Alternative investment classes such as wine and whiskey continue to grow. But, during uncertain times, not taking adequate measures to protect your investment is risky.
09 February 2021: Avid investors whose portfolios have been subject to intense market jitters throughout the COVID-19 pandemic have found a safe haven in rare and fine wine. This is because alternative assets such as wine and whiskey have provided a viable avenue for investors to diversify their portfolios and provide resilient returns during the prevailing period of uncertainty. But, experts are cautioning collectors that not adequately protecting such an investment can significantly impact its potential return.
“The pandemic has taught us that unforeseen events are part of life, but if we are not able to hedge against them, we stand to lose a significant amount,” says Christelle Colman, MD of Elite Risk Acceptances, a specialised wealth insurer and a wholly-owned subsidiary of Old Mutual Insure. “Wine and whiskey are low-risk investments due to the fact that they are asset-backed, but with high-value collections continuing to fetch high prices, it pays to protect your valued investment.”
Trends driving wine and whiskey investments
Bloomberg predicts that cask whiskey is to be one of the biggest alternative investments in 2021, with the Knight Frank 2020 Wealth Report suggesting that the value of whisky is escalating rapidly. Thanks to rising demand driven by Asia, the value of rare and collectable whiskey has soared by 564% in the last ten years. Later this month, all eyes will be on the UK as one of the rarest bottles of whiskey ever produced – the Macallan 1926 – comes under the hammer and is expected to become the most expensive ever sold at £1.5 million.
Similarly, the value of fine wine has shot up by 200% over the past decade. The Liv-ex Fine Wine 1000, which tracks the value and investment of 1000 wines from across the world, reports that the Index is currently trading at its highest point in close to 10 years, driven by robust demand for fine wine. By way of example, the Sassicaia 2009, a legendary red wine from Italy, has already seen its price increase 14% over the first two quarters of 2020 from $2,040 to $2,329 per 12 bottle case.
Back home, COVID-19 has also escalated the value of wine collections in South Africa. A fine wine auction held during the early stages of lockdown in 2020 set a record for the highest average price per bottle ever auctioned; reaffirming investors’ interest in the quality and collectability of top-end South African wines.
How to protect your wine or whiskey investment
“It makes sense if you are a wine or whiskey investor with sizable collections to seek adequate insurance to protect the growing value of your investment,” says Colman.
Firstly, she says, make sure that you store your wine or whiskey collection correctly in a temperature-controlled environment, as this will determine the return you get for it. This will be a requirement for your insurance policy.
“Specific risk coverage can protect against power interruptions, especially if you do not have an inverter or a generator to keep your wine cellar cool during power outages such as load shedding.”
Colman adds that specialised insurance can also protect against accidental damage if there is breakage, spillage or faulty cellar equipment, such as with wine racks falling over or becoming detached from walls. She advises that investors regularly review the sum at which the wine collection is insured, at least once per year.
“This is because if there is accidental damage or a loss of sorts, wine collections that may have cost R1 million years ago now may cost R2 million to replace, which could leave investors out of pocket.”
She adds that the replacement value of wine is influenced by various factors; including exchange rates, global trends as well as whether or not wine as an investment class has grown. The price at which the wine was bought is not necessarily used to determine the replacement value, specifically because many investors pay inflated or record prices at auctions or events.
“The value of an item is decided by a professional assessor, who uses a wealth of technical data and specialised information to determine the replacement value of wine collections, and to help investors adequately insure their collections at market rates.”
She adds that as wine collectors build their collections, they must guard against fraudsters, especially as COVID-19 has opened the gates for conmen looking to make money from the wealthy by falsifying the labels of collectable wines. The problem was brought into the spotlight by the Netflix documentary Sour Grapes, which tells the story about wine counterfeiter Rudy Kurniawan.
“Although less common in South Africa, wine fraud can be a big pitfall for the investor. There are many stories of wine collectors having unknowingly spent millions on counterfeit vintage wines, only to find out that their insurance policy didn’t cover them against this fraud.”
And, although wine is an asset usually produced for consumption, Colman jokes that “mysterious overnight disappearances” are also not covered under specialised insurance policies.
“For some, it’s a long-term investment while others like to consume their wine. Either way, if you are looking to maximise the returns of your collection and protect your alternative investment, you’ll need to take steps to preserve both the taste and value by insuring properly against risks,” concludes Colman.