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Benefits and Pensions MonitorA Real Alternative Investment By: Jim Helik The investment world can move quickly. What was once cutting edge is now mainstream. A mere dozen years ago, high yield bonds from emerging market countries could have been considered an ‘alternative asset.’ Today, they are just another type of bond. Hedge funds, infrastructure, and real estate are now acceptable parts of the investment landscape. So where can a plan sponsor find Alpha these days? A book that has landed on my desk may have the answers. It is titled ‘Wine Investment for Portfolio Diversification: How Collecting Fine Wines Can Yield Greater Returns Than Stocks and Bonds.’ You would expect a book published by the Wine Appreciation Guild to make a case for this type of investment, but what is surprising is that it includes a fairly rigorous analysis of the academic literature involving wine prices (which have shown mixed return results so far), volatility, and portfolio construction when combining fine wines with more traditional asset classes.
Free Lunch I have recently discovered that there is a growing economic literature around wine. A group called the American Association of Wine Economists produces a journal with some interesting research. In one recent paper, an economist examined whether there is a free lunch, or in this case a free breakfast in the case when hotels include a breakfast when quoting a room price. They found, unfortunately, that there is no such thing as a free breakfast. Hotels that offer this appear to raise their room prices by 10 per cent to 15 per cent to compensate for the breakfast provision. On the financial side, various wine indexes (which track the prices of fine wines) have recently emerged and a few offshore fine wine funds have been created in the past couple of years. All seem to want to capitalize on some market interest and earn what appear to be very significant management fees at the same time. The key question as to whether there are excess returns in this market is still a topic for debate. Like other alternative assets that are bought and sold at auction, such as art, just constructing a long-term price history can often be problematic. Some academic studies have shown that longer term returns are low and, even more importantly for the construction of an investment portfolio, there is some evidence that alternative investments are positively correlated with broader investment markets. In the case of wine in particular, there is some evidence that any strong rate of return is very specific to the time period being examined. There is also some evidence that while a broad ‘buy and hold’ strategy may not yield excess returns, specific strategies (such as buying young wine at its opening price or focusing on the wines of a particular chateaux) may be profitable. Largest Drag The largest drag to investment returns comes from holding costs, which are substantial for wine. After deducting sales commissions (for both buying and selling wine), insurance charges, and storage costs, many studies have found that net price appreciation drops substantially. For plan sponsors, there are particular issues around custody, since wine is often stored by the same firm that sold it to you. Some in the wine industry speak of the growing interest from pension plans, but this has been very hard to verify. So far, the major retirement option seems to be limited to what is the UK equivalent of self-directed RRSPs, which now permit investment in wine. A very unscientific discussion of this asset class with a few Canadian and U.S. plan sponsors over the past couple of months has been remarkably circumspect. None will go on record as saying that they are, or have thought about, investing in wine. There are probably two reasons for this. The first is that this asset still sounds a little…strange. It isn’t like timber, for example, another alternative asset which most plan members can appreciate, even if they have never invested in timber for themselves. The second reason goes to the heart of the matter regarding any real market anomaly. As one hedge fund manager said to me, “If this is so profitable, why should I let the world know about this idea?” So maybe wine is the next investment trend. The only thing that I do know is that if things go massively wrong with your investments, you can always drink it to forget your losses. ■
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Jim Helik is co-author of ‘Strategic Wealth Conversion,’ a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto.