Pour cash into wine, drink in profits

By Tim Middleton

Somewhere on the English side of my family there was a tradition of giving a newborn son a case of claret wine that would be maturing just as he was. Add in the gifts of uncles and grandparents, and the lucky kid had a proper cellar when he finished school.

Claret is a wine the rest of the world calls Bordeaux, and if you had an aged cellar of it, you could enjoy a glass on Easy Street. A case of 1986 Haut-Brion, a first-growth Bordeaux that cost a few hundred dollars when it was released two decades ago, is today worth $3,000. Any good wine merchant can dazzle you with tales of wine that has appreciated 500%, 1,000%, even 5,000%.

And the 2005 Bordeaux harvest -- the one now being sold as futures in wine stores around the world -- is said to be one for the ages. But forget about drinking it. "If you just want to make as much money as possible, I would invest in midtier 2005 Bordeaux futures," says Gary Vaynerchuk, the director of operations for the Wine Library in Springfield, N.J. "I would attack that area feverishly. It's going to be a strong place to turn an enormous profit."

Satisfying your inner oenophile

Wine merchants insist that as an investment, wine isn't sensitive to the usual economic factors that drive prices of stocks and bonds. But like real estate, fine art and collectibles, wine is most expensive when buyers are feeling flush, as they do during a bull market for stocks. Also, prices of '05 Bordeaux futures contracts are said to have been bid up in part by Russian and Chinese newcomers, whose fortunes almost certainly would be very sensitive to a global economic slowdown.

Investing in wine in the United States is no easy task. There are no mutual funds or public investment pools devoted to wine. But if your inner oenophile lusts for investment profits as well as fresh blackberries and a hint of leather in a handblown crystal glass, there are ways to do that. The first is to venture overseas, where one investment pool claims a three-year profit of more than 40%.

The other is to hire a personal expert to help you figure out what to lay down. In the Internet age, that is especially easy, even if the clerk at your local grog shop thinks Haut-Brion is the name of a rap album. The Wine Library has built itself into a $25 million annual business, mostly online, according to The Wall Street Journal.

One enthusiast, Richard Bakal of The Wine Trust in Ridgefield, Conn., plans to launch a private offering of elite wines, buying wholesale and then marketing, years later, to lavish restaurants and the rich.

A poured portfolio

There are numerous offshore wine funds, some of which appear to be defunct. Two that are not are the Vintage Wine Fund of the Cayman Islands and the Orange Wine Fund (NL:NL000028627) of the Netherlands.

You can't buy these through your broker; they aren't regulated by the U.S. Securities & Exchange Commission and can't legally market themselves here. You are free, however, to contact them directly.

The Vintage Wine Fund has 86.7% of its assets in red Bordeaux, with the balance in other European wines. Its September 2006 report says the fund has delivered a total return of 43.42% since inception in 2003.

How, exactly, the fund delivers those returns, I can't say: Its Web site offers no details, and the sponsor didn't respond to my query. The fund invests in wine itself -- one area of the Web site offers to buy yours -- but information is otherwise lacking.

These returns evidently (the documents are imprecise) include a 2% annual management fee and a 15% performance fee (the managers take 15% of the profits). Among U.S. investment vehicles, the Vintage Wine Fund most resembles a hedge fund. The minimum investment is 100,000 euros, which as of Monday was about $128,000. Withdrawals can be made only quarterly, with 60 days' notice.

The Orange Wine Fund invests in wine companies rather than directly in wines. Nearly half of its assets, as of Oct. 31, were in five companies: Guala Closures, Laurent Perrier (LPRRF, news, msgs), Vina Concha y Toro (VCO, news, msgs), LMVH and Constellation Brands (STZ, news, msgs). It claims an annualized return since inception in 2001 of 8.5%. More like a mutual fund than a hedge fund, shares were trading last week for nearly 153 euros (about $196), according to the MSN Money database.

There are domestic mutual funds that happen to invest in the liquor industry. The Vice Fund (VICEX) has Constellation Brands and Brown-Forman (BF.B, news, msgs) among its top holdings. But it puts even more assets into cigarettes and gambling, so it's a poor proxy for the wine market.

Own a little, drink a little

The purest way to play wine is to own it, as cases in the cellar and futures contracts for cases to be delivered in a year or two. Wine futures are nothing more than a promissory note, meaning they're only as a good as the merchant who issues them. It's possible he could sell more futures than he himself has purchased, or even make them up, so it's best to buy them from a well-established dealer, ideally the one who gets your regular business.

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