Villains of the piece

2014-08-14

As prices of fine Bordeaux continue to tumble, the chancers, city trader refugees, the numerically challenged, con-merchants and worse - who set up so-called wine investment companies over the last few years and who attracted hot money and gullible consumers’ hard-earned cash - are continuing to go bust as their mini ponzi schemes or lop-sided balance sheets run out of road.

The latest to hit the headlines are Encarta Wines, Canary Wharf Wines and the snappily named En Primeur Ltd. These add to the list of Culver Street, Premier Cru Fine Wine Investments (who transferred their clients to Cult Wines), and European Fine Wines this summer.

These events do serve to further depress prices, as two things happen: distressed stock comes onto the market and is quickly traded; and consumers who have been stung take flight and get out at any cost. I suspect these events contribute to the overshoot that is a typical behaviour of all bear markets. Whether we’re already in overshoot territory, only time will tell.

It is really rather depressing how people get seduced into putting money into these businesses. Very often we see prices being offered to consumers that are far higher than market rates. For Christ's sake, don’t buy from cold callers you’ve never heard of! At the very least buyers really need to check the value of wines via Wine Owners Market Level pricing or by browsing the range of merchant prices listed through Wine-Searcher. One such consumer contacted Wine Owners earlier this year after they’d been offered a case of Montrose 2003 by a firm selling prestige fine wine at £2,100 per 12x75cl IB when the market price was £1,350-1450 at the time. The implication was that it had been rerated 100 points by Parker and that it was primed to go rise to £2,500 per case. In the event it had not been rerated, was not rerated, and today stands at £1,450.

Then there’s the story of Nobles Crus (the wine fund of Elite Advisors) who were forced to suspend redemptions last year by the Grand Duchy of Luxembourg’s financial regulator due to insufficient assets to meet the demands of clients heading for the exit door. Then in May this year something akin to a sweetheart deal was stitched up with leading creditors that led to redemptions at a notional value of €37M (Read the FT article Luxembourg embroiled in fine fine row).

What the true worth of the fund is, no one really knows. Ernst & Young were apparently used to bring authenticity to a suspect valuation method that included punchy Hong Kong auction prices. Supposedly there are €51M of assets left in the fund. Yet the fund has not filed accounts since 2011. Rumour has it that a variety of potential buyers have sniffed the assets over the last year only to walk away, believing values to be too high. One thing is likely: investors would be lucky to get out with the 28% discount to valuation that Banca Generali achieved when it recently sold their shares in Noble Crus to an unnamed 3rd party, as and when they manage to redeem.

How can a global leader like Ernst & Young have accepted a proprietary valuation methods for auditing a fund’s value, especially when that valuation was being questioned by other parts of the mainstream fine wine market including Liv-ex? How can the presumed oversight of a leading Italian Bank, who was a shareholder in Noble Crus, have still allowed a situation like this to develop? Not that regulated markets are necessarily any better. And they say the opaque derivatives market is booming once again…

But doesn’t this further demonstrate the value of being in control of your own portfolio of fine wine? A bit unfair perhaps on the good guys such as The Wine Investment Fund, Wine-Source and other reputable, well-run funds. But of course people who want to build their own portfolio are a different breed to those who are happy to go into a collective, so you can’t really compare. Collectives address a certain market seeking financial diversification and targeted returns, which isn’t the same as the mainstream fine wine market of collectors and lovers.