast when you've done it. I will yeah So to follow up and the reason why the price are going up and so why the return is interesting Is that again the cause the wines maintain the quality the and the demand keeps on being higher? So I mean if we look at individual wines we kind of touched on a minute ago It's it's the play between demand and supply so when they're in their perfect drinking window They're also at their scarcest but the man's also higher because they taste better so utilities increased So increase in demand decrease in supply kind of dual-oxys increases price But then if we look at the market as a whole you've got increased demand from People knowing more about wine. So the information of wine is growing You've got the premiumization effect. So we've seen that millennials and Gen Zs are potentially spending more Her bottle than generations before So more demand for fine wine and then we're seeing the number of ultra high net worth and high net worth individuals Increased throughout the world. So it'll be another impact on demand because they'll be the main consumer of the top wines So there's more very very wealthy people but even in the slightly less wealthy people while still being wealthy but as you were saying the generational effect That's also something that we've noticed in other in other studies that now that the younger generation Go straight into more expensive wines. They don't have to build up you know going from the Intra-level price and then go up they go straight into the higher tier price and that's something that you've noticed as well You've mentioned the class assets quite Several times where does wine fit in terms of class assets and with which other product is it in the same class off? So wine would be classified as an alternative asset So examples of other alternatives would be cryptocurrency for example would be classified as an alternative asset But so is classic cars so was watches and art would be in there as well. Is it the same everywhere? Was it specific to the UK market the classification of assets? I would say that's pretty universal and something that I wanted to come up to Was like human that there is no correlation between how wine investment performs compared to how the S&P 500 performs so regardless of how S&P 500 behave up and down in the market that has no impact on the wine market But something that we've discussed and that we actually seeing at the moment is that the currency has an impact and the interest rate has an impact on On the fine wine market. Can you elaborate on that and why is that? Yeah, sure so we did a bit of research last year into effective interest rates and specifically UK interest rates on the fine wine market and basically would look at the performance of the one year guilt as our interest rate proxy for the UK and then the performance of the live X 1000 since inception and we got a correlation coefficient of minus 0.6 pretty geeky basically what that means is there's a strong inverse correlation between interest rates and the price of wine so the higher the interest rate the lower the price on the market Exactly that and there's a number of reasons for that first off is sterling so the baseline currency of fine wine is actually Poynt sterling the reason for that is the majority of the indexes are based in the UK and the majority of the biggest merchants are in the UK as well So that historically then has been the baseline currency that then means when sterling goes up in value relative to other currencies the cost of fine wine goes up as well and given the majority of fine wines actually not demanded from the UK that affects the fine wine market when sterling goes up So the UK interest rate is the main determinant on the value of sterling so if the UK increase interest rates for whatever reason inflation or The economies to overheat it and I suppose also when the interest rate to high There's a more interest for me to hit my money in the bank than to invest on anything right because that's that's such a low risk That's it. So there's something we call risk premium So for example if interest rates are 5.5% you can then pitch your money risk-free into a bank and you will earn 5.5% and if the average return for fine wine 7.2 Yeah, well then you're only getting 1.7% return for taking on some risk in that asset class or that investment while if interest rates are done 2.5% that risk premium then becomes a lot more attractive and something that you've mentioned earlier when we were being very geeky about the sharp ratio So again the ratio that measure you know the risk versus the return You mentioned that Italy is has now the best sharp ratio which if I translate in my words mean that Italy is The region where I will get the more money for the lex Extra amount of additional risk right? Yeah, that's correct. Yeah, Italy and that's that's the first time right? It's quite I suppose that's quite new so Italy I would say over the last number of years about the highest sharp ratio But for the first time ever last year it had the lowest volatility or risk Okay, traditionally it would be more than the lowest return was always good But the fact that it's now considered a lower risk than Bordeaux is new yeah So traditionally Bordeaux had the lowest standard deviation or risk and yeah for the first time ever in 2023 Italy had the lowest standard deviation. However Italy has had the highest sharp ratio for the last number of years Mainly that has been driven by Coscening but to the tail end of last year we started seeing Paymont wines really really contribute to the performance of the 100 and vex when you look at a sharp ratio for Bordeaux for example and the Bordeaux 100 or 50 top Estates is there a huge difference between the estate or are they all very similar as in the sharp ratio Individual estate because I suppose you track this as well, but you know, there's investing in Bordeaux 50 top properties and there's investing in Chateau Margo versus I don't know any other property do they have a huge difference or are they you know Quite quite similar in the risk that I'm taking compared to the return that I can get so there's not an awful lot of difference between The different Chateau's in Bordeaux. We do see the fine wine 50 which is the the main first growth Has slightly lower risk than say the Bordeaux I guess 400's the larger index But there isn't an awful lot in it and that's something that I wanted to come back to with you as well when we prepped together You said that you mentioned that by looking at the data You can see if the wine is overpriced or if a wine is underpriced which is of course for you a very interesting data to have in order to advise your Your clients, but I was wondering what would be the main reason for wine to be overpriced to underpriced what usually can explain that So I think the first thing then To talk why there is well, what is the price to compare it to so There's a number of ways what we compare wines First is a live X-Toe Called Fair Value And basically it uses similar Method that we talked to earlier comparing critic scores to market price and then that can create a line of best fit and For example any of the ventages above the line would be considered overpriced and ventages below the line Maybe considered underpriced so that's kind of a good proxy Then there's other ways at looking at wine so for example if We talked about looking at the accuracy of a critic and if this critic shows good accuracy in predicting or his scores or her scores match The value of the wine you can then calculate price per point And then use that as another proxy to value or compare wines against I would price per point that's interesting and then another way of doing it too is comparing the value of the wine Which is similar to fair value, but maybe a little bit more rudimentary is just compare it to back ventages Say it's a similar point score and you vintage to a vintage of say four or five years Is that vintage in four or five years time more expensive because it probably should be because it should be more scarce And it should taste better because of bottle age So these are all different things we will look up to determine if a wine is good value or not The price per point is something that short is going to Interest the audience of course. Is it something kind of universal or does it also depends on the region where the wine come from? I mean does do all the wines that have a hundred point from a critic that is Reliable do you multiply that by three and that means that all those wines needs to be 300 pounds or Oh, does it still depends on whether you are from the loir valley from border or from napa? I think it's probably more accurate if you're looking in the same region So if you're comparing apples for apples otherwise you can get a little bit messy if you if you're comparing Italians cause against the Somalde Bordeaux. Yeah so the score are important but they are not something universal or they are not you know stronger than again the region or all of those things because again a hundred points from a lesser known region is not worth the same amount of money that a hundred points from the top ones. Okay I wanted to look a bit of you know the recent trends and development before you know asking you a final question on the future and you know one of the reasons we've heard a lot about you when we were doing our Singapore reports and a lot of the private consumers, private collectors that we interviewed mentioned you and they also mentioned that young people were attracted to the gamification part that comes with wine investment and collecting and I was wondering if you could touch base on that and explain to us exactly what is the gamification that's attached to wine investment. Sure I mean and I think a lot of this actually came from crypto because buying and selling crypto wasn't as simple as buying and selling traditional asset classes you had to teach yourself how to get and I clanked how to use an exchange bed and offers and they also had like security keys and codes and things that were completely new to how retail investors traded before and that kind of knowledge then give them a bit of financial acumen to them maybe apply to other asset classes and also explore asset classes so it's not too much just your 60/40 equity fixed income portfolio anymore younger investors are far more interested in investments that maybe want as traditional maybe the word or normalized or what the majority used and they've applied that to wine and we're definitely seeing that night but one makes it fun I mean at least if I understand gamification correctly for me there's a part of having fun when you do it because you kind of playing a game so what makes it what makes wine investment fun today. I think it's more of a passion asset so the joy of wine and wine investing is the amount of work over time that's gone into making such a niche product that can only be made in that one part of the world under certain conditions and the story behind the families and the brands and kind of that background adds a bit more to the investment as opposed to just owning a company because it's got good cash flows. If I don't think it's also a lot about memories and experience because once you go to visit the vineyard and you have that glass of wine while watching a sunset it sort of gives you this some set of memories and motions which which then every time you see that case or bottle on the screen it kind of brings that back as we know when you have a glass or two it kind of makes you a little bit happier and gives you that sort of balance. In moderation of course so I suppose what you're saying is that the fun part while the fun comes from the experience and also the fun comes from investing in something that's tangible and real. That's right and I mean a lot of these wines have second wines that maybe you might want to try one of those because as a similar flavor profile to the wine you've invested in and I'm partly think of being an investor or cruise we do put on specific events so for example we had Jane Dunston last year take a few of our clients through the Bordeaux 2022 tasting so we got a number of them before they were made physical into a lovely building in London and Jane talked us through how to taste very young wines and what to look for to identify potential flavors in the future. So that's this role of education/ entertainment as well yeah totally. All right also you know when we talk about finding what investment I have to ask you this question because you know there's a lot of things that I've been said on the wine investors and a lot of things that are said about wine investment you know being a big negative force for the future fine wine because people associated with the raising prices and wine becoming overpriced and you know inaccessible and you all have those stories like when I was young 20 years ago I could afford all the best wines in the world I can't now and that's all the fault of you know wine investors is that true? I mean what do you respond to this and can you see anything positive that wine investment brings? So the wine speculation was always part of the of the trade so for many many years I think we mentioned before that you know historically people who had a disposable income they would buy two or four cases and then once the wine is ready to to be drunk they would sell half of it which would typically pay for their wine and they drink a very good and mature wine free of charge. I sort of see that the fine wine falls into this luxury category especially in the recent years and it's a product that you know with more wealth in the world kind of being pushed in the price so I almost see it other way around that the branding and the wealth pushes the prices up and then wine investors taking advantage of that. So it's almost because the wine brand have been so successful in establishing the quality of their brand and the status that comes with it that there is an investment rather than an appeal for investment. And I totally agree that you know the number of people who are able to afford some wine 20 years ago cannot do today but what's positive is that you know the wine never been in the kind of never had such a bad quality than it is now so there is enough wine for everybody at the moment at the different price points to buy at the very very high quality that you know complex interesting intellectual so I think that there is always something positive and that's how I see it as a wine industry kind of moving into into right direction. How do you see wine investment evolved in the in the near future because it's difficult to predict more than five years ahead now but how do you see you know evolving and what role can it play in the future fine wine? So I see quite a lot of parallels between fine wine other asset classes like equities and fixed income and one of the things we've started to see quite a lot and we've talked about one of the exchanges today the liveax but there are a number of other wine exchanges that are opening up and what that does is it makes a centralized point of liquidity and if enough liquidity goes on to each exchange that should tighten the bit off or spread which should improve pricing. So the fact that there are platforms where you can trade transparently makes it more liquid because it's easier to trade right so that increase the liquidity because it's easier to trade. Exactly. But then what would be the impact of having more platforms? So right now we're kind of at a fragmented stage where there's a multiple number of platforms I mean the way this is developed in other markets is the number of platforms has become fewer fewer competitors but more liquidity on each exchange which has worked out better for the consumer because more wines so harder to find rare wines are there and better supply and better pricing because there's more of them both buyers and sellers. Okay and it takes the price down because all the data and all the information that I want plays and you can see straight away the prices that are operated on different platforms and then it encouraged people to drop the price. Well the pricing becomes smaller because it's called a spread the difference between the bid and the offer when there's a prior off something the spreads tend to be wider so you'll buy at this price and the sell price may be 30-40% higher but the more buyers and sellers there are the more that spread narrows in which case the difference between those two becomes less and the pricing becomes more favorable. Would that mean that the return on a wine would be less then? It may not be easier to buy in sell wines so over time wines will go up for example because if there's a spread quite a lot I can buy it at the offer price the sellers price but then if I was going to sell it the difference between that price may be 20-30% well if it's more liquid that difference will be less. Okay so consolidation of the platform is something that you see. Exactly and the other really important thing there as well is if there's more trade in these exchanges there's more data so there's data to understand the market better. Is there a is there in the near future? Is there a way that producers can benefit from the added value that their wines are taking on the secondary market? Because that's also been a huge critic is like no it's not the producer that benefits from those rises in price and to some extent it's very you know understandable it's the role of the middle man at every stage but is there a scenario in the near future where you know the added value can go back until the other producers? I think producers do benefit from it in a way that if one of the vintage so let's let's take 16 as an example which was great for most of the European fine wine regions if the value of that vintage traded on the secondary market 20-30% above its release producer would be tempted to increase slightly the next release to get closer to the market value of his wine you know on the secondary market. What it also kind of the classes for producers is they do get more money back in the business reinvesting meaning they producing a better wine for their longer term so I think the there are a lot of benefits for the producer. One other thing aspect when it comes to maybe investment and holding restaurants at the moment, they find one restaurant they want to have amazing wild list and that means that they need to buy wines pretty much and promote and tie a lot of cash in a stock. But potentially they won't be able to sell five, 10 years later. So here the positive thing is that from investor, from the collector who buys 10 cases of leafy and then puts it back on the market 10 years later and knowing that that wine was stored in a perfect condition and that restaurant can buy half a case or whatever. I think it's beneficial again because there is a kind of provenance point here that wine has been looked after for all these 10 years in a manner which we all would want it to. - And that's very interesting what you're touching on because that's a big question, Ag. Who will carry the cost of aging? Because restaurants used to do that, they can no longer do that as much estate. We've seen them doing more and more keeping loads of library wines, but in your scenario, it's also, no, the collectors do have that rule. Also in the fine wine value chain is that they allow that capacity to age. They bear the cost of that so that restaurants don't have to do it that much. That's an interesting theory as well. - It's indirectly, but this is exactly what they invested on the market. - Well, thank you so much, Matt and Rotis Larritz. It's been a fascinating conversation. Thank you for being geeky with me. I think we share a lot of interest between finance and wine and how fascinating both those worlds can be. Thank you so much for being with me today. - Thanks for having me, Point. Thanks for having us. - Thanks for listening to this episode of a really global in conversation. If you are interested in the global conversation around fine wine and what the future holds in terms of production, distribution and consumption, head over to our website, www.arini.global, and become a member. This is not only a great way to support us, but the best way to unlock all our analysis, reports and articles on the topic, including our latest reports on the Singapore fine wine market the one we're talking about in the podcast episode. Because whether you are producing or selling fine wine, you need reliable specific data to make informed decisions. And we have just that in store for you. Until next time, cheers. - Thank you for joining us for the Aurene Global Podcast. If you liked what you heard today, please give us a positive review and share this episode widely. Stay connected with us and join our conversations via Facebook, Twitter or Instagram and visit our website at Aurene.global to find out how you can take action to ensure the future of fine wine.