One of the questions arising from last week’s note on the narrowing of first growth and second label price differentials is not simply whether it will continue but, for those of a more speculative inclination, where else it might manifest itself. Let us say at the outset that we are entering higher risk territory here.
The main reason for the outperformance of the second labels is their association with the first growths and the discount at which they can be purchased. Is there anywhere else in the fine wine market place where a similar theme may play out?
Traditionally consumers who knew more about the market would be guided as an early principle by the vintage of a wine. “Oh it’s a 2005, so it must be good”, sort of thing. What investors in the second labels are arguing is: “How much worse than a Lafite can a Carruades really be?”
As we know, if the narrow price differentials are anything to go by, this at the same time includes: “How much worse than a 2010 can a 2013 really be?”
We have highlighted this issue in the past and are not going to repeat ourselves here, because the current task is to explore where else this approach might visit itself. Behind the premise is the undoubted quality and prestige of the first growths, as well as the very strong link with those premium wines. Issues of absolute quality are secondary in this discussion.
The market has been agonising for the last few months, indeed years, over how long the inexorable rise in Burgundy prices can continue. There is some logic to the suggestion that both consumers and investors will baulk at paying up for a Domaine de la Romanée-Conti, and we can say with some certainty that the fever has infected the whole DRC stable:
So is there anything here comparable to what we observe among the second labels? Last week’s note gave rise to a discussion over whether or not copies of luxury items was the right analogy. Surely a product with diffusion, like Mercedes cars, might be more suitable. If an A-class Mercedes is technically inferior to a fully loaded Ford Focus why do people buy it? That’s prestige for you.
There is no great diffusion among the first growths although everyone will be familiar with Mouton Cadet at the bottom of their scale, but there is at somewhere like DRC, whose six constituents dominate the Liv-ex Burgundy 150 index. These wines all having taken off from the end of 2015 there seems a decent argument to suggest that they have led each other upwards, even if some have outperformed others.
The difficulty here is that looking across the vintages there are few clearly discernible patterns. In 2005 the short-term laggard may appear to be the Grands Echezeaux, while over a longer time frame it is Richebourg; in 2008 it is the St Vivant short term and long, as it is in 2010 with La Tâche. We will monitor the latter two wines over the coming weeks to test out this theory. We might also point out that Grands Echezeaux 2005 and Tache 2010 score well on the Amphora proprietary algorithm.
Burgundy wines operating under the ‘diffusion principle’ might include Armand Rousseau, even if the only index constituent is the Chambertin. It is perfectly possible to argue that Clos Roche and Charmes Chambertin hardly cut the same mustard as the Chambertin itself and the Clos de Bèze, but both are up over 30% in the last six months even though you can’t see it on the following chart, because of the distortion resulting from the higher priced wines:
So on this basis even though, or perhaps in this case, because it has had a good six months, do we invest in Clos Roche 2005? It is clearly in focus to some extent, but on a five year view has done relatively little.
It is also true that DRC has dominated proceedings in the Burgundy sub-index, so the next question might be whether the outperformance there might overflow into other index constituents. Back in April we discussed the possibilities for Comte de Vogüé Musigny, Ponsot Clos de la Roche, and Clos de Lambrays, and speculative investors might well conclude that just as consumers may prefer a second label rather than pay up for a first growth, so the same standard may apply among the Burgundies.
Moving away from the aspect of diffusion, we might look at the price and performance of a group of equally rated wines from Comte de Vogüé Musigny Vieille Vignes:
It is fair to point out that 2008 wasn’t such a great vintage in the Côte de Nuits but I don’t think many people would quibble about the 2009 and 2010, so do we invest in either or both of these?
It doesn’t take a gigantic leap of imagination to see those elements that have so clearly benefited the prices of the second labels alighting on other areas of the fine wine market, but as we suggested earlier, we are in more speculative territory. That said, with the wind so much in favour of Burgundy, the question of “which ones to buy?” might be more pertinent than “do we buy at all?” at these seemingly inflated levels.
Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition with Amphora.