Investments of Passion Still Reign Supreme

by Westgarth Wines November 07, 2013

In the face of a compromised global economy, made even more fragile by a problematic credit crunch that has plagued the financial arena for nearly a decade, the number of the world’s High Net Worth Individuals, or HNWIs, has, surprisingly, seen a solid and impressive surge.    Wealth-X, one of the world’s most definitive and accurate wealth intelligence firms, reported that 2012 showed a 5% increase in the number of people who met the firm’s definition of true “ultra-wealth,” that being, the possession of net assets meeting or exceeding $30M.  Further, the report predicts that the next ten years will yield an even greater growth of HNWIs, reflecting a 50% cumulative increase in people reaching and crossing this $30M wealth barometer.  Still, the capricious economic problems which continue to impact the financial landscape have prompted even the super-rich to seek investment channels that pose less risk but nonetheless meet their appetite for glamour and diversity.  Despite its reputation for being a potentially volatile “investment of passion,” fine wine continues to perform exceptionally well among the elite investor.

The Wealth Report 2013, Knight Frank’s flagship research publication on luxury investment trends, presents an optimistic view of fine wine as a consistently appealing and popular investment among HNWIs.  Wine offers the savvy HNWI a way to satisfy the desire for a sound financial investment as well as the penchant for seductive indulgence, and trails behind only collectable art and fine time pieces as passion investments.  And, unlike the more traditional, mainstream investment arenas favored by HNWIs, such as finance-oriented stocks and bonds, this special category of assets has the unique ability to reflect an investor’s own tastes, style, and even personality – an attractive perk for this high income niche.  In response, the last several years have shown significant growth in investment and boutique funds which specialize in such emotionally-driven investments, offering HNWIs the opportunity to build a more diversified portfolio that is both personally gratifying and less vulnerable to dramatic fluctuations.  Investments of passion have historically maintained their value amidst a variety of economic climates, including inflationary conditions, which speaks to the HNWI client’s more rational side.

The art of investing in things you love certainly seems attractive, but are there complications?  As with any investment, regardless of how seemingly fail proof or appealing, the answer is yes.

Morgan Stanley, the global financial services firm and a market leader in securities, asset management and credit services, recently delivered a sobering report on the global availability of fine wines.  According to the report, 2012 showed a shortage of nearly 300 million cases of quality wines, the most notable decline in nearly five decades.  These numbers can be directly attributed to multiple events, the most obvious being the decline in wine production Spain, Italy and France - the world’s three top wine-producing countries - due to unexpected climate changes.  Producing 60% of the globe’s wine supply, these countries have all experienced a drop in the range of land used to grow and develop vineyards after a 2004 peak.  Meanwhile, worldwide wine consumption has steadily and incrementally increased since 2000.  Only European consumption has gone against the trend and has conversely shown a minor wane, but even this decline has been countered with a heightened consumption increase in countries such as the United States and China, the latter enjoying a dramatic 150% increase in fine wine consumption over the last five years.  In short, the scenario represents the fundamental equation of supply not meeting demand, which, while frustrating for the neophyte buyer, can be great indicators for the assertive, proactive and experienced investor.

Morgan Stanley’s somewhat grim statistics were soon met with more positive results from the International Organization of Wine and Vine (OIV).  In its own October 2013 report, the OIV stated that the year ushered in an exciting and significantly improved global harvest, signaling good news for future acquisitions.  Investors could take a deep breath and put their worries about the vine on the shelf; however, they might have to practice patience and wait a few years for their dream investment.

The OIV’s update was a welcomed one, but what about the current investment climate?  For those lucky enough to be in a position to buy, there are still prestige wines available, but the overall shortage begs for action.  Smart HNWI investors, and especially those for whom fine wine is a top-tier investment preference, should capture their wines of choice sooner rather than later.  And, along with providing sound portfolio diversification, investments of passion will surely bring a special kind of return which surpasses almost any financial reward – the thrill of owning a prized, elegant and cherished possession.