As an investment in future drinking – buying young wines which will improve over time. * As a financial investment – buying wines with the sole intention of reselling them later for a profit. The global demand for fine wine has increased enormously over the last few decades. Wine as a financial asset outperformed benchmarks such as Dow Jones, FTSE 100 etc, and offered spectacular returns. It also offered stability against volatility of the Stock Market. Stake holders
The prices of wine are a key topic for market participants interested in valuation of wine funds. Dealers, restaurants and consumers interested in optimizing their wine purchases also show interest in accurate pricing mechanisms. Measuring performance of wine investment funds is also linked to remuneration and bonuses of managers, assessment of fair value of a share in the fund, and, more generally, accurate reporting to all stakeholders involved. As a closely related issue, regular re-valuation becomes an essential element of accurate valuation of a stock. Managers of wine funds are generally entrusted with these valuations. In this case, fair-value measurement is compulsory by law. In the next section we will discuss the available methods of valuation and also a newly emerging quantitative method aimed at meeting IFRS 13 compliance for fair valuation.
Transition from traditional valuation to IFRS 13 and wine funds versus other funds
Traditional valuation of physical assets by independent appraisers is slowly rendered obsolete by increasing access to data and automation capabilities. Furthermore, the growing level of stocks held by wine funds makes a regular very difficult to achieve. As the ‘manual’ evaluation gradually became difficult, new methods emerged, and as a consequence, the adoption of IFRS 13 (effective since January 2013) by regulated wine funds requires significant changes to traditional procedures for fair value determination. Unlike stocks and bonds, a wine bottle does not provide any coupon or dividend, and unlike other unconventional assets such as art that perpetually yield aesthetic dividends, wine cannot be consumed without destroying its value. For the same reason, cash-flows cannot be obtained from renting, or leasing bottles of wine, so that any type of net-present-value valuation cannot be applied. This research addresses the question of valuation of wine in the context of wine funds valued in going-concern and that are subject to IAS-IFRS regulation.
1. How should wine investment funds account for their holdings?
Current environment and methods presently used by some wine funds and their short comings:
Before arriving at the suggested valuation methodology for wine investment funds, it is imperative to have a look at some of the common valuation methodology keeping in mind that since 2005, compliance with IAS-IFRS is compulsory for all investment vehicles quoted on European stock exchanges, including wine funds.
I. Valuation system based on list prices – List prices are also referred as offer prices stated by merchants. This may over value the stock since the merchants may offer to sell at a much higher level than the market can realize or tolerate. At the same time, when these merchants were to buy the stock, they would bid at a much lower level for profit gains.
II. Pricing as per auction houses – these prices include a high rate of commission (ranging from 10 to 20%) thereby overvaluing the actual cost of the portfolio. Moreover auctions are not a daily or regular phenomenon, applicable largely to less frequently traded wines, and may not represent the regular fine wine portfolio in true sense.
III. Average of dealers & auction prices – Valuation is based on some average of the prices from wine merchants and from leading auction houses. This valuation strategy is used by companies like Nobles Crus and Vintage wine fund.
IV. Generally accepted valuation methodologies, e.g. Live Ex – Live Ex (the London International Vintners Exchange) is valuer for a number of wine funds. Some of its prominent features are: * Liv-ex valuations gathers data from Liv-ex fine wine exchange and calculates valuation based on algorithmic methods. * Trades are based on a standard contract. Terms for payment, delivery and the condition of the wine are usually standardized and kept uniform. * Liv-ex transactions mimic transactions in a stock exchange with either party of any trade paying transparent price devoid of any hidden costs or margins. The price data are posted, in real time, on Liv-ex.com. * Mid Price Methodology – It provides market value of the stock based on the mid-price of the highest bidder and the lowest offer price as of the close of the business on the valuation day. Only when the fund house has sold the product above the mid-price, is when higher price is considered for valuation purpose.
The Liv-ex platform is organized in a similar fashion as a stock exchange: bids and/or offers are put on the platform; in case of a matching trade, both buyer and seller are notified of the transaction. The seller then delivers the wine to warehouse maintained by Liv-Ex within 14 days. The buyer sends the funds to Liv-ex, which in turn transfers it to seller in 3 weeks. Buyer can either collect the wine at the warehouse, or choose it to be delivered.
Shortcomings of Live-Ex: Though Liv-Ex takes a much more scientific approach it does not fully meet the requirements per IFRS-13 for fair-value computation of wine as a financial asset. In spite of being a very successful venture with 400 members and more than 1000 transactions per month, there is little evidence that Liv-ex is the most representative market. As per Liv-ex data, Bordeaux wines accounted for 95% of its exchanges in year 2010, with five Premiers Crus amounting to 61% of Liv-ex trades by value: Chˆateau Lafite-Rothschild (Pauillac), Chˆateau Latour (Pauillac), Chˆateau Margaux (Margaux), Chˆateau Haut-Brion (Pessac, Graves), Chˆateau Mouton-Rothschild (Pauillac).
In 2011, more than GBP100m worth of wine were exchanged on the Liv-ex platform, which is a considerable amount in absolute value but undeniably smaller than the yearly SD397m+ worth of transactions reached the same year at major auction houses. Auction houses such as Acker Merrall and condit, Christies International, Sothebys, Zachys and Hart Davis Hart Wine Co accounted for a majority of wines traded. In some cases, favouring ask prices of dealers to estimate a bid price instead of favouring auction house transactions publicly available seems an unreasonable choice given the opacity of dealer prices and the relative importance of large auction houses in the secondary market for wine (auctions would account for roughly 10% of the market according to Liv-ex), especially as far as old vintages and collectible wines are concerned.
Finally, one can reasonably question the independence of an exchange excluding its competitors (auction houses) but including data from its clients or prospects (dealers). The inclusion of a valuation committee in case of absence of data lets stakeholders clueless about the methodology and data eventually used to reach final evaluation. Also there is obvious conflict of interest for Liv-Ex being an exchange that simultaneously acts as intermediary and an expert and a fund whose fee, like the exchange, depends on the price level.
Table 1 presents some funds of wine as an investment and which valuation they use, if published. None of the funds appears to use a traditional historical cost approach, where inventories are valued at lower of market price and acquisition price. On the contrary, several funds already rely on a market approach to value their stocks, even though IFRS 13 compliance is not obvious in that case.
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