Don't waste your money on wine that doesn't exist!

GrapesThe august Financial Times questioned the value of a major wine fund recently. It highlighted that the wine market had attracted "billions of dollars" in recent years from private investors and pension funds – attracted by promises of high returns against a generally unhappy economic background.
The billions the FT was referring to went into legitimate organisations with real wine in their vaults.
But I – and many, many others – receive an almost non-stop attack from so-called wine brokers whose only purpose in life is to separate investors from their savings.

Investing in imaginary wine...

I have lost count of how many calls I have received from these so-called experts who claim to have my best interests at heart. But after so many, I can say that they mimic the legitimate funds almost word for word with the same narrative – lots of fine wine buyers with a limited supply so the prices go up. The difference is that the real funds have real wine and will be there in the future, while the people who contact me probably have no wine and definitely won't be around this time next year.

The fund that the FT questioned is real, regulated in the European Union, and there are genuine bottles of wine held in its multi-million dollar vaults. The question is how those bottles are valued. It is a problem that goes to the heart of all 'alternative' investments – anything where there is not an active market.

If you want to buy or sell shares in a FTSE-100 company, you can check its value second by second. There is a small gap between what you pay as a buyer and what you receive as a seller (plus, of course, broker fees and Stamp Duty when buying).

Wine is different. You can't find the selling or buying prices of Chateau this or Bordeaux that online – or at least you can't find reliable prices as wine dealers tend to look at their own stock and what they want to do with it.

How wine is valued

The FT raised questions over the fund because it had managed to gain in value every single month of its life – even when other wine funds hit rocky conditions. That may have been superior skill from the managers. Or it could have been a different valuation method.

Some funds use an independent valuer. This questioned fund looked at prices from auctions and a small number of wine dealers. Neither approach gives investors the certainty they might wish for. They can both be dependent on figures based on just a few bottles. So if an auction sells a case (12 bottles) of a particular vintage at say £10,000, that does not mean that the 100 cases of the same wine in a fund are worth £1 million.

It would be impossible to sell that amount at one go without dragging down the price. The same applies in shares when a seller of, say, 10 million BP or Vodafone shares knows the disposal will force the market down.

With BP or Vodafone or any other mainstream share, it would probably be a penny or so. But with the wine, it could be 20 or 30%.

All this was in my mind when Stephen phoned me. He told me he was working for a major wine dealer which had an investment fund. At times there was so much background noise – his colleagues making similar calls to other potential punters – that I had to ask him to repeat details.

It can only go up!

He promised me that the wine could only go up; that rich Chinese and Indians would only buy the finest vintages; and that my investment would be kept in a safe place. I could start with as little as £2,000 and, once I was happy with that, I could go higher. Some of his clients, he said, were investing £50,000 or £100,000. He asked if I would be happy at that level if I was confident.

"You bet," I replied. "This sounds fantastic." I was, of course, using the word "fantastic" meaning fantasy but I doubt if Stephen understood this.

The FT's questioning of the wine fund concerned the value it placed on the various bottles. But these bottles existed. The proposal I received had no details of the bottles in question or where I could inspect them. They could be non-existent (true for some wine scams) or more likely there would be a collection of Chateau Rotgut, Australian plonk, or at best, something good but dramatically over-priced.

And if you still believe that it is possible to put a value on a bottle, take a visit to your local supermarket. I recently saw a bottle of red wine at £11.99 (a bit above my pay grade). But the sticker said I could have two bottles for £12.50 - more like it! So was that worth £11.99 a bottle or £6.25?

But if there is such a discrepancy in the supermarket, just what faith could I have in Stephen's insistence that I would make a fortune?
Read Full Story