After over 30 years in the exchange-traded derivatives and fintech sectors, I retired from that arena a few months ago and changed careers into the fine wine investment world. Long story but a passion, life too short, time for a change etc...
I was also developing an alarming twitch when hearing phrases like, ‘disruptive paradigm-changing fintech innovation models based on both an API economy and embracing the new valuation models of the digital era’ and ‘Mifid II'. Oh, and ‘blockchain’ was starting to add to the nervous tic (see below). So, time to move on.
But some things in life you can’t hide from. My second career started at a time when the Bordeaux ‘wine futures’ or En Primeur (EP) market was commencing its annual post-first tasting frenzy. As this event is now coming to an initial close (in terms of the market cycle) and my involvement has been significantly more than in the past, I have been reflecting on the similarities, and differences, between my old ‘futures’ world that most financial capital markets folk know and love and the perhaps more arcane world of EP.
Some of you already know this, some not, and to desperately avoid the ‘wine bore’ tag (wine can never be boring, see Mifid, above) in brief here is how EP wok.
Given that grapes are a cultivated commodity there is the annual agrarian routine of planting, growth, dealing with weather conditions through to the harvest cycle. Then it’s into the barrel and around 12-18 months later into bottles for the official release of the vintage. EP is the method of purchasing the vintage at the barrel stage. This ‘futures market’ is most commonly offered on Bordeaux and Burgundy regions. Every spring, after the harvest, wine experts and merchants descend to Bordeaux to taste barrel samples and at this point the wines will be given a preliminary score or rating based on expected quality when they are bottled and mature over time. An investor in EP wine has the right to receive the wine once bottled, typically the Spring two years after release (i.e. this year’s 2016 vintage will be delivered to customers in Spring 2019). Crucially, at the point where the wine transfers from barrel to bottle, there is another tasting from the experts and a revised score/rating is given. Given that all Bordeaux vintages need many years to mature, the initial futures delivery term contract is initially set at around 18-24 months.
Vintages differ for many reasons but taking this most recent 2016 example, the initial tasting scores indicate one of the best years for over a decade, so the initial strike price (first tasting) has suggested those investors at the EP stage are set to make significant gains at the next tasting and rating. The vintage is typically re-scored upon physical release, i.e. 2014 vintage ‘in-bottle scores’ were published in March this year. The investor then has several options: to sell and go to cash delivery/settlement or, keep the physical stock, in bond, for future maturity and investment growth or consumption in due course - although this may be a good few years in the future.
Expert wine tasters often use a very florid lexicon to describe the product (see wine bore), so my most favourite wine commentator wrote of the 2016 vintage, ‘All I can say is fill your boots with this stuff, it’s amazing. If you play the EP market you will make huge returns. If you manage to stay alive for a decade or more then you will enjoy one of the finest vintages from Bordeaux for years.’ My kind of language. The trick is to have an active portfolio across a wide range of vintages so every year there is something extraordinary to drink. Wine is a ‘passion asset’ (I really don’t like that term) so we must never lose sight of the pure enjoyment of the underlying asset to drink and enjoy it as much as part of a diversified overall portfolio of investments.
Owning some investment grade Margaux, Lafite, Latour or Mouton Rothschild, for example, is a slightly more exciting read than a list of ISAs, shares, funds, bonds and other traditional assets-well at least I think so. And unlike an exchange-traded product, there is only so much wine that can be made each year. As more gets invested and consumed by the traditional and new market entrants, the laws of supply and demand become very rapidly apparent and thus have huge impact on the pricing. Where EP wine may not get the volatility of many pure financial products, it has its own unique set of pricing characteristics that have historically outperformed most of the financial indices over the same period.
Anyway, you get the gist of the wine ‘futures market’. It’s not strictly a futures market, it’s a forward market but that's me being pedantic.
Comparing it to the exchange-traded futures markets of my previous life there are some very similar uses of terminology across the two. Here’s a string of EP terms and recognised descriptors that may resonate: orders, fills, positions, allocations, limits, reconciliations, bank guarantees, lots, parcels, strategies, collateral, market-makers, brokers, cash settlement, physical delivery, portfolio management, hedging, speculating, warehousing, clearing houses, warrants, the list goes on. Technology, inevitably, has a role to play. Thankfully it is not envisaged that AI or robotics will ever take the place of the human element unless a machine can, say, have the skill of a wine maker, eliminate frost, have the nose of an expert or the ability to enjoy an extraordinary bottle of wine but I’m sure someone will try, sadly. But there are recognised transparent exchange on-line pricing (Liv-Ex) venues, trading and portfolio platforms, back office systems, mobile device price and quality apps and even blockchain, there is no escape. I’m going to say it, ‘VinTech’. You may now shoot me.
So, some similarities across the broad umbrella of the two ‘futures’ worlds. A lot of differences of course. But as established platforms and mechanisms they share the common characteristics of all forward markets to mitigate risk for the originator, provide price transparency and offer both a hedging tool and consistent and well managed investment returns. I won’t last 32 years in the wine business (go figure) but I’m finding this different type of asset investment a refreshing change. And there is no Mifid II.