Wine in Focus vodcast | Ep 1 | Investing in wine

Transcript: scroll to the areas that interest you

• LM: Lerato Motshologane, Investec for Business, trade finance specialist and Discover Wine founder
• RVE: Roy van Eck, Investec Wealth and Investment International, wealth manager
• JM: Johan Malan, Wine Cellar, investment and brokerage
• MR: Mike Ratcliffe, Vilafonté co-founder

• 00:00: Introduction and welcome of guests

  LM: Welcome to Wine in Focus, an Investec Focus Radio SA vodcast series to awaken not only your appreciation of South Africa's world-class wines, but the diverse people behind a resilient industry that is a key driver of our economy. As proud sponsor of the Trophy Wine Show and the Trophy Spirit Show, Investec wants to showcase what our local industry has to offer.

  I'm Lerato Motshologane, a trade finance specialist at Investec Business Banking, founder of Discover Wine and your host. In this debut episode, we'll be discussing investing in wine, for enjoyment and returns. Now let's meet my guests. Joining me today at Grande Roche in the heart of the Paarl winelands is Mike Ratcliffe, Roy van Eck and Johan Malan.

  Mike is the co-founder of Vilafonté, one of South Africa's most acclaimed luxury wine brands. A second-generation wine maker with global experience and a wine MBA under his belt. Mike also serves as chair of the Stellenbosch Wine Route and co-founder of the Cape Wine Auction, raising funds for kids’ education.

  Roy is an engineer turned Investec wealth manager in our George office, who sipped into wine during his varsity days. He’s since deepened his knowledge through the Cape Wine Academy and the Wine and Spirit Education Trust. From balancing portfolios by day and wine palates by night, experience has taught him that the best bottle of wine is the one opened with good friends.

  Johan leads the investment and brokerage division at Wine Cellar, South Africa's premier fine wine merchant. He's got a Masters in International Trade, and many years ago worked on a wine farm. Johan specialises in fine wine investment and cellar management. 

• 01:54: Wine as an alternative asset class

  LM: Gentlemen, welcome. Thank you for joining me here today.

  It's so lovely to see the three of you. And I'd like to kick off with you, Roy. You're a wealth manager at Investec and you’re into wine, that's really cool, the two sort of go hand-in-hand, yes?

  RVE: Yes. I think today's discussion will be leading to looking at wine as an investment.

  But I think if you take a step back and you want to look at a portfolio, where does wine sit in that portfolio? So usually we look at equities, property, fixed income, cash, and then you have an alternative section. And within the alternative section, you get structured products, you get private equity, and all those types of things, art as well, and then wine forms part of that as well.

  Even within an alternative asset class, which should be anything between zero to 35%, depending on your risk profile, within that alternative asset class, wine should maybe be at 5-10% of your asset class of that piece. So, for me, I think if it's like that, it's well diverse. It's something that you can experience and follow a passion in, and maybe make a big buck or two while having a nice asset in your class and not only in your glass. 

  LM: Amazing. So you are actually saying that wine can be considered an asset class that can yield returns?

  RVE: I think it's a fun hobby that you can actually use to fund your passion. If you know what to look for and when in the time period, and when to sell, and how to sell and how you store it correctly. There are a lot of things that I think we'll unpack today that you need to look at. 

• 03:29: The basic investment case for wine

  LM: Which then brings us to Johan, our wine investment specialist from Wine Cellar. Johan, what is the basic investment case for wine?

  JM: I'll explain it this way. Remember that wine is an agricultural product. It's the consequence of harvesting fruit from a vineyard or vineyards every year. And that infers limited supply, of course, and once supply diminishes over time with a consumable like wine, in the basics of supply and demand – Economics 101 – price should rise with lower levels of supply.

  However, there's a second element in that question trading on the secondary market that I think is really at the core of why wine has an investible aspect to it, and that is that consumers of fine wine or people who really enjoy wine, understand that the greatest wines in the world are really at their greatest after time has run its course.

  And consequently, you don't only have diminishing supply over time, but also in wines that are deemed investible, you actually have rising demand over time as consumers or connoisseurs or people who just enjoy terrific wine, understand that these wines are now actually at their peak.

  In very simple terms, if you have to use a simple example, 2015 was a terrific year for Stellenbosch reds, cabernet in particular. I'm sure Mike would attest to that. And I think it's fair to say that today there's much less 2015 Stellenbosch reds available than they would've been at release in 2017, 18 and 19.

  And by the same token, if you have a discerning consumer or just someone who likes great wine, they'd be willing to pay much more for a 2015 today than they would be for a current release 2020 or 2022. 

• 05:12: What separates a fine wine from an average one

  LM: Which then brings me to Mike. You are the connoisseur of fine wines, the man behind Vilafonté, and we know that you're producing some of the finest wines in the country.

  Now, can you give us some tips? Can you educate us on how to identify what Johan has touched on? How do I, as an average wine drinker, now I want to get into this wine investing thing, how will I be able to identify what a grand cru wine is and the difference between that and just an ordinary wine?

  MR: Like anything in the world of investment, you need to take advice. And so that's why people like Johan are invaluable because they spend their time doing this.

  Broadly in the wine industry, there are five categories, and if all five boxes are ticked, you can be fairly sure that wine is investible.

  The most basic is going to be quality. Quality is subjective, but there are broad discernible characteristics of quality in terms of balance, and basically just making sure a wine is not faulty. But quality can be ascertained over time and professional people are able to adjudicate quality. That's the easiest one.

  The second one is definitely going to be emotion and passion. So, the definition of a fine wine can often be broadly brought back to the fact that a wine can actually provoke emotion, can provoke feelings, can allow you to drink a bottle of wine that actually makes you sit back and think that might give you goosebumps.

  And emotion and passion are very important, and people that like fine wine will have recollection throughout their life of those wines that invoke that passion. That's the second tick box.

  The third one, I think, is very important. Provenance. Provenance is not just about “where does the wine come from?”. There's usually a common denominator of some of the great wines in the world that they come from a place, that they come from a particular piece of land where you can visit, where there's a uniqueness about the soil.

  But I would like to add to that, you should add who made the wine because generally another common denominator of greats and venerable wines is that there is a track record of greatness that is often associated with the terroir, the provenance, and the wine maker themselves. So that's the third one.

  The fourth one is slightly more obscure, but I would argue very important. It's about sustainability, and sustainability in the world that we live in is fundamental, and it's of course about doing the right thing, respecting the environment. But I would argue also about financial sustainability.

  It's no use that a winery is producing a wine that after three years goes out of business, all the people lose their jobs, and it no longer exists. Like I say, slightly more obscure, but sustainability is absolutely key.

  And then the fifth, quite obvious yet somehow, sometimes overlooked, is pedigree recognition.

  There are recognised ways that a wine can be identified by critics around the world who basically make it their living to identify great wines, great investible wines and fine wines, but in this more modern era of crowdsourced opinion, there are WhatsApp groups – thousands of them around the world – of fine wine collectors, and they're constantly talking about the wines that they identify as fine wine, crowdsourcing opinion of recognition of pedigree.

  There are specific wines from specific vintages made from specific plots by specific winemakers that have achieved adulation amongst wine consumers. And I would say that's the final category of fine wine. And just in conclusion, because we're talking about investible wines – there are no investible wines that are not also fine wines.

  LM: Beautiful. I like that. And thank you for sharing those attributes. 

• 09:00: Are stickers a sign of pedigree?

  LM: You speak about pedigree and when I go into a wine store and I see a rated wine with the stickers on the wine, does that speak to pedigree as well? Is that something I can use to identify a good wine? Because you can get to a bottle and there are five stickers and you're like, “oh, this is good wine”, and you get home and you're like, maybe not. Are the stickers a good indication? Is there a specific one that one should look out for?

  MR: I think competitions are fundamentally important. I think being able to allow the consumer to recognise the wines that have done well in competition through the use of stickers is also very important. But pedigree is something that doesn't happen overnight, it happens over time.

  And so if you are able to consistently apply a Trophy Wine Show gold sticker to your bottle every year for 10 years, you've got pedigree. But if it just happens in one year, you've made a great vintage. So, pedigree is much bigger than just winning a gold medal. You need to consistently be flying very high. You need to be consistently delivering.

  And in my own business, I often take things right back to a real basic premise that ultimately in Vilafonté, my job is to make sure that every time a consumer or a sommelier opens a bottle of our wine and they taste it, very simply, they need to go, “Wow”. 

• 10:24: How to store wine properly

  LM: I love that. Thank you for sharing that with us, Mike. And I just want to go back to you, Johan, we are speaking about fine wines. We're speaking about patience and time. Now how do we store these wines? Right? So, if you are going to collect a wine or collect wines, how do you make sure that you get the right sort of environment to store the wine so that it doesn't go off? How does that work?

  JM: Yeah, very good question, and I think critical to not just fine wine or investible wines, but just great wine enjoyment is the handling of the product, as with many other things.

  Wine likes to be kept in a relatively dark, constantly temperature-controlled environment, ideally cool. So, if someone is looking to set up something at home, for the short term, I think you can definitely do something like that.

  I'm saying short term because most air conditioners or home-installed air conditioners really only go as low as 16 or 17 degrees. And if you don't have a very well-insulated room, you know, that can become a challenge to maintain that temperature or to really maintain even 17, and I'm saying 17, because the ideal temperature to store your wine in is between 13 and 16 degrees Celsius.

• 11:38: Should you insure your fine wine?

  LM: Roy, obviously fine wine is expensive or not as easily accessible. How does one look at insuring this portfolio? Is it possible to get insurance on wine?

  RVE: Yeah, so I think if you store your wine in a bonded warehouse, like with Wine Cellar, it's insured, and if something happens, at least you know it's protected. When it's at home, you're going to have to include it in your personal household insurance.

  And I think then it gets a little bit murky. And I think there are cases where people try to claim after consuming their wine and say that they were falsely consumed, so they would like to claim the value of the wine. But I think there are a lot of nuances that come in there, that's a problem.

  The one is, how do you value the wine? Was it really insured? Was it properly stored? If it was properly stored, then it has its value. If it wasn't, it doesn't have the value. So it gets murky.

  I think you have to understand that when you go into this type of investment, you want to make sure that you're protected in the future.

  There are other ways as well. One is an investment methodology of diversification, which actually goes back to how Bordeaux also started.

  Merlot and Cab Sav – the one was planted as an insurance policy for the other one, because it ripens a bit later. So if the weather strikes the one, the other can still produce a harvest.

  So when you look at diversification into a wine asset, again, as at the beginning, if you have an alternative asset loss, only a small percentage of that, even that small percentage, diversify.

  Go between different producers that have a range of consistent wines that they've produced into the market. And you can say, we have one or two of these.

  Because another thing that people forget is that wine can age well. But it is still finite. At the end of the day, we'll have a peak and you would want to experience that peak. And if you don't, it will go down and you'll lose that opportunity to have that peak. And you as a person, your palate grows over time, so you can't insure against that.

  So, what you need to do is you have to have a nice diversified wine collection. Make sure that you have a range from Sauvignon Blancs you can age – proper Sauvignon Blancs, some white wines, some nice red wines from different producers.

  And then in time, you can look back and say, look, this is my journey of wine. You experience it with people and, yeah, be sure that you drink it before it goes down, because you can't claim against that. 

• 13:44: Cultivating patience

  LM: I keep thinking about fine wine and patience. I don't think I'm that patient. I get my wine and I want to drink it now. And we said earlier that if you get a very good bottle of wine, the chances are in a couple of years down the line, it's going to taste even better.

  So how do you advise somebody like me who just wants to get into my Series M now, or how do I, like, build up that patience? And I know that patience in wine is something you're very passionate about. So how can you teach me to be more patient?

  MR: I love that question. I always think about wine collecting in the same way as art collecting or investing in classic automobiles. There's an underlying passion and there's also an underlying enjoyment you can get, and it’s heightened when you know that the value's going up. So, I call it the joy of investing. But we do live in a very fast-paced world, an FMCG pace, where anything we want, we can get it today, Takealot will deliver it tomorrow.

  I buy a lot of wine from Wine Cellar. I have to say Wine Cellar is very good, but if it takes more than two days, I get a bit jumpy and maybe a little bit thirsty.

  I often like to think about the idea of creating occasions in this fast-paced world. I don't think that we spend enough time on creating great occasions.

  The greatest wines in my cellar, when I speak for myself, is I'll go into the cellar on a Monday morning, find a spectacular bottle of wine, and then think I'm going to drink this on Saturday, five days ahead, and then I'm going to call my best mate. I'm going to think about which butcher I'm going to get the perfect piece of meat from.

  I'll make sure that I've got perfect glassware, that I decant the wine, that I create a lovely menu. I might even think about where we're going to sit and when that bottle actually gets opened, there's an occasion.

  And then you then have the joy of investing where you're consuming something, but also knowing that you might have paid R500 for it and it's worth R5,000 now, and it actually makes the wine taste better.

  To expand on that, the actual physical active investing, which in the wine world is purchasing wine, it should give you as much joy as the ultimate joy of consuming it. And so I say to people, if you have a wine cellar, don't go and buy hundreds and hundreds of bottles straight up and just fill your cellar.

  Make sure that every bottle in your wine rack has a story so that you can remember when you take it out of the wine rack to drink it, you can remember why you put it into the wine rack. Who were you with when you bought it? Why did you buy it? Were you with the winemaker? Were you with your close friend? Were you visiting the wineries? Were you in consultation with Johan, getting some advice?

  And I would apply the same thing to art. If you're going to buy a great piece of art, make sure that the act of acquisition brings you as much joy as the act of consumption.

  LM: I think you've just changed my whole world. I'm definitely going to look at this differently, and I think there's also a respect element for the wine. I think, you know, you highlighted that so beautifully.

  V/O: We will return to the conversation in a moment. But for those of you who are not familiar with the Trophy Wine Show brought to you by Investec, here's what you need to know.

  It's an annual competition that sifts and sips through over 600 wines, to identify South Africa's best. Winners will be announced on the 9th of June.

  And then you'll have a chance to experience all the award-winning wines at the Trophy Wine Show's Great Tastings. These are taking place in Cape Town on the 10th of June at the Cape Town International Convention Center and in Johannesburg on the 12th of June at the Sandton Convention Center.

  Investec private clients will enjoy a 20% discount when they use their Investec Visa card to purchase tickets on Webtickets.

  Now let's get back to that discussion. 

• 17:35: What returns to expect from fine wine investment

  LM: Johan, I just want to touch on something that I think people who invest, think about, is returns, right? So when you go into investing in anything, you want to know what you're going to get. And I think, Roy, you can agree that in your world, that's the first thing clients ask you.

  How do you make it clear to your clients on the return aspect of the wine? So in terms of auctioning, I invest in wine from Wine Cellar. I buy it, you cellar it for me. How do I then, five years down the line, 10 years down the line, make money from it?

  JM: When speaking about investing in wine, I think it's important to just for your sake as an individual, for your own sake, to make a distinction between two types of investments in wine, and that would be as a gross categorisation.

  On the one hand, investing in wine, if I can look back at the European roots of where it came from and what the old custom of investing in wine in Europe would've been: I stay in Saint-Julien in Bordeaux, and I've got two or three properties around me that were my friends or mates, people I know well.

  And each year during ‘en primeur’, I'll go and buy a case from each of them, because I like them and I like their wines, but, by the same token, I'll buy a case or two of Mouton up in Pauillac, or Lafitte, or whatever. Keep those for five or 10 years, let them build up a bit of value, and I'll sell them back to the market. And they actually finance the three cases or six cases that I bought from my three friends.

  So that's really the one aspect of looking at investing in wine – it's really as a means of financing your own consumption and investing in your own long-term sales.

  The second view or way of investing in wine is a much more pure asset-driven focus, where you say, cool, I'm buying wine at price X, and over the course of time I want to achieve X plus 10% or 15% or 20% or 50%, or whatever.

  So, at the heart of the question of how do I achieve that second nature of investing, really viewing it as a financial investment and as an asset class, valuation becomes critical.

  I can pull out a bottle of wine here and tell all of you, this is how much this wine is worth, and I've got it in my cellar. But the reality is, if no one in the market is willing to pay what I'm saying this wine is worth, then it's not really the investment that I've made it out to be.

  And so to that extent, wine investment as such has really formalised globally over the last couple of years, and the advance in technology is helping us to value wines much more accurately.

  And so, the de facto pricing mechanism in the world of fine wine is called Liv-Ex - The London International Vintage Exchange – started by two ex-bankers in the London fine wine scene. What they literally do is they plot values of wine over time and how it trades. So, there's an active market price.

  And to that extent, you can now actually start allocating a relatively accurate market price to what wine is actually worth in a local South African context to bring it home. Our market is much younger, still very much in its baby shoes there. There's less of a formalised element in our local wine market.

  So if you want to talk about what kind of returns can you look at, of course I'm not a wealth manager, an investment manager myself, but because we've got an inflationary-driven economy, it's natural for top-end producers to have annual price increases in the next vintage release of between six and 10%.

  And if it is a wine that has the brand equity, in other words, there's someone in the market that's willing to buy all the vintages because of the qualitative aspect of the product, it's fair to assume that there would be a premium on top of that. So, wine Cellar has started putting together these baskets of top end wines for our customers a number of years ago already.

  And we've seen over time the value on these wines, again, depending on the vintage and the producer et cetera in the region, but these would grow between 10 and 20% per annum in value.

  So, it really depends on the composition, but I think that's a fair ballpark in a South African context. Globally the outlook is a little bit different and more conservative. But then of course it's in currency terms, it's not in South African Rand terms. 

• 21:53: First of its kind: A wine bond

   LM: Amazing. And we spoke of wine bonds and that's something that I've been reading up on from Wine Cellar. I'm so intrigued. What does that even mean? Wine bonds?

  JM: Yeah. So the main way in which wine is sold internationally – it's not the case locally because of how local legislation works – is to sell wine in bond – meaning that no tax or duties have been paid on the product as such – those are only paid when you take physical delivery.

  And so, to that extent, Wine Cellar has actually partnered with an FSCA-regulated entity called Shire Capital, where we've put together what we believe is a world first. We think it's the world's first because we're speaking to many of the top UK merchants and to our knowledge, speaking to the folks at Liv-Ex, they haven't come across something similar.

  We've put together a fine wine AMC (Actively Managed Certificate), where South Africans, or anyone for that matter, can basically invest in wine with a pure asset focus. So it's not wine that you would want to take delivery of. These are wines that are bought in the UK and Europe. Liv-Ex is the pricing mechanism for valuing this portfolio or composition of wines.

  And they're all kept in bond, as I said, which ensures the provenance that Mike referred to earlier on. And in essence, what happens is that as an investor, you would buy a certificate or certificates, and these certificates are then linked to the underlying asset, which is a basket of fine wines. So, you really have the opportunity to capture the long-term, uncorrelated to other asset classes, steady growth that wine offers with less volatility. And from a South African perspective, has a bit of currency exposure.

  And Liv-Ex runs an index, they call the Liv-Ex 1000, really the broadest measure of the fine wine market, the thousand most liquid wines on the fine wine market. And this index has been doing seven or 7.5% since inception in the early 2000s. And that's in Pound terms.

  LM: Wow! I'd like to say wow to such a great session. I really enjoyed speaking to the three of you and learning so much about wine as an investment. 

• 23:53: Wine industry in next 10 years and conclusion

  LM: The last question that I have for you is: Where do you see, or where would you like to see, our industry in the next 10 years?

  MR: I have two quick comments. The first one is, the greatest wines from South Africa get sold out very quickly. That's a huge strength, but I would argue that it's a slight weakness in the sense that, if you were to take the top 20 by whatever measure wines from South Africa, they sold out so quickly – but a lot of that wine is being sold to South African consumers.

  So I would love to see the greatest wines in South Africa produced in slightly larger quantities, so that if I went to Tokyo, New York, Geneva, or San Francisco and I went to a three-star Michelin restaurant, there would be sufficient supply to service the world.

  And then a final comment on that front is, I would love to see the South African wine industry have a little bit more confidence. The greatest wines from South Africa are as good and many times better than the greatest wines in the world. And I just think that commentators and wine producers could maybe just put their shoulders back a little bit more and shout about it a little bit more because it really is a fact recognised by some of the greatest commentators in the world.

  RVE: Yeah. If I can add to that as well, to say where I want to see the industry in 10 years, I think is to be firstly more respected locally. I think to have a local culture where we appreciate wine for what it is and what we produce into the world, where I would want to see families teaching their children to say, look, we appreciate the wine, we enjoy it for what it is, for the quality it produces.

  And then I think if we adapt that culture, we will hit the international market. So that would be great to have a nice wine culture, bigger wine culture locally in the next 10 years, and hopefully then, speaking as someone that enjoys our local wine, it won't be priced out of our budgets. But if you invest properly, hopefully you can still afford that in the future.

  JM: I think we have terrific people locally making incredible wines across the age spectrum. If you think of old traditional Stellenbosch properties that have been around for decades, to the youngest startup-style businesses with young wine makers fresh out of varsity, we really make incredible wines.

  But if I look at the international market, if I look at something like Liv-X, the total volume traded in South African wine on Liv-Ex – really the greatest formalised exchange in the fine wine world – is 0.4%. And to me that's a pity.

  I'm very much aligned with Mike's view that I think we produce some of the greatest wines in the world, what various producers have done with invigorating our old vine Chenins, and certainly Stellenbosch following the Bordeaux mould, but with a much clearer South African identity doing our own thing, not trying to be Bordeaux.

  I think we've got terrific wines, and I think the world needs to know about it. And for me, if I look 10 years ahead, which is why we're doing what we're doing with bonded and Wine Cellar, it would be great if, as Mike said, if we can see on something like Liv-Ex, or in the world's greatest restaurants or when I go to Bordeaux again end of June or in 10 years' time, that when I mention these top-end African names, you would have the French salivating about our wines and not just trying to sell their wines on to us. Great as they are.

  But I'm excited. I think we've got a terrific industry with fantastic people doing great things, farming terrifically well, looking after their people and making incredible wines, and I think the world needs to know about it.

  LM: Amazing gentlemen, this was a treat. Thank you so much. I hope that I'll be seeing you at the Trophy Wine Show, either here in Cape Town or back in Johannesburg. But I'd like to end off this wonderful session with a toast. So, if we can raise our glasses, and this is to the joy of investing in wine and to great occasions.

  All: Cheers!

  LM: Thanks for listening to this episode of Wine in Focus, brought to you by Investec Focus Radio SA. In our next episode, we will be chatting to some of the industry's biggest wine makers and shakers about how the Trophy Wine Show elevates our local wines, and ensures further diversification and development of the industry.

  If you're interested in watching the video of this discussion, check out the Investec YouTube channel. You can also find all the episodes of the series at investec.com/wineinfocus, or wherever you get your podcasts.

  If you enjoyed this episode, please rate it, leave a comment, and forward it to your friends and colleagues.

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