The practice in the wine investment world known as en primeur has come in for a broadside by a fund specialising in investing in the great houses of Bordeaux.

While devotees of the noble grape will cavil at the idea of fine wine as an investment asset on a par with equities or bonds - surely the point is to drink it eventually - the great houses of Bordeaux, Burgundy and some select others have found a niche in recent years. Fine wine is thought of as an asset rather like art, classic cars and jewellery.

But with all markets, practitioners can disagree sharply on whether certain ways of operating are worth it. Over at The Wine Investment Fund, a London-based fund only investing in Bordeaux fine wines, its managers have sharply attacked the practice of pre-selling the latest vintage, a process known in the trade as “en primeur”.  TWIF is represented in centres including Hong Kong and Bermuda; it is also available worldwide on a variety of platforms. Since the base month of March 2004 when net asset value was set at 100, the NAV stands at 227 as of March this year, according to its website.

With en primeur, the liquids created in the region are not bottled or made available to the market for as long as a year or more but they are bought and sold without parties having a definite proof of how good the vintage turns out to be. The chances of getting the gamble right is why this market exists.

But not everyone is convinced this technique is worthwhile.

The Wine Investment Fund says that since its founding in 2003, it has questioned the logic of buying wines en primeur because, it argues, returns achievable are not justified by the higher volatility in the price of these wines during this period.

TWIF says that a person buying en primeur is purchasing the right to a future benefit (delivery or ownership of a wine) by giving some benefits today (the cash which has been paid, plus any interest or other return which could be earned on this cash). To compensate the buyer for such uncertainty, the buyer hopes or expects that the price of the wine when it is physically released and ready to be drunk is higher than on release. TWIF says its analysis shows that, up to and including the 2000 vintage, en primeur was the most efficient way to tap the market, but this has not been the case since the turn of the century. The very popularity of this method has been its undoing, TWIF says.

“Ironically, it was the very success of the high profile 2000 vintage from the point of view of the collector or investor which began to undermine the en primeur system and may eventually lead to its demise,” Chris Smith, analyst at TWIF, said in a note.

His colleague, Andrew della Casa, founding director at TWIF, added: “We have always excluded en primeur from our portfolios at TWIF, considering it a sub-optimal way to invest in wine.  It now looks as if our view is finally becoming mainstream. We continue to advise investors to avoid en primeur.  Unlike many commentators, who may have a vested interest in promoting wines en primeur, at TWIF our role is to analyse the wine market objectively and take whatever approach is most beneficial for our investors.  Buying wines en primeur has never been part of that approach."

The wine fund argues that by 2000, châteaux owners, who had seen the big profits made from en primeur, became determined not to lose out, and released their wines at a higher price.

While some vintages may still have produced good returns, they were outpaced in investment terms by wines which were/are physically available in the marketplace, TWIF says. It adds that the method is still used due to inertia in the traditionalist wine trade, and the issue of branding. On the second point, TWIF argues that the top names in the Bordeaux market have become global luxury brands, so it is difficult to cut prices if there is a poorer quality year or if there are big price falls in the wider market, as this would undermine the brand.  

“The 2013 vintage has now been released and the wines are described as the worst since 1997 or possibly 1987.  It is the third weak vintage in a row, and large stockpiles of these poorer wines remain in the distribution network.  Everything points to the need for a sharp drop in prices, but an understanding of the main forces at work (inertia, decreasingly, and brand position, increasingly) suggests that this may not be forthcoming,” TWIF adds.

Missing a point?
At Berry Brothers & Rudd, the renowned wine merchant dating back to the late 17th Century, the firm said TWIF’s comments made some sense on the investment side, but added qualifications.

“We have to remember that wine is a food product made to be drunk and enjoyed and speculation is only a micro part of the reason wine is purchased. Also, not taken into account is the fact that Bordeaux is a victim of its own political game but in essence some of the wines are really good value,” the firm told this publication, adding that in its view, the transparent Bordeaux market favours the end-consumer by enforcing lower margins compared to other regions.