Chateau boxing: Fine wine funds deliver knockout returns

Hints of black ink and a stable finish are enticing investors into these niche funds. Some, like the Noble Crus, had vintage years. 

 Appellation trail. (Bloomberg) Financial turmoil may drive investors to drink, but that could turn out to be a boon for some savvy punters.

The Noble Crus fund, which invests in fine wines, had a vintage 2008. Launched in November 2007 and now managing nearly $14 million, the fund returned over 20% last year.

“Our portfolio is focused on the Burgundy region, and we like older wines whose valuations tend to remain stable. Market risk is quite remote for this kind of wine,” said Michel Tamisier, owner of Elite Advisers which promotes the fund.

“France’s other important wine region, Bordeaux, tends to produce more wine. It is more easily accessible, and so the financial crisis has had more of an impact on prices. Younger wines are also more sensitive to price fluctuations,” he said.

A sizable part of the fund is invested in older Bordeaux vintages, which have maintained their value or appreciated.

But other wine funds didn’t make out as well. Indeed, it was a much tougher year for the Vintage Wine Fund, which focuses on wines from Bordeaux.

Probably one of the world’s largest wine funds with over $125 million under management, Vintage’s value fell 33.4% last year.

The decline occurred entirely in the last third of the year, with much of it attributed to what the fund called “essentially foreign exchange related reasons.” The fund, which reports net asset value in euros, was hit hard by sterling’s sharp year-end decline.

The fund said that by basing valuations on ex-chateau prices quoted in euros by Bordeaux vendors, it could have booked a profit for the year. For consistency’s sake, however, the fund’s managers say the maintained their current valuation method, which is based on U.K. list prices.

One problem for investors in this kind of fund is that despite the physical nature of the underlying product, wine funds may—ironically—be difficult to liquidate. Indeed, such niche funds have few buyers and sellers, and so bid-offer spreads can be volatile.

“Spreads vary between merchants and can be quite large. You don’t want to have to liquidate your portfolio if you get a redemption request, because you may not get the best prices for the wines,” said Tamisier of Elite Advisers.

To contain this problem, he said the fund holds at least 10% of its assets in cash, and ensures that no client accounts for more than 10% of the fund.

Even so, if a rush of investors wanted quick access to their cash, they might have to sell at a discount to net asset value.

If that is too unpalatable a thought, one way out is to take physical possession of their share of the fund.

In that case, investors will need a corkscrew to liquidate their holdings.