Investing

Turning Vices Into Profits: Should You Be Investing in Alcohol?

If you're interested in rare wines and whiskeys, investing in alcohol could be a lucrative hobby. However it's not without risks.

Typically, when people think of investing, the first thing that comes to mind is investing in stock, bonds and maybe gold. However, investing in tangible assets like art, real estate and even some unique options like handbags and alcohol can prove to be quite lucrative. So let's say you aren't really an art connoisseur, nor do you want to invest in handbags, and you don't have enough liquidity to purchase an investment property. However, you've always enjoyed a good whiskey or a glass of wine. In this case, investing in alcohol could be a fairly interesting alternative. Below, we break down what potential whiskey and wine investors should know about investing in alcohol.

Investing in Whiskey

If whiskey is your drink of choice, then you can consider investing in a distillery or investing in a bottle of rare whiskey. To invest in a distillery, you will need to find a distillery that allows investors to invest in their casks. They'll usually let you keep the whiskey in their distillery to age for as long as you want. Casks are valued at regauged litres per alcohol (RGA), age and distillery reputation. Returns on whiskey casks have been healthy, with annual profits ranging between 10-30% over the lifetime of the cask depending on the distillery you invest in.

However, there are a couple of factors that you need to consider when investing in a cask. First, the best way you can get returns is if you buy a young, high quality cask and hold it to maturity. Since the older the cask is, the more value it accrues, you would need to be prepared for a long-term investment (12-18 years). However, there is a delicate balancing act between waiting for whiskey to age and what's happening inside the cask. As your whiskey matures, it also evaporates and the alcohol content declines. If you're not careful and wait too long to sell your cask, the ABV may drop below 40% and you'll no longer be the owner of whiskey and the value will drop. This means you should only invest in casks from reputable distilleries whose young whiskey has an ABV well above 40%.

5 Year Performance of the APEX 1000 Index

This table shows the annual performance of the APEX 1000 Index between 2015 and 2019

If you want quicker returns and have higher capital, then you could try your luck at auction. Bottles of whiskey are valued depending on the rarity, age, brand and market demand. When it comes to bottles of whiskey selling at auction, a quick sample of 30 whiskey lots show an average return for the seller of 9% (the difference between the hammer price and seller price). Common whiskeys on auction can sell for as low as 9%, but more expensive whiskeys like we saw during the February 2021 Whiskey Auctioneer auction can command upwards of 60,000GBP (over S$111,000). Typically, prestigious brands like Macallan and Hanyu command the highest prices, especially if they're rare, aged and are auctioned in high quality casks and decanters.

Investing in Wine

While investing in wine has been an increasingly popular activity due to healthy returns even during 2020's market uncertainty, you should still conduct a lot of research if you want to become a profitable wine investor. First, you should familiarise yourself with the major market for wines: London International Vintners Exchange (Liv-ex). There, you'll be able to find, sell and buy wines, as well as get market data and insights.

The reason why wine research is so important is because the value of a bottle of wine can differ dramatically depending on seemingly small changes. For instance, while you may think that the older the wine the better it is, the reality is that it truly depends on the year of the wine (besides, the region it was produced, the make, etc.). For instance, the younger 2005 bottle of wine may be almost twice as expensive as a 2004 version of the same wine from the same producer, simply because the production year was much more favourable. Also, you can't just purchase any wine and expect it to age and appreciate in value. In fact, around 99% wines are meant to be drunk within 1-5 years. Out of the 1% left over, even less are going to command a high resale value on the auction market.

This table shows the 1 year and 5 year returns of the liv-ex fine wine indices

Next, you'll need to decide whether you want to invest in individual bottles and sell at auction or invest in a wine fund. Selling wines at auction could be a good option for those who like to have tangible assets and who enjoy wine tasting or collecting as a hobby. However, wine collecting can be a time consuming and costly hobby, as it requires a lot of the aforementioned research. That said, the average wine lot in the first half of 2020 sold for between $5,400-$11,557 at Sothebys with the total sold price reaching 100-111% of the high-end estimate, indicating a healthy demand for wines.

Alternatively, you can also invest in wine funds. Wine funds could be a better option for novice wine investors, since they're managed by experts and aren't subject to the changing demand of an auction market. A few examples of wine funds are the Wine Source Fund, The Wine Investment Fund, Watermark Fine Wine, among others. These funds saw an average annual return of 8% in 2019.

Investing in Alcohol Stocks and ETFs

If you want to invest in alcohol but don't want to invest in tangible assets, then you can consider alcohol portfolios. Here you have two options, investing in alcohol ETFs or individual companies. An ETF or alcohol funds will let you invest in portfolios that include different types of alcohol. Their market cap also includes not just alcohol producers, but also distributors, retailers and licensors. Similar to wine funds, this is an easier route for novice investors as the fund is managed by experts.

Experienced investors can also invest in alcohol stocks. Two of the largest alcohol companies are Diageo and Constellation brands. However, there are also other alcohol stocks like AB InBev, BownForman, Anheuser-Busch. Since stock picking can be risky, you should ensure you do your due diligence in the stocks you're interested in, including reading the company's annual reports, learning about their business model and the industry's potential risks and upsides.

Alcohol is Potentially Lucrative, But Be Aware of Risks and Costs

While alcohol can be a great investment for someone who is interested in rare wines and whiskeys, there are general risks and costs that are associated with investing in these goods. First, past results are not indicators of future results, and there is always the risk of losing money. Second, you will need to have the right amount of capital. Cult Wines, an global leader in fine wine investment, recommends having at least 10,000GBP to spare on a wine portfolio. Those looking to auction alcohol will need to have a similarly large amount of cash to spare in addition to investing in the right storage for your rare bottles. Second, you will need to take into account auction house fees like the buyer's premium and sales commissions. Lastly, you will also need to pay for shipping of your bottles as well as any customs duty.

When it comes to investing in alcohol stocks or ETFs, it is important to note that there is a common misconception that alcohol will always turn a profit. Firstly, there is an increase in people who are quitting alcohol drinking, even in nations like the US where drinking alcohol is a social norm. Secondly, even though alcohol is a consumer staple, it is a discretionary type of spending that may decline when the economy is facing a downturn. Furthermore, you should also note that as a Singaporean you may incur Forex fees if you will be opening a foreign account to invest in wines or whiskey or if you'll be trading on international markets. To circumvent this, you can consider opening a US-based account with online brokers who are providing free or discounted trades on US stock exchanges.

Anastassia Evlanova

Anastassia is a Senior Research Analyst at ValueChampion Singapore, evaluating insurance products for consumers based on quantitative and qualitative financial analysis. She holds degrees in Economics and International Business Management and her prior working experience includes work in the capital markets sector. Her analyses surrounding insurance, healthcare, international affairs and personal finance has been featured on AsiaOne, Business Insider, DW, Vice, Her World, Asia Insurance Review, the Australian Institute of International Affairs and more.

Comments and Questions