A new company is about to make it easier. Is it worth investing?

A new company is about to make it easier. Is it worth investing?

A specialist in fine wine investment has recently announced its intention to float on the Alternative Investment Market (AIM).

Wine Investors is seeking to raise around £30m, which will be invested in the finest Bordeaux wines, such as Chateau Lafite-Rothschild and Chateau Latour.

For the first time, many private investors will be able to access an asset class that has previously only been a viable investment for high net worth individuals and institutions.

Investment grade wine

Less than 1% of global wine production is considered 'investment grade', principally that produced by the leading chateaux of Bordeaux.

The rationale for investing in such wine has stood the test of time. Fine Bordeaux wines improve with age, but the supply of any given vintage reduces each year through consumption, creating an 'inverse supply curve'.

The only thing that's changed in the 21st century is that demand for top wines is stronger than ever, coming not only from the traditional markets of Europe and North America, but also new markets such as China and Russia.

As the table below shows, the blue-chip Liv-ex Fine Wine 100 Index has outperformed the FTSE 100, on both returns and volatility, during what has been a poor decade for mainstream equities:

Given the comparative returns, and even allowing the FTSE a few additional percentage points for dividends, it's perhaps not surprising that interest in fine wine investment has been on the rise in recent years.

Anpero Capital

Anpero Capital, the investment manager of Wine Investors, will use the proceeds of the placing to invest in the finest wines from the most liquid segment of the market.

Andrew della Casa, a founding director of Anpero and Wine Investors, tells me that the company will restrict itself "currently to 35 chateaux and ten vintages from Bordeaux."

It will avoid investing in wine en primeur (before the wine is bottled) because it considers the higher risks at this stage, due to the uncertainty of the final quality and price volatility, outweigh the potential higher returns. It will also avoid wines over about 20 years old, as the market for such wines has less liquidity and, again, greater price volatility.

Wines purchased will be insured at market value and stored in a UK government-bonded warehouse.

Anpero has been keen to stress that it is not a "trader" but has a "buy-and-hold" philosophy with a portfolio churn of only about 10% per annum.

Anpero's fees may elicit more than a gasp from all but veteran investors in the most exclusive hedge funds. When I quizzed Andrew della Casa on the details, he gave me the following breakdown:

"Management fee of 1.5% of the Company's net asset value, paid quarterly, and the following performance fee after the following hurdle rates and subject to a high watermark paid annually: 10% fee over 8% hurdle; further 5% over 12% hurdle, further 10% over 16% hurdle."

After five years there will be a continuation vote on Wine Investors, shareholders deciding whether the company should continue or liquidate its assets and distribute profits.

One Anpero made earlier

Anpero has a successful track record of investing in fine wine, as the manager of The Wine Investment Fund (TWIF), an unlisted and unregulated collective investment, which was established in 2003 and now has £45m assets under management.

TWIF has a minimum investment for private investors of £10,000 and operates discrete five-year investment Tranches. There have been 18 launched in the 2003-10 period, 4 of which have already matured, with the majority of investors reinvesting their gains in further Tranches.

Fees are similar to those of Wine Investors, so the post-costs returns of the four matured Tranches -- shown on the performance page of the TWIF website -- will be of interest to potential investors in Wine Investors.

Each Tranche has paid out an annualised return of between 13% and 17% after costs, in line with the asset class's long-term 14% trend, which has been running for at least two decades. Of course, there is some variability in individual five-year periods: for example, TWIF's yet-to-mature Tranches launched just before the market dip in 2008 have suffered and may struggle to reach double figures if the market undershoots Anpero's forecast 21% rise in the market in 2011.

Wine Investors

Past performance is not always a guide to the future, but TWIF's historical record offers some insights into what investors might expect from the newly-formed Wine Investors, if the fine wine market continues to display the same characteristics as in the past.

However, there are some differences between Wine Investors and TWIF, which are worth mentioning.

TWIF's returns have been generated without the use of gearing, but Wine Investors will have the power to borrow up to 75% of the company's adjusted capital and reserves. Gearing can enhance returns; or magnify losses.

I asked Andrew della Casa what sort of level of gearing he would be comfortable with, but he only summed up the position as follows:

"No borrowing facility is in place and putting in place such a facility cannot be guaranteed. It will be up to the Directors to determine if and when to seek to put in place such a facility."

Whilst TWIF's ungeared returns have been very decent, I suspect that, given Anpero's faith in the fine wine market and its own investment approach, it will be happy to gear up, if it can put borrowing facilities in place at attractive rates.

Another thing I quizzed Andrew della Casa about was the potential relationship between Wine Investors' share price and the value of the underlying assets.

In the bearish times of the recent past, we've seen shares in small cap investment companies trading at huge discounts (50%+ in some cases) to their net asset value (NAV). Is there a danger that, at times, Wine Investors' shares will take on the volatility of equities rather than tracking the underlying asset class, thus negating the comforting low volatility that some investors are looking for by diversifying into investment grade wine?

Mr della Casa is hopeful this won't be the case and that:

"As more investors or analysts follow the stock over time and understand how we go about managing the company's wine portfolio, the more these characteristics [relatively low volatility of the underlying assets and low correlation with equities] will be recognised."

Wine Investors will also have the power to repurchase its own shares in the open market, giving it the option to buy them if they are trading at a discount to the intrinsic value of the wine, thus enhancing shareholder value.

The bottom line

In opening up investment in fine wine to private investors of modest means, Wine Investors is a novel and intriguing proposition.

Mr della Casa tells me that the placing, which is aimed at institutions, is also open to individual investors, who may invest through their private client broker or IFA; and that there is no minimum investment requirement. There's one warrant for every five shares subscribed to in the placing.

Personally, if I was looking to invest, I would wait and see how much the company manages to raise and whether it puts borrowing facilities in place. There's a chance, too, that despite Mr della Casa's hopes, the shares may go to a discount to its asset value at some point, giving investors the opportunity to buy with a margin of safety.