The gold in your cellar

THE PASSION FOR WINE DATES back 6,000 years, if you believe reports that the earliest winery was operated by prehistoric people in an Armenian cave. But for something with so much history, our relationship with wine has remained pretty boring. We drink it. How many of us would put good money on a case of Bordeaux, for instance, only to stash it in a London cellar and wait 10 years or more to sell it at a premium on a fine wine exchange? That’s exactly what Mumbai-based wine and spirits consultancy All Things Nice is pushing rich investors to do. “We’re not asking people to put all their money in wine—we’re asking them to diversify,” says founder and CEO Nikhil Agarwal.

The 37-year-old sommelier studied fine spirits in Australia and London, and worked as a consultant with LVMH Moët Hennessy-Louis Vuitton in India after a stint with Sula Vineyards. In 2010, he set up his company, conducting training, and hosting wine-tasting parties for the well-heeled.

Agarwal says he has always wanted people to understand and appreciate fine foods. “Apart from wine, we work with cognac, single malts, vodkas, pairing appetisers (read fine cheeses and charcuterie or cold cuts), and at times, cigars,” he adds.

In July last year, Agarwal started a joint venture with Britain’s fine wine investment consultancy Amphora Portfolio Management to attract Indian investors to park their money in wine. Since then, 11 investors have pumped in a total of Rs 6.7 crore.

Agarwal’s next target: Bring on board at least 100 investors by July 2016. “People take a long time to accept the idea of fine wine investment. But I need [at least those many backers] to make this [worthwhile],” he says. To get there, Agarwal is planning to tap his 9,000-plus HNI (high net worth individuals) base. He is also putting together a team to work exclusively for his company’s wine investment arm.

THE IDEA OF FINE AND RARE WINES as an asset class has been around for more than a decade. Much like equity, it can yield handsome returns. But its appeal has been constrained by a limited market, opaque pricing, and hefty commissions and buyers’ premiums charged by wine merchants and auctioneers.

Things have begun changing now, with a clutch of investors worldwide buying into vintage spirits as a niche but credible asset class, similar to art or classic cars, which can generate 10% to 15% returns. There’s a growing secondary market, and fine wine exchanges have also come up, leading to better liquidity and price transparency.

Wine’s lack of correlation to other major asset classes also means less volatility. In fact, certain wines outperformed gold during the past decade due to limited supply of investment-grade wines and a surge in Asia-led demand. “The quantity of fine wine in the world is finite,” says Agarwal. “Also, fine wine producers turn in small quantities and haven’t increased their production at all for the past 100 years.” So prices can jump rapidly, bringing in huge returns. It’s quite possible that a case of Château Margaux priced at £5,000 (Rs 4.9 lakh) ends up being sold for £150,000.

Thanks to all these factors, the global fine wine market is now worth $4 billion (Rs 25,268 crore) according to the London International Vintners Exchange or Liv-ex, the world’s most influential fine wine exchange.

The exchange, set up in 2000 by former investment bankers James Miles and Justin Gibbs, has built a strong reputation and merchant base. It runs a number of indices and sub-indices, and its leading benchmark is the Liv-ex Fine Wine 100 Index, which tracks the price movement of the hundred highest-quality and most sought-after fine wines in the secondary market.

The market did see a steep fall post the financial crisis, and recovery did not begin until last year. Investors seem to have gotten only more experimental though, buying wine en primeur (while it is still in the barrel), investing in wine funds (which operate like mutual funds), and even channelling money into real estate investment trusts that deal in vineyard land.

But here’s the most disruptive trend: While Britain and the U.S. continue to be the top players on Liv-ex, much of the current growth in the business is driven by the emerging markets. China has been a game changer while India could be “the next big growth story”, given the strong “increase in [the number of] wealthy Indians”, says a report by British fine wine investment firm Cult Wines.

India imports around 500,000 cases of wine annually. Its consumption of wine is estimated to rise to 2.4 million cases by 2017, per studies by international wine exhibition Vinexpo—a growth of 73.5% compared to 2013.

AGARWAL SAYS INVESTORS IN THIS NASCENT but promising space need to go through steep learning to pick investible wines. “Too often, they play connoisseurs and buy what they love,” he says. That’s where All Things Nice and Amphora come in with their suite of advisory services that can help investors make the right choices and build bespoke portfolios.

Typically, the partners recommend a specific variety—say, a 2009 Château Margaux—based on ratings from wine experts and how undervalued or overvalued it is. The trick, says Amphora’s director Philip Staveley, is to look for price anomalies—wines that are rated high but are trading low. Once an investor puts his money on a case of wine, it is bought on his behalf, registered in his name, and stored in an insured and climate-controlled London warehouse. The advisors also help with sales.

Earlier, Staveley worked as a stockbroker with several investment banks, including Merrill Lynch. He oversaw emerging markets, and it was in that role that he first developed an appreciation for the potential of the Indian market. He says Amphora got excited about India after tasting success in Beijing and Shanghai early in 2014. “I don’t mean to be racist, but [things] do get lost in translation when you introduce a new idea [in China],” he says. India is much easier to navigate.

Agarwal says Amphora brings the network and market knowledge that are critical in this business. “Philip understands the financials; he has a practical point of view. I, on the other hand, look at it emotionally, like a wine lover,” he says. Access to Amphora’s London operations is another plus as it brings proximity to Liv-ex. Amphora usually quotes the Liv-ex 100 in its proposals to prospective investors.

Amphora’s top management visits Mumbai every other month to meet prospective investors from Agarwal’s Rolodex. Staveley says he is confident that the Indian market is a winner, despite the perception that investors here are conservative and most don’t know much about fine wine. “Everyone we’ve met so far understands our core concept. We see an increasing level of interest at every visit. [If all works to plan,] the Indian business could dwarf the U.K. business in the next couple of years,” he claims.

THAT SAID, THE JURY IS STILL OUT on the future of wine investments. Like all other alternative assets, wine doesn’t generate dividend income, and attractive returns call for extended lock-in periods. The best wines take a long time to mature, and their prices often fluctuate, depending on ratings and reviews. They are also prone to price bubbles: Huge, speculative surges are followed by prolonged slumps. “This is undoubtedly a long-term investment. If you buy today, you will have to hold on for at least 10 years,” says Agarwal.

That does not worry Kshitij Bendre, a former investment banker who has worked with Goldman Sachs and the now-defunct Salomon Brothers, and is one of Agarwal’s early investors. Bendre dispels the popular belief that there’s not enough liquidity in the wine market. “They will give you a bid price at which you can sell and get out within a day or two,” he adds. “The storage facility in London is excellent too. I think the Queen’s wines are also stored there.”

Bendre was particularly impressed by Amphora’s “scientific approach to investing”—which includes helping clients understand arcane quality benchmarks like Parker Points, assigned by the leading wine critic Robert Parker on a 100-point scale. “Not too many people do this [type of investment] objectively,” he says.

However, another major roadblock to the business—prohibitive taxation—has proved more difficult to tackle. Each state imposes its own tax on liquor, varying between 30% and 100% or more, apart from 100% to 150% import duty and an additional duty of 4%. For investors who like to move their wines closer home, the process tends to get long and expensive, depending on where they live. “The system is extremely [chaotic],” says Agarwal. “With so much tax to pay, how can you import blue-chip wines or set up a trading business at home?”

In 2008, China scrapped import duties on alcohol, which saw its fine wine market explode and turned Hong Kong into the world’s prime wine trading and distribution hub. The same could happen here if India and the European Union ink a Free Trade Agreement that slashes import duties. Staveley remains hopeful. “Import duties could be dramatically reduced in the next five years in India,” he says. “That will do wonderful things for the fine wine market and investors.”