Last Frontier Investments: Fine Wines of the Alps Clémentine Fauchery, Philippe Masset & Jean-Philippe Weisskopf Ecole hôtelière de Lausanne © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction  Motivation Data Analysis of Alpine wines Conclusion Quantitative easing and low interest rates following the GFC: Most assets are now extremely expensive  low expected returns Inflation risk is on the rise More generally, the risk of a market downturn is on the rise Investors allocate more to alternative investments and especially tangible assets. Why? Diversification  reduction in portfolio risk Hedge against inflation Potentially higher (risk-adjusted) returns than traditional assets Investors have started to push the frontier of investable assets ever further  New frontier : the frontier of alternative alternatives Research question: what are the implications of investing in goods/assets that are located near or on the frontier? © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

The perfect laboratory Introduction  Motivation Data Analysis of Alpine wines Conclusion The perfect laboratory The market for fine wines offers a perfect setting to investigate frontier investments and their financial specificities Segmentation of the market Few investment-grade wines: mostly Bordeaux and Burgundy Many “other” wines including a large number of excellent but non-investment- grade wines Frontier = not fixed German Riesling used to be more expensive than Bordeaux wines Burgundy wines = have only recently become financialized Focus on Alpine Wines Classic in style = in line with what the market is currently looking for The finest wines from the region are of excellent quality, have a good ageing potential, are produced in limited quantities and their reputation is on the rise They thus seem to be close to the frontier Benchmarks Bordeaux, Burgundy and traditional financial markets © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction  Research agenda Data Analysis of Alpine wines Conclusion Research agenda Proposition 1: Alpine wines have entered into a financialization process over the last decade and are thus becoming actively traded on secondary markets. Proposition 2: Alpine wines have seen their prices increase at a pace exceeding inflation since their financialization process started. Proposition 3: Alpine wines have delivered positive risk-adjusted returns since their financialization process started. Proposition 4: Alpine wines have maintained a low correlation with traditional asset classes and other wine regions and thereby offer a significant diversification potential. © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data  Analysis of Alpine wines Conclusion Data Our wine data comes from Steinfels Zürich Leading auction house located in the middle of Europe Essentially no home bias The dataset covers period 01/2002 to 12/2017 and it contains more than 25,000 observations (hammer prices and details on the lot auctioned) Alpine wines: the producer must be situated in proximity of the Alps and/or of an Alpine lake and/or of an Alpine river Austria, Germany, Switzerland: 20 wineries (e.g., Gantenbein, Egon Müller) Northern Italy: 15 wineries (e.g., Gaja, Giacosa) Rhône Valley in France: 14 wineries (e.g., Chave, Rayas) Benchmarks: Burgundy: 15 wineries (e.g., DRC, Roumier) Bordeaux: 14 wineries (all first growths from the Médoc and their equivalent from St-Emilion, Pomerol and Sauternes) Economic and Financial data come from Datastream © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

 Financialization of Alpine wines Introduction Data Analysis of Alpine wines  Financialization Conclusion  Financialization of Alpine wines Proposition 1: Alpine wines have entered into a financialization process over the last decade and are thus becoming actively traded on secondary markets.  © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Price evolution Conclusion  Index estimation and analysis (1) Indices estimated with the help of the Repeat-Sales Regression (RSR) approach. Resulting wine indices: Value of 100 as of 2007 © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Price evolution Conclusion  Index estimation and analysis (2) Proposition 2: Alpine wines have seen their prices increase at a pace exceeding inflation since their financialization process started.  © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

 Risk-adjusted returns (1) Introduction Data Analysis of Alpine wines  Risk-adjusted performance Conclusion  Risk-adjusted returns (1) © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

 Risk-adjusted returns (2) Introduction Data Analysis of Alpine wines  Risk-adjusted performance Conclusion  Risk-adjusted returns (2) Proposition 3: Alpine wines have delivered positive risk-adjusted returns since their financialization process started.  © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Diversification Conclusion  Diversification potential and portfolio analysis (1) Correlation table: © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Diversification Conclusion  Diversification potential and portfolio analysis (2) Proposition 4: Alpine wines have maintained a low correlation with traditional asset classes and other wine regions and thereby offer a significant diversification potential.  © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines Conclusion  Conclusion Investigate the frontier of investable assets Use the market for fine wine with a focus on Alpine wines Benchmark with traditional financial assets and already financialized wine regions Propose, test and validate 4 propositions Contribute to both practitioners and academics: Provide a comprehensive analysis of the market for Alpine wines from Austria, Germany, Switzerland, Northern Italy and the Rhone Valley Model and evaluate the price dynamics of these wines Relate to a more general debate in finance on frontier investments, their proper identification and their performance in an investor’s portfolio © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Thank you! Introduction Modelling “En primeur” prices Modelling subsequent returns Conclusion Thank you! © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Price evolution Conclusion Index estimation and analysis (2b) © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery

Analysis of Alpine wines Introduction Data Analysis of Alpine wines  Diversification Conclusion Diversification potential and portfolio analysis (2b) © 2018 P. Masset & J.-P. Weisskopf & C. Fauchery