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Investing in wines and fine arts

In many of my earlier articles, I have emphasised on the need to have a well diversified portfolio where most of the constituents/asset classes in your portfolio should have as low a correlation factor as possible so that your portfolio is able to weather various different kinds of economic conditions.

While the majority of investors are primarily focused on investing in stocks, bonds or even cryptocurrencies, there are actually a few other unconventional asset classes which are beginning to gather investor's interests in recent years.

These asset classes might not be something an average joe will be expecting but track records have shown that they are definitely a good hedge against drops in stock markets.

And these asset classes are wines and fine arts.

Similar to other non income-producing assets such as gold and Bitcoin, wines and fine arts derive their values based on how people perceive their values to be. Throughout human history, it has been well known that wines and fine art have a reputation to grow in value over time with relatively stable momentum. Now, let's explore these two asset classes in details to determine how we, as average investors, can partake in the inclusion of these asset classes in our portfolio for diversification.

Let's talk about wine first.

Similar to the stock indices, there are actually wine indices that track the prices of the most traded fine wines on the market. They are usually represented in the form of Liv-ex 50, Liv-ex 100 etc with Liv-ex 100 being the most common representation when used for comparison against other asset classes such as stocks and gold. You may find more information about the various indices here.

According to research done by Aranca, a global research and analytics firm, the Liv-ex 100 index has an even higher sharpe and sortino ratio than gold or S&P 500 based on data from 2004 to 2014 due to the ability of wine to be constantly producing high returns amid lesser volatility compared to these other asset classes. In fact, wine has outperformed S&P 500 in the past 30 years. And the best part of it is that the wine has a very low correlation factor to these other asset classes. What affects the stock market do not typically affect the wine market. For instance, weather probably has a higher impact on wine production than any other typical economic factors such as interest rate. Hence, these combinations of factors result in wine being a perfect addition to your portfolio as it is an asset class which has a high risk-adjusted return yet low correlation factor to your other typical constituents in the portfolio.

(Source: Bloomberg)

(Source: Bloomberg)

So, how could the average investors like us, invest in wine without breaking our bank account or building an underground wine cellar to store those fine bottles of wine?

One option is to invest with Vinovest. Vinovest is a wine investment platform which combines both the expertise of sommeliers and AI-driven algorithms to derive suitable investment portfolios of wines for various different risk appetites (conservative, balanced and aggressive). Once you sign up with Vinovest, you will need to answer a series of questions to determine your risk appetite. From then on, you will be allocated to a suitable portfolio and what you will need to do then is to fund your account (a minimum amount of 1000 USD is needed) so that wines belonging to the portfolio suitable for you could then be purchased. Vinovest will then help you to buy and store the wine at an annual fee of 2.85% (can be lower if your portfolio goes up to 50,000 USD). At the end of the day, you could then sell your wine at a profit when you are satisfied with the gains or simply have the wine delivered to you if you like to enjoy them (though I will think that most will probably like to see a profit instead). The downside of the platform though is that you can't really choose which wine to purchase as the portfolio you are allocated to is a fixed selection of wines chosen by the AI algorithm so you are kinda at the mercy of the platform. However, this might not be a downside if you are not well-versed in choosing the right wines and prefer the experts to do the selection of wines for you instead. This then allows you to not lose out in the potential gains of the wine market due to a lack of personal knowledge. Anyway, you could have more say in your wine selection if your portfolio is 50,000 USD or above.

How about fine arts then? How's the performance of fine arts over the years? Do we have something similar for fine arts for average investors to invest in?

From what was gathered, fine arts has also outperformed S&P 500 in recent decades. According to Artprice, blue-chip artwork has actually outperformed S&P 500 by more than 250% from 2001 to 2018 and generated an average annual return of 8.9%. Personally though, I will take this with a pinch of salt as there is a certain survivorship bias in this.

Similar to wines, fine arts has very little correlation to most other asset classes. In fact, the correlation it has with respect to these other asset classes are even lower than that of wine.

(Source 1: Art Market Consultancy, LLC, February 2019)

(Source 2: Citi Private Bank, Global Financial Database, April 2013)

Just like how you could invest with Vinovest for wine, you could also invest in Masterworks for fine arts. Masterworks is a platform which allows buying and selling of shares (of iconic artworks). Using their proprietary data/algorithm, they will look for artworks which are believed to have the best risk-adjusted returns. They will then securitize the work, which then allows for investors to be able to "purchase shares of the artworks", pretty much like how you purchase shares of a company. This thus provides the opportunities for average investors who could not afford to buy a whole artwork to still be able to purchase parts of the artwork in that sense and enjoys the potential returns this asset class could bring to their portfolio.

While wines and fine arts have always been seen as investment vehicles for the rich, these are no longer true as upcoming platforms like Vinovest and Masterworks have allowed average investors like us to be able to invest in these asset classes for better diversification and risk-adjusted returns. I will personally look more into these platforms and consider investing a small part of my portfolio in these asset classes. If you are looking at building a data centric balanced portfolio, these asset classes should definitely be in your radar.

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