By Joe Roseman

Following BRIC’s and CIVETs, Joe Roseman identifies the next acronym to hit the investment world as silver, wine, art and gold (SWAG) punch well above their weight.

A few years ago, Jim O’Neill of Goldman Sachs almost revolutionised the way many people thought about emerging markets.  He coined the term ‘BRICs’.  It is successful because it works on so many levels.

Investing in the BRICs has become an asset class of its own.

This got me thinking about asset classes generally and just what it is that differentiates one asset class from another.  And, once I got started thinking about that, I started to think about how specific asset classes had performed.  Some assets, in particular, stood out to me as ones that had performed especially well over the last decade or so, despite two very deep recessions.  Silver, Wine, Art and Gold. These assets have punched way above their weight.  The SWAGs.

A lawyer friend of mine called me up a few months ago to tell me about an article he had read.  Apparently, the best performing wine over the last 20 years when held for a five-year period was a 2004 Carruades de Lafite.  This wine had appreciated by 3000-4000% over the defined five-year holding period.  Starting at £4,500.  It does not even taste that nice.

Notwithstanding the peculiarities of Carruades de Lafite, fine wine has exhibited a very strong asset performance over the last decade.  The Liv-Ex fine wine index is up almost 300% over the decade.

The story for gold is well-known.  But whenever one can get in a dig against Gordon Brown, one should not pass up the opportunity.  From the low point of $250-300 a decade ago, where Gordon Brown decided to sell the UK’s holding of gold, gold has appreciated some 600%-700%.  Silver has put in a similar performance.

Art is a tougher asset to nail.  All-time records are being set at Christies and Sotheby’s for Picassos, Morres, Hepworths, Rodins and other such classic artists.  The more well-known and prestigious the piece of art, the greater the price appreciation appears to have been.  The Artprice Global Index takes an average, and shows that fine art as a whole has appreciated by 120% over the last decade.

Obviously, the nature of each asset has its own fabric and character, but they all share a similar characteristic.  Namely, notwithstanding two global recessions, a severe global banking crisis, a credit crunch and (generally speaking) highly volatile and mostly negative equity market performance, they have all appreciated quite sharply with a relatively limited volatility given the size of their appreciation.

The FTSE All-Share index, by comparison, stands almost at the same level as a decade ago.

If held within a portfolio, the SWAG assets have provided a tremendous boost to an otherwise lacklustre portfolio mix of equities and bonds.  And that is what got me thinking about a new type of asset calls.  OK, it not as intellectually rigorous as Jim O’Neill’s BRICs, but I believe there is some merit in thinking about allocating a portion of any portfolio to the SWAG grouping. Everyone needs some SWAG.

But what is it about the SWAGs that has allowed its investment performance to be so strong?  One way of looking at this question is to identify the common traits of each of these assets.  What do they all have in common?

1. They are all physical assets.
2. They all have longevity – Lafite will last for 50 to 100 years.
3. There is no incumbent debt associated with the asset.
4. They are transportable and relatively easy to store/hold.
5. There is scarcity – a finite supply.
6. There is no income stream – so no income tax liability.
7. Asset performance seems relatively uncorrelated to equity markets.
8. A sovereign default would not alter any of the above traits.

SWAGs, it seems, all carry a similar DNA.  I am a big believer in the idea that no asset class is too risky.  Risk is virtually all in the size of the allocation to an asset.

Given the scale of the price increases in SWAGs, it seems sensible to me to have them in a portfolio in one guise or another.  Gold and silver already have active ETFs.  There are several art funds that can be purchased and similarly one can invest in fine wine through specialist funds.  Each of these assets can be used in a financial or portfolio capacity and is open to the small investor.

I have read the views of many economists who tend to class SWAG-style assets as not ‘proper’ assets because they  have no income stream.  Such thinking is, actually, tremendously naïve.  To define an asset as needing an income stream fails to appreciate the very essence of an asset.

Similarly, many economists argue that assets such as SWAGs cannot be valued objectively because they have no income stream.  Well, again, I see that as naïve.  Analysts have no problem in valuing an equity that pays no dividend based on its P/E ratio.  Why can the SWAGs not be valued on a similar basis?  What is the P and what is the E, I hear the sceptical economist saying.  Well, the P is the price of the asset, and the E? Well, that is the global money supply.

As the global money supply rises and with real interest rates across the industrialised world negative, then the SWAGs get driven up in price.  The more money printing there is, then the more investors will look to protect and insulate their investments by allocating to assets that have SWAG qualities.

Learn more about how Cellar Advisors can assist with your portfolio by reading more here or contacting us at 314.667.5328

Read more at www.winespector.com

A QUICK RECAP OF WHAT WE HAVE TO OFFER

• 3 full-time Project Managers who travel to wine cellars around the globe.
• This expert crew tackles wine cellar moves, reorganization, inventory, data, inspections or appraisals – anywhere in the world.
• Market intelligence, pricing data, auction strategy, valuation and buying or selling services.  Our goal is to be affordable or even cost neutral on these undertakings.

In short, hiring Cellar Advisors as your acquisition or liquidation agent will result in better pricing, fewer fees and lower transaction or logistics costs.  Those results will give you peace of mind and precious time to tackle other activities.

Please contact us here or call 314.667.5328 to discuss your needs.

Widely recognized as a premier destination event, Hearts Delight gathers winemakers, culinary greats and distinguished guests to play and bid in our Nation’s Capital.

YOU CAN HELP IN TWO DIFFERENT WAYS

1. Donate bottles to the auction
2. Purchase a ticket to one or more of the events

WINE DONATIONS

The American Heart Association would like to fill the remaining auction lots with ’07 Cult California Cabernets, Burgundy or Bordeaux.

• Minimum auction donation: $100
• Deadline to donate: March 8
• Contact Sarah Blind at sarah@cellaradvisors.com or 314.667.5328 x 1003 to plan your donation
• We want to make this easy for you!  Our team will manage all logistics and paperwork associated with your donation and ensure that you receive a tax letter after the event.

EVENTS

Join us for one or more of the events below!  Contact Sarah Blind at sarah@cellaradvisors.com or 314.667.5328 x 1003 to purchase your tickets.

UNITED STATES OF WINE

Wednesday, May 2, 2012

Wednesday evening is a new United States of Wine celebration showcasing the best of American wine. Highlighted wines will be presented by owners and  winemakers, and will include a live auction featuring large format bottles from the winery.  This will be followed by a Collectors Dinner.  Tickets: $200 & $500

PRIVATE DINNER SERIES

Thursday, May 3, 2012

Thursday Offers a series of intimate wine dinners with an international flair in homes, restaurants and Embassies with a host, chef and winemaker at each.  Tickets start: $400

FRIDAY NIGHT VINTNERS SERIES

Friday, May 4, 2012

Friday features an exclusive Vintners Dinner highlighting the wines of Château Mouton Rothschild.  The dinner is followed by a live auction led by Sotheby’s Jamie Ritchie.   There will be an award presented to the Congressional Honoree.  Tickets: $1,000

GRAND TASTING, RECEPTION & AUCTION

Saturday, May 5, 2012

Saturday begins with a virtual tour of Bordeaux including an unique wine tasting of the 2009 vintage and an older vintages selected by the visiting Château owners and wine directors.  The adventure continues with exciting seminars and food prepared by some of the nation’s top chefs.  During the Grand Tasting Reception guests will have the opportunity to bid on exclusive travel packages, dining experiences and rare and exceptional wine during the spirited silent and live auctions. Tickets start: $250

We encountered a small warehouse packed with floor to ceiling racks, 22 rows tall.  Up above was a second level with a sea of wooden cases on the floor and stacked on pallet sized shelves rising 15 feet in height.  We started by inventorying bottles…..all day, every day for 14 consecutive days.  After all the wine was accounted for, we began the second phase of applying a unique barcode label to each bottle and case.

In the time it took to complete this project, the Cardinals went from 10 1/2 games out of the brink of a World Championship.  The collection spanned from Bourgogne Rouge to Jayer Richebourg, from Ridge Geyserville to 1990 Margaux.  Legendary rarities shared space with quirky and seldom seen wines like Dageneau, Tempier, Paolo Bea, and ancient Mayacamas cabs.  It was energizing to see the owners personality shine through in this expansive yet unique collection.

On the 40th day of a the project, after the 48,199th bottle had been entered into a CellarTracker account and labeled with exact location, quantity, drinking ranges, reviews and purchase data, Andrew, Will and Joe raised glasses of Vilmart “Coeur de Cuvee” and Lopez de Heredia “Tondonia” in celebration of completion another complex Cellar Advisors project.

Last Fall, Marc and I visited China to see what all the hubbub was about.  On this mission, we found friends and facts; but most importantly, we discovered that rumors still rule the roost in China’s fine wine market – both internally and externally.

Internal Rumors Pervade

Our first dinner was quite an event – a multi-course dinner at an exclusive private club, paired with wines that Marc and I hand-carried from the US.  The attendees were more than 30 of Beijing’s largest wine collectors – these people were in the know, the collectors who would dispel all of the rumors that we read in the western wine media, right?  The answer was not so easy to discern.

Bottles popped, we splashed into the evening with Marc and I exchanging the microphone to lead discussions about each flight.*  The first flight – 85 and 96 Krug – we were met with a mass of perplexed stares, and Marc, the trepidation evident on his face, bravely stood up to describe the two.  The attendees were initially disinterested – they did not drink Champagne, let alone at the same dinner with Lafite and Latour; but as Marc spoke, they became engaged in the complexities inherent in the two wines.  The yeastiness of the evolved 85 holding our attention until a sip of the 96 electrified our palates with its high tensile acid core and exuberance.

Confusion eased into contentment as the collectors savored the wines.  Then, glasses empty, the room overflowed with questions: Was all Champagne this good?  Where could they buy it?  And, with an underlying sense of dismay, why had they never before heard that Champagne could be as good as Bordeaux?

This newfound eagerness allowed for Marc and I to wipe the sweat from our brows, and with credibility galvanized by the excellence of these ‘esoteric’ wines,  press on.  Although excitement was high and the wines showed perfectly ^**, each flight, save the first growth Bordeaux, was first met with skepticism.  The collectors wanted to know why they had never heard of these wines before; why they couldn’t find the bright 1996 DRC Echezeaux or the intense, rich 2088 Ponsot Clos de la Roche.

Flight after flight was studied, discussed, and enjoyed, and it quickly became apparent that it wasn’t at all that these collectors demanded only Bordeaux, rather that Bordeaux was the only wine supplied.  Even the attendees who frequently traveled the world or had wines in their collections from outside Bordeaux expressed difficulty in shopping for anything other than the usual classified growths in Beijing.  The evening became a session in exploration, an opportunity for Marc and me to plumb the rumor mill’s depths and hopefully dispel some of the most invasive offenders.  It seemed that information was doled out asymmetrically to collectors, oftentimes by their suppliers, creating a view of the wine world that holds ubiquitous stock above all else.  The artificially perpetuated top of the pyramid had become a loose bottle of 1982 Lafite from European held stock, with a cosmetically perfect label and capsule; nothing else could compare.  These suppliers, the gatekeepers of the fine and rare realm, let their access to wine dictate the information they supply, and in the absence of impartial wine media that exists in developed markets this marketing spin solidified into dogma.

That said, there was no need to actually teach these collectors that Lafite was not the only wine in the world.  They were interested and insightful – many taking notes and bottle photos – and just needed to experience other high quality wines for that point to become evident.  In fact, it was the previously unknown 2005 Harlan and 2007 Roty Charmes Tres Viellies Vignes that took top honors, besting even the two Lafites that had loomed over the other bottles but two hours earlier.  We all left the evening in good spirits, but also with a new quandary – how to obtain these wines that they had enjoyed.

A Rising Tide

Burgundy was to be the highlight in Hong Kong.  John Kapon of Acker Merall & Condit was betting that the softening in the secondary market for Bordeaux telegraphed an interest change; buyers were looking for something new.  He obtained a consignment from Don Stott, one of the world’s legendary Burgundy collectors, to give these buyers what he assumed they wanted – an incredible catalogue of highlights from the region’s most renowned producers

To solidify his position, Kapon spent the week preceding the auction proving to his customers the quality of Burgundy.  Multiple lunches and dinners showcased the quality and provenance of the wines from Stott’s cellar.  In many cases, collectors were able to taste before purchasing, bolstering interest and demand, and thereby strengthening prices.  Hundreds of top Burgundies were poured, and highlights of the week included the 1993 Rousseau Chambertin Clos des Beze, 1971 Roumier Bonnes Mares, and 1969 Drouhin Musigny.

The total market for fine and rare wine is growing, and not just in value.  The spectrum of interest is broadening as palates develop, collectors tire of Bordeaux, and purveyors of wine scramble to find the next hot item.  Hong Kong has the opposite problem of China, unlimited access; which has created a pool of savvy consumers.  Thus, it becomes an interesting proxy for predicting future trends on the Mainland.  Both markets are made up of interested, intelligent consumers searching for fine wines that they only recently could obtain locally.  The collectors in Hong Kong had a head start, mainly due to taxation changes, but are still at the stage of developing their tastes.  Savvy Mainland Chinese collectors find it easier and safer to buy wines in Hong Kong, because they fear the consequences of buying aged stock at home.  Both of these markets are still ripe for development and will continue to grow over the coming years, but specific action must be taken by all involved if they want to create markets as vigorous as those in the US and Europe.

The Upshot

Although the problem of access is a differentiator between Hong Kong and Mainland China, it is the question of trust that connects them.  For these markets to fully develop, the relationships of trust that are central in the American and European markets must be created, and more importantly, must become the norm.  Developing trust that pervades an industry and connects all of its actors – consumers, purveyors, regulators, media – is a process that takes times.  It seems though, that Hong Kong and Mainland China are on a trajectory of accelerated development.

Many companies have been successful at extending their reputations into Hong Kong, proving themselves trusted brokers and developing efficacious client relationships.  Unfortunately, though, especially in Mainland China, trust is not yet the norm.  Consumers exist in an opaque world, with very few impartial venues in which to learn about or discuss wine.  Their suspicion causes them to request cosmetically perfect bottles and the ability to personally inspect bottles before purchase.  These requirements stymie all merchants – even those with the best reputations – and hinder market growth.  Imagine a market without pre-sale offers on current vintage Burgundy, en primeur campaigns for Bordeaux or Napa mailers that arrive one year before the wine is bottled.

So where is the tipping point that pries these markets open?  What factors will allow for the market in Hong Kong to continue its rapid broadening and that in Mainland China to fully open its doors to legitimate business?  Observing the US  and Europe, it seems that fair-minded merchants, venues of impartial discussions, and moderate, transparent government regulation need to exist for the development of a more robust wine market.  The interested collectors are already abound; in fact, new ones enter both of these markets every day.  These consumers just need an infrastructure based upon trust and transparency that allows them access to the wine they want.

Lifting a bottle of enticingly effusive, but still primary 1995 Bouchard La Romanee from the table to more closely inspect the label, one of the more experienced collectors that we met in Beijing bemoaned the wine market around him.  He was one of the lucky ones; he had long ago established trusted wine publications.  A founding member of a few of Beijing’s wine tasting societies, this collector was at the center of wine society in China – he had access to anything available.  With a wrinkled brow, he placed the bottle back down on the table; no reason to call one of the brokers in Beijing, he guessed that he would just try to find the wine next time he happened to be in the US.

^* Our translator spoke for easily 5 times as long as us after each of our descriptions.  Based on this and the volume of laughs he garnered from the crowd, it is still quite possible that Marc and I were billed as comic relief for the evening.

^** Based on the 100% success rate with wines at this dinner, I put forth that any bottle benefits from at least two airplanes rides directly prior to consumption.

Our goal is to help our clients with their wines whenever possible, and sometimes that means finding wine storage in locations where there are not Domaine Wine Storage facilities.  The bills we receive often shock us.  Luckily there are quality storage options in many markets, but also ones that will charge for every inbound or outgoing box, and every touch in between.

The latest example was from a prominent east coast facility that charged us:

• $8 per case per month for storage
• $4 per case for inbound delivery
• $4 per case again for removal

When deciding upon the correct wine storage facility for your collection, make sure to check the handling costs for wine entering or leaving.

Possibly more important are the terms on speed of delivery.  In this same transaction our wine was “held hostage” and we were told it could take up to 30 days to “close the account” and retrieve our wine.  Make sure that your storage provider can guarantee a pull within a reasonable time period.  Under normal circumstances this should be no more than 3-5 business days at the worst.

Contact us here or call 314.667.5328 for more questions about wine storage