Fine Wines, Fiscal Hangover

POSTED ON 22/09/1990

WANTED: tippler with expensive habit and three-quarters of a million to spare. Mount Street Fine Wine Company would like to hear from you.

That’s the price Mount Street wants for the liquid assets at its disposal. These are the wines bought with investment money put in by shareholders persuaded in 1985 that investing in wine was as easy as falling off a wine cask. Now that the five-year period is up, the shareholders want out. I know because with my minimum shareholding (not enough to stretch to a case of Dom Pérignon champagne) I am one. There is such a glut of fine wine around at the moment, however, that the market does not want to know.

Anyone who was ill-advised enough to take a punt on the generally hyped-up and overpriced 1989 claret vintage, instead of buying it for laying down, is not going to see any quick return on their investment. The clearest advise for those thinking about investing in wine for profit is: “don’t”.

Mount Street was one of a spate of wine investment companies set up as a Business Expansion Scheme (BES). As a venture with a risk element, wine investment entitled taxpayers to maximum tax relief – 60 pence in the pound at the top rate, as long as the investment was left in for five years. With this government carrot began one of the sorriest episodes in the recent history of the wine trade, one that almost everyone concerned will want to put behind them as quickly as possible.

Most of the numerous wine investment schemes that mushroomed in 1985 have either gone bust, settled for a loss or, in lieu of money, left shareholders with vintage claret in which to drown their sorrows. Of all the many ingenious schemes promising a nest egg, only Classic Wines, masterminded by Graham Chidgey of Laytons Wines and Charles Fry of Johnson Fry, and Elite Wines managed by Giles Clarke of Drinkx Plc, have remotely succeeded.

Prospectuses issued in 1985 by cohorts of consultants, auditors, bankers and stockbrokers certainly made the palate water. City Fine Wine, advised by Tom Machen who set up the Tate Gallery Wine Cellar and Tony Hein of Hein Wines, drafted Sotheby’s to reassure investors: “If you are investing for a five-year period, the time is right to buy claret. The port market is also sound.”

According to another company, Winebank, with respected Masters of Wine Nicholas Clarke and John Davies on the board, “the international demand for fine wines continues to put pressure on limited stocks. The directors anticipate that there will be a growing and more sophisticated international demand for the company’s selection of fine wines.”

The popularity and mystique of red bordeaux (claret) and, to a certain extent, vintage port makes them the ideal investment vehicles. Using convincing graphs, indices and tables drawing on the performance of claret and port between 1987 and 1983, investment schemes suggested that growth was bound to continue at the same rate over the next five years.

“The BES is a super wheeze,” said one promoter to The Sunday Times in December 1985. “The investors win, they get tax relief. Promoters like myself win because we can get away with higher charges and the directors can reward themselves handsomely.”

Not everyone was quite so bullish. In the same week, Charles Fry, who started the ball rolling in September 1984 with the launch of Classic Wines ahead of the market, told George Graham of the Financial Times he no longer considered the schemes a good investment. “God help them in five years’ when they try to sell the wine,” he said.

In the same month Nicholas Faith, in Wine & Spirit, also had his doubts. “Like the more informal arrangements common in the early Seventies, they are all based on the fallacy that what goes up need not necessarily come down. To sceptical insiders”, he prophesied, “the flood of outside money into these schemes is a sure sign that the inflated wine market, especially in claret and vintage port, is about to break.”

The sceptical insider was right. The earliest schemes apart, most were investing at the top of the market. In fact, the writing was already on the wall. 1982 was an exceptional claret vintage in great demand. The best time to have bought it was in spring 1983 when the wines were first offered by wine merchants to the public.

In a buyer’s market buying a great vintage en primeur – offering pre-shipment wines for sale at a fair place – allows room for appreciation in value. Much of the classic, if less exciting, 1983 vintage has also been bought in this way on the coat-tails of 1982. But by the time the BES millions were looking for a home in 1985, 1984 – the worst vintage of the decade – was on offer. The BES company has missed the boat. The ‘82s were changing hands at record prices that only now, five years on, are again being realised.

In 1986 the Island Revenue clamped down on the loophole that had allowed schemes to accumulate without having to trade. It warned it would withdraw tax relief if the companies flouted the intention of the legislation, which was to simulate employment. For companies with limited business experience, it was the last straw. Winebank lost its entitlement to tax relief and its chairman Ronald Clempson, who ran off with the loot and was jailed for his pains. Paramount Wines had to be bailed out and turned into a trading company, Magnum, which is contesting the Revenue’s decision to withdraw tax relief.

Even the companies that were trading – such as Thurloe Wines, a small scheme established on a shoestring by Julian Earl, a retired investment broker – found the Revenue’s insistence on increased overheads close to crippling.

Timing, in the case of the wine investment schemes, defeated even the most skilled buyer. On top of that, the milking of charges by professional advisers added substantially to their burdens. Barrington Wines, whose wines were bought with the assistance of Master of Wine, Mark Savage of Windrush Wines, has liquidated with a return of roughly 70 pence to the pound of the original investment. “I was so horrified by the amount of money charged on fees and expenses that I resigned after a couple of years,” he said.

The bottom started to fall out of the fine wine market in early 1986. Bordeaux prices peaked when the 1985 vintage was offered in the spring of 1986. Even without taking inflation into account, the ‘85s, many of which were bought for investment, are selling at auction for less than the original stake.

The ‘83s have stagnated. Even the so-called “blue chips” (the top classified châteaux of Lafite, Latour, Margaux, Mouton-Rothschild) and “super seconds” (like Cos d’Estournel, Léoville Las Cases, Ducru Beaucaillou and Pichon Lalande) can be bought at auction for considerably less than their en primeur price in the 1989 vintage. Vintage ports, too, have shown little sign of movement. And the dollar, which had been riding tall in the saddle, has since plummeted.

With the glut of young claret vintages nowhere near ready for drinking, prices have reminded static for the past five years. Only the 1982 vintage is showing sings of upward mobility. Once again it is a buyer’s market for clarets. For drinking in the short to medium term, well-chosen ‘81s, ‘83s and ‘85s are the best current buying bets. The ‘86s and ‘88s are much longer-term prospects.

As Nicholas Kerman of Mount Street says ruefully: “It’s easy to get into these things, but a lot harder to get out.”

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