How to Invest in Whiskey?
Alternative assets have long been favored by investors seeking to diversify their portfolios and maximize returns. Among the multitude of options available, whiskey stands out as a particularly enjoyable investment opportunity. For the ultra-rich, collecting rare individual whiskey merges both financial gain and personal pleasure. The appreciation for this liquor extends far beyond the Western world, with rising affluence in Asia fueling the popularity of whiskey among Chinese and Indian consumers. An Asian collector recently shattered records by acquiring a unique 1975 cask of Ardbeg single malt Scotch for a staggering £16 million at auction, surpassing all previous whiskey sale amounts.
While the returns on whiskey investments may not have been remarkable in the past year, the past decade tells a different story. According to the Knight Frank Luxury Investment Index, rare whiskey bottles have outperformed other luxury investments by a whopping 373% over the past ten years. Moreover, recently, whiskey has taken a whole new level of allure. In February 2023, an exceptionally rare single cask bottle of The Macallan went under the hammer at auction and fetched a staggering $250,000, surpassing its estimated value by threefold. This extraordinary sale equates to a jaw-dropping $10,000 per dram of whiskey, a price that eclipses its weight in gold by more than five times.
So, should you think of investing in whiskeys? When evaluating potential additions to your investment portfolio, it is essential to consider whether whiskey aligns with your financial objectives. While trading in the public markets may offer quicker gains, whiskey investments require patience and a longer-term outlook. Experts advise a minimum holding period of three years to achieve satisfactory returns. The value of a whiskey attains premium status only after 15 years of maturation.
Whiskey investment also demands a deep understanding of its nuances and market dynamics, underscoring the importance of thorough research before committing funds. It is crucial to be aware of the presence of fraudulent schemes seeking to exploit unsuspecting investors and sell overpriced or non-existent casks. Adding to the challenge is the fact that whiskey investments lack regulatory oversight, leaving investors with little recourse for compensation in case of fraudulent activities.
Your approach to whiskey investment may vary depending on factors such as your available funds, your tolerance for risk, and your level of investment experience.
1. Buy whiskey by the bottle
Investing in individual bottles of whiskey requires a certain level of knowledge about the spirit itself. Once the whiskey is bottled, it ceases to age further, making it essential to possess the ability to identify rare bottles, recognize brands that have the potential for appreciation in value, and be familiar with highly regarded distilleries. Additionally, investing in single-bottle whiskeys entails costs for storage and the need to make informed purchasing decisions. A useful resource to begin exploring this field is the index provided by Rare Whisky 101. This index offers insights into the most actively traded bottles of single-malt whiskey at UK auctions and tracks their performance over time. It’s important to note that the index is regularly updated on a monthly basis.
Furthermore, when it comes to whiskey investment, investors often have preferences for particular flavors, which can significantly impact the price a bottle ultimately commands.
2. Buy whiskey by the cask
If you find yourself uncertain about which whiskey bottles to select, investing in cask whiskey might be a more suitable option for you. However, it’s worth noting that the upfront investment for cask whiskey tends to be considerably higher, ranging from ca. $1,500 to $90,000.
The process involves directly investing with a distillery in a cask of whiskey that will undergo maturation in their cellars. Whiskey production is a labor-intensive and capital-intensive process. With the minimum three-year maturation rule applied to whiskey, distilleries cover costs and raise capital by allowing private investors to purchase whiskey casks stored in their facilities. When the time comes for you to capitalize on your investment, you have the option to sell your cask to auction houses, brokers, back to the distillery, etc.
Investing in cask whiskey requires a long-term perspective. Similar to fine wines, a good whiskey tends to appreciate in value over time. Casks older than 15 years begin to be considered as premium products. Therefore, for optimal returns, it is crucial to be prepared to exercise patience and allow the whiskey to mature accordingly.
3. Invest in the market
You can also participate in the whiskey market by purchasing shares. The choices available are plentiful, including renowned companies such as Remy Cointreau, Pernod Ricard, Constellation Brands, Diageo (the company behind Johnnie Walker), and Brown-Forman (a major producer responsible for numerous brands, including Jack Daniels). To diversify your risk, you can also explore investment opportunities in funds. Although not commonly found, there are occasional ETFs and mutual funds that track the global liquor industry or specifically focus on whiskey. Examples of such assets include the ETFMG Whiskey & Spirits ETF.
Investing in the whiskey market offers higher liquidity compared to investing in cask whiskey or individual bottles. However, it is important to note that owning shares does not provide the same portfolio diversification benefits as physical ownership of whiskey. And, the performance of stocks is influenced by factors beyond the price and demand of whiskey.
What are the risks for investors?
Having an exit strategy is essential for any investment, and whiskey is no exception. While the past decade has seen impressive returns in the whiskey market, it’s important to note that these returns often represent gross figures, not accounting for the various annual fees and costs involved (e.g., insurance, warehousing, taxes). Some brokers also impose a significant fee (up to 10% and even more) when selling your cask whiskey, significantly impacting returns.
And, similar to other physical assets, there are ownership risks involved in whiskey investments. If matured too long, it may lose its value if the alcohol by volume drops below 40% or if the contents evaporate entirely, irrespective of its age or the distillery it originated from.
One of the other challenges in the whiskey investment landscape that should be mentioned is also the absence of regulation. This lack of oversight has created an environment where schemes targeting young investors have become more prevalent. It is crucial to exercise caution and ensure you are paying a fair price. Making an ill-advised purchase can result in difficulty finding a buyer for your investment.
