Wine Investment Guide

Wine Investment Guide

Contents Introduction & Cult Wines Ltd Page 3 Director Profiles Tom Gearing Philip Gearing Page 4 The Market Overview Market Size Wine Market Performance Emerging Markets Influence Page 5-8 Our Investment Grade Criteria Robert Parker Jr Vintage Branding & Marketing Page 10-11 Our Investment Objective & Policy Page 12 Why Invest in Fine Wine? Additional Motives for Investing in Fine Wine SWAG Tax Efficient Investing Page 13-14 Why Invest with Cult Wines? What do we Offer? How to Begin? How Does the Investment Work? Page 15-16 Tastings & Events Page 17 Press Appearances & Contributions Page 18 Contact Details Page 19

Introduction Introduction & Cult Wines Ltd Introduction Investable fine wine constitutes less than 1% of all fine wine that is produced, predominantly focused on the prodigious estates of Bordeaux With an extended period of compound annual growth rates in the region of 10-20% fine wine displays an imposing track record Whilst, investing in fine wine is not a new phenomenon, both market liquidity and price transparency have developed to a point whereby investors at all levels can now profit from this market An investment in fine wine has long been synonymous with low risk and stable returns due entirely to the asset s unique characteristics: Finite supply - ever decreasing through consumption Perfectly inverse supply curve Tangible asset Veblen good With the emergence of new markets in Asia increasing global demand the delicate balance of managing supply and demand has never been more acute, probably in the entire history of the fine wine market The market for fine wine has increased steadily over the last 5 years and this has been exacerbated by the emergence of China as a world superpower alongside continuing demand for fine wine in the BRIC nations The competition for the world s greatest wines is increasing exponentially, increasing market confidence that we will see continued growth over the short, medium and long term Cult Wines Ltd As one of the UK s largest fine wine investment companies and over 15 years experience in fine wine, we are well positioned to bring you all the necessary expertise to help private clients access the benefits of an investment in this market We are a family run company with an open and transparent focus on which we have built an unrivalled reputation, working with a wide range of investors across the globe The team here at Cult Wines are investment specialists combining our fine wine and financial markets expertise to create highly responsive portfolios Our strength lies in our stock selection and routes to market, but we also boast one of the most dynamic and innovative analysis and research teams, regularly providing clients with key market data Our team of specialists are dedicated to generating returns and delivering value and our service is widely acknowledged as the most competitive available in the UK Our team will provide the expertise, the tools and the information for clients to build a profitable portfolio that s right for their investment objectives At Cult Wines we also recognise the value in providing quality support services and our dedicated personnel across accounting, logistics & administration will ensure that your asset management requirements are met at every level We trust that you will find this guide to be both an informative and essential tool in your introduction and evaluation of the fine wine market and we look forward to working with you in the near future Phil Gearing Director of Cult Wines Tom Gearing Director of Cult Wines Page 3

Director Profiles Cult Wines Ltd Director Profiles Tom Gearing - Director Tom entered the wine industry as director of Cult Wines after graduating from the University of Nottingham, having read History Tom had gained experience previously working with his father and fellow director Philip in the 1990 s for Burgundy Cellar, in the early 2000 s for financialwinescom and working with his brother part time whilst studying at university Tom developed a keen interest in wine throughout his formative years, whilst accompanying Philip on many trips to the Cote d Or Tom showed he had an eye for wine from an early age, and once even upstaged the esteemed wine professionals at Christies at the age of 13 when he spotted that a 1959 12 bottle case of Domaine de la Romanée-Conti, Romanée-Conti had actually been reconditioned and not sold in the condition as stated at sale (Interestingly that case purchased for 16,000 in 2000 is now worth 150,000!) Tom is passionate about fine wine from both an investment point of view and aesthetically, and has formalised this passion for fine wine by obtaining the WSET Level 2 qualification with distinction and is continuing to study up to Diploma level Tom has continued to pursue his entrepreneurial flair and finished runner-up in Season 8 of the BBC s The Apprentice after battling against 15 other candidates over 12 gruelling weeks for the opportunity to win a 250,000 investment from Lord Alan Sugar Tom s firm belief in fine wine as an asset class, saw him pitch a fine wine investment fund idea to Lord Sugar and his advisors which was described by Mike Soutar as one of the best business plans I ve ever read Philip Gearing - Director Philip combines financial markets experience with fine wine expertise to provide a unique mix of skills ideally positioned for the investment services offered by Cult Wines Philip spent over 20 years in Investment Banking with some of the market leaders including Goldman Sachs, Swiss Bank Corporation & Tokyo-Mitsubishi and therefore has both the technical & business skills required to develop the range of investment options that Cult Wines offers to its clients Philip has also spent many years in the fine wine market launching a specialist Burgundy merchants in the mid-90 s and was founding partner of Financial Wines in 2001 which led the way in offering on-line price transparency services to the International fine wine community Page 4

The Market The Market: Overview Although investing in fine wine as a viable asset class seems a relatively new phenomenon, savvy collectors and fine wine enthusiasts have been doing it for many years By purchasing more cases than they wish to consume the future sale of the excess cases would fund further purchases As people have become more aware that these increases in value can be measured and are consistent - participating in wine investment has become more popular Over the last 25 years there is no doubt that wine has been a sound investment, with prices for the best wines rising around 15% per annum Traditionally the US and Europe have been the largest buyers of Bordeaux Grand Cru classés, but in recent times the Asian market in particular Hong Kong and mainland China has established itself as a major hub for Fine Wine This influx of demand has put added pressure on an asset which is finite in its supply Unlike any other tangible asset, Fine Wine has a perfectly inverse supply curve No matter how good the vintage, once bottled, the number of bottles diminish through consumption, and cannot be replaced It is also considered a veblen good - a commodity for which people s preference for buying increases as a direct function of their price, as greater price confers greater status, instead of decreasing according to the law of demand the ultimate in liquid investments Bloomberg Apr 13 2010 Page 5

The Market The Market: Size & Performance Market Size The top Chateaux of Bordeaux contribute about 2bn to the market each year Global annual sales of investment grade Bordeaux wines on the secondary markets is approximately 15bn The stock of investment grade wines held by merchants and individuals is estimated at 6bn to 8bn globally and 15bn to 2bn is stored in the UK In terms of investment classes, fine wine is still considered both niche and small, as the market size is estimated at between $5 billion per annum (estimated figure courtesy of Liv-ex) However, of all the alternative investment classes fine wine is considered to have the most viable, widely accepted and mature market 5 Year Index Performance Comparison:! *Cult Wines Index: Tracks a basket of 10 wines representative of our stock exposure Wine Market Performance Fine Wine has outperformed almost every major financial index over the past two decades During the last twenty years there have been periods whereby the market has returned upwards of 20%, most notably 2009 & 2010 Looking at a typical market cycle of 5 years, returns of around 15% per annum are a more accurate reflection of performance Fine Wine has also been proven to be a wellestablished asset class in times of financial turmoil, providing a safe haven for investors As the search for asset diversification, capital growth and an inflation hedge grows, it is clear that interest in this market both from individual and institutional investors is rising fast The establishment of Wine Investment Funds in the UK, China & most recently France highlights the investment demand for this asset class, add the continuing growth in consumption and the market has the perfect dynamics to offer real investment value over a sustained period A proven track record: Between 1950-1985 the Vintage Claret Index demonstrated an average annual compound return of 152% The 1983-2002 Fine Wine Index showed average annual compound growth of 123% Between 2003-2007 the Liv-ex 100 average annual compound growth rate was 153% Between 2007-2012 the Liv-ex 100 has returned 65%, despite experiencing two economic downturns in that period Page 6

The Market The Market: Emerging Markets Influence The Far East, most notably Hong Kong and China have had an enormous impact, it is clear that the region s buyers are the driving force behind the positive trajectory of Bordeaux Fine Wine in the last few years Hong Kong has led the way for the Far East and in 2008 they abolished import duty and taxes on Fine Wine, becoming the first tax free wine port amongst the major economies As a result wine imports rose by 88% in the immediate wake of the duty abolition and it is estimated that as wine sales fall in Europe they will double in Asia to US$17 billion by the end of 2012 and US$27 billion by 2017 This will be driven largely by mainland China where economic growth, rising income and lifestyle changes have led to a 360% increase in wine imports since 2005 As a result the Asian Fine Wine Market is expected to be worth $870million within the next 10 years Mainland buyers are pricing out consumers from Japan, Taiwan and in some cases Hong Kong in their quest for top quality Bordeaux Chateaux This has led to a staggering appreciation of prices for First Growth since 2009 Coupled alongside China s economic growth, which has seen its economy becomes the world s second largest, China is now the world s 5th largest wine consumer It has overtaken the UK and Germany as the largest wine importer last summer, and Hong Kong has surpassed New York as the world s biggest wine-auction market It is now the place to auction fine wine, and this dominance has seen both Ch Lafite-Rothschild and Ch Latour hold private cellar auctions in Hong Kong The level of global interest in wine investment is continuing to rise according to new figures released by Vinexpo, which show a 25 per cent increase in visitor numbers to its recent Asia-Pacific event The traditional markets of Europe and North America underpin the marketplace but it is the emerging markets that keep it buoyant With the continuing economic development of the BRIC countries is it only natural that we are witnessing a new influx of consumers for luxury goods such as fine wine Take India: It has emerged as one of the fastest growing markets for wine yet for the country s cast population of 11billion; consumption remains extremely low, indicating huge growth potential We are already starting to see signs of various factors such as government policies, increasing disposable income and the influence of western culture driving Indian demand for fine wine Page 7

The Market The Market: Emerging Markets Influence Continued India Wine Industry Forecast expects consumption of wine to increase by 25-30% annually This was underlined at the 2010 En Primeur tastings where, for the first time, fine wine representatives from India attended Whilst many would point to the strict religious beliefs which underpin Indian society as a potential obstacle to growth Fine wine isn t considered hard liquor and is in fact treated in a similar way to soft drinks It is the status and rich history behind each Chateau that will appeal to the newly expanding middle-upper classes The barrier for India appears to be the high Import Tax for fine wine, an obstacle that is already under the microscope, with the European Union currently negotiating to reduce the 150% import as part of a Free Trade Agreement, but this is unlikely to happen before 2013 The European Union is currently negotiating to reduce the 150% import as part of a Free Trade Agreement, but this is unlikely to happen before 2013 Union des Grands Crus de Bordeaux s recent tastings in Delhi and Mumbai earlier this month were as much an investment in the future as the present Brazil is another new area of interest with recent strong economic growth with the number of wine drinkers between the ages of 25-30 expected to increase year on year The fine wine market is very much in its infancy in the emerging markets but what is clear is that these new regions are putting a heavy strain on static supply, giving confidence to the investment market that further periods of sustained growth can be expected Key notes from Asia-Pacific Wealth Report by Cap Gemini & Merill Lynch Asia-Pacific HNWIs appetite for investments of passion increased in 2010, portfolio diversification has emerged as a strong driver of such demand by HNWIs in Asia-Pacific Asia-Pacific HNWIs continued to favour Luxury Collectibles as a hedge against inflation and currency risk, as well as for aesthetic and cultural appeal HNWIs from China, India, Singapore, and Hong Kong were especially active in the investments of passion space in 2010! *HNWI=High Net Worth Individual Page 8

You don t have to be an expert to profit from wine Just invest with one Simply call one of our portfolio managers today to see what we can do for you

Our Investment Grade Criteria Our Investment Grade Criteria Grade Criteria Our stock selections are the result of very detailed and lengthy analysis undertaken by our in-house team of analysts, allowing us to provide our clients with the most comprehensive range of recommendations in the market These selections are based around a range of specific characteristics, such as branding and marketability, Chateaux ownership, Robert Parker Junior (RPJ) score, vintage quality and value Robert Parker Jr Robert Parker is the preeminent wine critic and has been predicting and influencing wine market trends for over 25 years He has helped define the modern wine market and his ratings are probably the most significant contributing factors in setting the prices for newly released wines His 100-point scoring model and uniquely styled tasting notes in his publication The Wine Advocate are without doubt the most widely used by firms and collectors worldwide The price surge for the 2009 vintage is the most recent example of Parker s influence on the market The US wine critic awarded 18 Chateaux the perfect 100pts score, prompting an increase in price of 50-100% for certain wines Vintage Vintage quality is very dependent on climate factors, making each vintage unique, separating the average from the good and the good from the great The exceptional vintages have an elevated status and greater demand which commands a premium in price Other vintages may reach their drinking windows earlier than others, affecting consumption patterns With outstanding vintages such as the lauded 1961 and 1982, and more recently 2005, 2009 and 2010, global demand for these wines amongst consumers, collectors and investors is rising fast, which can lead to sustained price development Nevertheless, weaker vintages ( off-prime ), with substantially lower release prices, can also deliver strong investment potential and each vintage is assessed on its own merit alongside other contributing factors Branding & Marketing Branding is a key driver for buyers of fine wine particularly in the emerging markets such as Far East and India Brand is commonly associated with heritage, ownership and exclusivity but can also be attributed to cultural subtexts For example, Lynch Bages is famous in Chinese society (especially in Hong Kong), as in Chinese, it is called (Lan Chi Pat), a famous 19th Century Opera singer As a result it has a popular and loyal following Further wines such as Beychevelle have have developed cult status simply because the label features a Chinese dragon boat again considered lucky Chateaux ownership also plays a large role in developing the brand and penetrating new markets LVMH the world s largest luxury conglomerate owns two Bordeaux estates, Cheval Blanc & d Yquem and The Pinnault s family company PPR owns the First Growth Bordeaux estate Ch Latour, alongside a collection of assets that range from Gucci to Christie s auction house Page 10

2008 Lafite bottles display the Chinese symbol for 8 which is considered lucky Mouton chose Chinese artist Xu Lei to design the label for the 2008 vintage Beychevelle s dragon boat label is considered auspicious in China

Investment Objective & Policy Investment Objective & Policy The investment objective is to generate high capital appreciation across short, medium and long term strategies through investment in both physical and en primeur wines from Bordeaux and other selected regions Portfolios are created for each individual client based on risk and term strategy Each portfolio targets a return in excess of 15% per annum over a recommended investment term of 5 years Portfolios do not have a fixed term and clients can liquidate all or any part of their portfolio at any stage, typically when advised by their Portfolio Manager This is free of any early termination or cancellation charges We apply an active approach to portfolio management and will seek to achieve maximum performance for clients through detailed analysis and specific market factors as determined by our analysts Portfolio Managers keep clients up to date with the performance of their stocks and will approach clients on an individual basis, making personalised recommendations to enhance their portfolio Outperforming the Market: Through our stock selection strategy, intuitive reactions to specific market conditions and a well-planned exit strategy, we are able to outperform the key market indices Page 12

Why Invest in Fine Wine? Why Invest in Fine Wine? Motives for investing in Fine Wine Tangible Asset - Wine is a real asset, which unlike a share or a bond, has an intrinsic value As an investor you will be the owner of the wines Inflation Hedge - The price of fine wine tends to increase with inflation This makes investing in fine wine a good way to preserve wealth in times of rapidly rising inflation Flexibility - While we encourage investors to set a 3-5 year horizon for their portfolios, wine investment can be liquidated or extended, according to individual requirements Developing Asset - Fine wine quality improves with age and whilst it is not an income producing product, it is a tool for capital appreciation Finite Product - Fine Wine appellations are not extendible as strict laws govern the production of the majority of investment-grade wines The historic classifications remain very much unchanged Diversification - Classed as an alternative investment, Fine Wine is considered a vital component of any diverse portfolio Passion or Interest in Wine - Fine Wine is a fascinating subject matter and investment in the market allows those to combine their interest with capital appreciation SWAG SWAG, which is short for silver, wine, art and gold, is the term coined by Joe Roseman, a former hedge fund manager, in his book Swag: Alternative Investments for the Coming Decade SWAG assets tend to have the ability to last and perform well and they provide portfolio protection in a way that traditional financial assets do not Equities can go bust and bonds can default, but a bottle of Lafite will always be a bottle of Lafite Many financial analysts struggle to value assets like SWAG because it does not have an income stream However, the financial pages are littered with examples of equities with income streams that analysts have badly misjudged as income streams don t really help analysts see those bombshells coming Ideally, the addition of a new asset causes the overall return of the portfolio to rise or stay the same but at the same time reduces the volatility Historically, fine wine has managed to do that as academic research shows that fine wine has a low correlation with traditional financial assets In his point of view, there are two key drivers for wine prices Firstly, the very best wines are highly restricted in supply and therefore the supply curve for these wines is almost perfectly inelastic Secondly, demand is rising constantly and this will continue to be a key factor He believes wine is an asset that needs to be held for the medium term and as a part of a well-constructed portfolio Investing in fine wine is a good way to preserve wealth in times of rapidly rising inflation Page 13

Why Invest in Fine Wine? Why Invest in Fine Wine? Tax Efficient Investing Fine Wine is a tax efficient investment and has advantages for UK domiciled investors Investors are not liable to pay Capital-Gains Tax (CGT) on any profits from wine investments with a total value not exceeding 250,000 Wine is exempt from CGT because it is regarded by the HMRC as a wasting asset with a predicted lifespan of less than 50 years An Investment in fine wine can have substantial tax benefits and we suggest that you consult with your tax advisor for how best to include this asset in your investment portfolio Page 14

Why invest with Cult Wines? Why Invest with Cult Wines? What do we Offer? Managed portfolio covering stock selection, storage and liquidation Stringent stock selection process Tailored and flexible portfolio service Availability to wide ranging stock Access to key market information through: weekly bulletins, quarterly portfolio valuations, buy and sell recommendations The Cult Wines Team in Bordeaux for the En Primeur Tastings Apr 2012 Page 15

Why invest with Cult Wines? Why Invest with Cult Wines? How to Begin? 1 Decide on how much you would like to invest There is no minimum investment level but we have a recommended minimum level of GBP 5,000 in order to build a diverse portfolio and access stock with the strongest growth potential 2 Decide on your investment term Investors are urged to set a 3-5 year horizon for their portfolios to enjoy the typical market cycle 3 Liaise with a Portfolio Manager We advise all investors to contact a Portfolio Manager in order to build a portfolio that is right for them The aim is to construct a portfolio drawing on your objectives and our tailored analysis 4 Selecting the Wines After consultation with a Portfolio Manager, you will receive a recommendation based around your investment level, term and risk profile with all supporting analysis for each selected wine 5 Contact our Office Line Call Cult Wines on +44 (0)20 8332 9386 We are at hand to answer any questions you may have and to make your investment as simple and as straightforward as possible How does the investment work? We quote you the price of the stock plus our 15% management fee which includes portfolio updates, shipping, handling, all administration costs, storage and insurance and the guaranteed sale of your wine at 0% brokerage fee You can sell your wines at any stage regardless of the proposed term of the portfolio; we do not levy any early redemption charges at any stage When selling, liquidation of stocks can take 4-6 weeks and this will be based upon an agreed exit strategy with your portfolio manager Cult Wines do not charge any selling commission We will provide you with regular updates on the market throughout your investment term including newsletters, weekly bulletins and market reports You will also receive quarterly valuations of your portfolio We will monitor your portfolio throughout the investment term and will advise when to sell We take an active role in all client portfolios and this allows us to maximise returns Your wine will be stored under your name in temperature controlled conditions at a Government bonded warehouse Ownership is confirmed by documentation from us, certification and access to the bonded warehouse records Cult Wines do not levy any early redemption charges at any stage or charge any selling commission Page 16

Tastings & Events Cult Wines Tastings & Events Events & Tastings As a client of Cult Wines and as part of our portfolio management services, you will be invited to exclusive events and tastings which will be held at our Richmond offices We are investment experts but also passionate about fine wines and want to share both the enjoyment of the world s finest wines with our clients as well as the financial reward Wine Tasting Room We recently finished having a bespoke tasting room built at our office and this will allow us to hold regular events throughout the year as well as always having our door open to clients to visit and share a glass of wine with us Over the course of each year there will be a number of different events and tastings covering the broad spectrum of fine wine Enjoy Wine From New World Pinots, Barolos and Tuscans, Burgundy and the most prestigious Bordeaux estates we hope to introduce wine enthusiasts of all levels to the world s premier wine producers Furthermore we are happy to arrange private tastings for friends, small groups or corporate events Feel free to contact a member of our team to arrange a tasting or simply to request further information Page 17

Cult Wines Ltd Press Appearances & Contribitions Press Appearances & Contributions Cult Wines Ltd has a strong media profile, regularly appearing and contributing to the media on the subject of the wine market This has seen Cult Wines and its principals featured in the following publications and media channels dating back to 2001 Philip Gearing featuring on Canadian Financial News Channel - BNN Tom Gearing, Director of Cult Wines speaking to Thomson Reuters Above: An interview with Tom Gearing featured in Britain s best-selling financial magazine - MoneyWeek Right: Director Philip Gearing has been involved in the market since 2001 Financial Times Page 18

St Andrew s House, Upper Ham Road, Richmond, TW10 5LA Tel: +44 (0)20 8332 9386 Email: info@cultwinesltdcom Company Registration No 6350591