Alternative Investing - Whisky
Have you ever wondered about the world of whisky investing?
Take a moment to familiarise yourself with unfamiliar territory.
The usual stock market volatility has become a continuously frustrating rollercoaster of emotions as we watch our portfolios bounce from green to red or lows to highs in the ever presence of unpredictability. With inflation still rocketing and interest rates closing in on century highs, I have recently been inspired to delve into areas of “passion investing” and explore how new or unfamiliar territory such as whisky investing could be used as a method to complement a traditional portfolio of stocks or bonds.
As the saying goes, good things come to those who wait, and when it comes to whisky, that slow process is all the while worth it. Whisky is not only a beloved beverage around the world, but it's also becoming an increasingly popular investment opportunity. With its rich history, complex flavours, and scarcity of certain varieties, whisky is a commodity that could be poised for growth and is attracting the attention of investors from all walks of life.
But investing in whisky isn't just about buying a few bottles and hoping for the best. It's a nuanced and complex process that requires a deep understanding of the market, the distilling process, and the various factors that can impact the value of a particular bottle or cask.
In this blog, we'll take a deep dive into the world of whisky investment, exploring everything from the history of the spirit to the current market trends and future predictions. Whether you're a seasoned investor or just curious about the potential of whisky as an asset, we've got you covered.
So, pour yourself a dram and join us on this exciting journey into the world of whisky investing.
The whisky marketplace has a rich history, from wacky to wonderful. Did you know that during America's Prohibition in the 1920s, whisky could be legally imported into the United States because it was considered as a medicine, not a liquor? And it is believed that the unrefined predecessor of modern whisky could have been discovered by farmers distilling spirits from surplus grains sometime during the 13th Century. Today, Whisky continues to captivate investors and collectors alike. Recently, a rare cask of scotch whisky sold for an eye-watering £16 Million, setting a new world record. Known as Cask No 3 by Ardbeg Distillery on the Scottish Island of Islay, this single malt is a remarkable piece of liquid history, dating back to November 1975. Renowned for producing some of the best whisky in the world, you’ll be surprised to hear that this distillery was once on the brink of extinction.
Link: Ardbeg Was Almost Extinct. Now It’s a Cult Whisky Phenomenon. | VinePair
Historically, whisky has produced impressive average returns of around 8-15% per annum over the last couple of decades. Investing in this tangible asset, with careful research and ones due diligence is a liquid asset like no other. Depending on the composition of your current portfolio this could be the perfect complement.
The demand for scotch whisky continues to rise, with the export value reaching £6.2bn in 2022, up £1.68bn (37%) compared with 2021, and £1.28bn compared to 2019 (pre-pandemic), according to the Scotch Whisky Association (WSA). Markets around the world continue to evolve and excite. For example, India has become the largest export market for the UK, with 219 million bottles exported in 2022, a 60% increase from 2021. An anticipated UK-India trade agreement could remove a 150% tax burden, boosting market access and allowing for an additional £1bn of growth over the next five years. Currently, scotch whisky represents only 2% of the Indian whisky market, leaving ample room for growth. These numbers make for some impressive reading.
For more information: Scotch Whisky Exports Over £6bn for First Time (scotch-whisky.org.uk)
Due to its growth in popularity, there are some other key trends to keep an eye on:
Increasing demand for rare and limited-edition bottles: Collectors and investors are increasingly interested in rare and limited-edition bottles of whisky. This has driven up prices for these bottles, which can sell for thousands or even tens of thousands of dollars.
Focus on older bottles: Investors are also increasingly focused on older bottles of whisky, which are often more valuable due to their rarity and the fact that they were produced using traditional methods that are no longer used today.
Interest in Japanese whisky: Japanese whisky has become increasingly popular in recent years, with many collectors and investors interested in acquiring rare bottles from Japanese distilleries. This has driven up prices for these bottles and increased interest in Japanese Whisky as an investment. Japanese Whisky is also notoriously difficult to get your hands on.
Growth of online marketplaces: The growth of online marketplaces has made it easier for investors to buy and sell bottles of Whisky. This has also increased transparency in the market and made it easier for investors to track prices and trends.
The change in demographic: Consumer perceptions of single malt whisky have been shifting over the past few years as more people enter the category. Single malt newcomers today tend to be younger, aged between 25 and 35 years old, a sign of the younger demographic becoming more attracted.
Increased regulation: As whisky investment has become more popular; regulators have taken notice and have begun to issue guidance on how investors should approach the space. This includes guidelines on how to properly store and transport Whisky, as well as warnings about potential scams and fraud in the market. Look out for the WOWGR (Warehouse keepers and Owners of Warehoused Goods Regulations) Number – This license in required to buy and sell casks in bond and is issued by HMRC.
Key Reading
As a Mutual Funds & ETF specialist in my latest position at Bloomberg, I couldn't help but dig out a thematic investment opportunity in the form of an ETF. With little option for an alcoholic fund's focus, I eventually unearthed the Spirited Funds/ETFMG Whisky and Spirits ETF. Notorious for its demise in 2018, as founder David Bolton was charged by the SEC for defrauding investors and misappropriating at least $215,000 for his personal use, the fund launched in October 2016 and raised a mere $15 million AUM. Eventually shutting down in June 2018 due to lack of demand, it was only after this that complaints and allegations of fraud appeared. As could have arguably been expected, two years earlier, Bolton was also reported to the SEC for unsuitable trading and destroying files, for which he was eventually charged with failing to preserve books and records because he later destroyed the files. Bolton was fined $20,000 and suspended from associating with any Financial Industry Regulatory Authority (FINRA-member) firm in any capacity for one year. Let this be a lesson in due diligence of fund management.
As an investment option, the narrowly constructed ETF invested in the biggest publicly listed Whisky and bourbon makers across the world, featuring names such as Diageo (DEO), Pernod Ricard (PRNDY), and Rémy Cointreau (REMYY), to name a few. These holdings accounted for more than a third of its allocation, suggesting a significant lack of diversification. Over its short-lived 21-month existence, it posted a return of 32%, compared to the S&P 500's 34% over the same period, which, for a thematic investment opportunity, falls short of a Cathy Wood-style expectation.
With that said, investing in a group of publicly listed companies to gain exposure to Whisky as an investment is a different ball game. Entire businesses have significant costs, employees, and often significant levels of debt, to name the least, and cannot be compared to investing in Whisky as a commodity itself.
Investing in whisky can be a lucrative opportunity for investors, but it's important to understand how to do it properly. One of the key steps is to find a reputable dealer or auction house. Following conversations with Charles Cregeen, one of the co-founders of Catton Casks Whisky Consultants, it becomes very clear that the world of whisky investing is no walk in the park, and one should almost certainly consult a professional before making any decisions. With a team of specialists and an extensive list of industry relationships, you will be guided step by step through the process by leading experts.
Why Catton Casks? In my opinion and throughout my research and data collection. I spoke with various industry advisors and there was only one that stood out. The team at Catton Casks offered the most personal experience and was more than happy to discuss my relentless list of questions. They clearly explained the investment process and any risks associated. After building an initial relationship, I shortly after met with Charles in person, to discuss ideas over a beverage in the heart of the City of London where you will find their offices. Charles instantly exhibits expertise, we discussed everything from the latest resampling technology that enables a more efficient decanting process, reducing the need for costly manual labour and in turn, fewer costs eaten away from investor returns. We discussed academic papers that research timely industry trends such as those detailed by Moroz and Pecchioli, 2019, that produced research about Investing in an old bottle of whisky vs a bottle of old whisky.
What is most encouraging, is that Catton Casks has built its reputation in the industry to gain access to ultra wholesale cask investment prices that have attracted the attention of several institutional investors and Multimillion pound hedge funds alike.
For better understanding, the whisky distillery process typically involves the following steps:
Malting: The process begins with malted grains, typically barley. The grains are soaked in water and allowed to germinate, which converts the starches into sugars.
Mash: The malted grains are ground up and mixed with hot water to create a mash. This mash is then allowed to ferment for several days, which converts the sugars into alcohol.
Distillation: The fermented mash is then heated in a still, which separates the alcohol from the water and other impurities. The resulting liquid, known as "new make" or "white dog," is clear and highly alcoholic.
Maturation: The new make is then aged in wooden barrels, typically made from oak. This ageing process can take several years, typically between 12 and 15, during which time the whisky takes on the flavours and characteristics of the barrel.
Blending: Once the Whisky has matured, it may be blended with other Whisky’s to create a consistent flavour profile. The final product is typically bottled and sold to consumers.
Already invested? There are several ways an investor may capitalise on investment to realise their monetary gains (which by the way, are often tax-free).
Hold onto the bottles: One way to potentially profit from your investment in Whisky is to hold onto the bottles you've purchased and wait for them to increase in value. As Whisky ages and becomes rarer, its value often increases. This can be especially true for limited edition or rare bottlings.
Sell to collectors: Another way to capitalise on your investment is to sell your Whisky to collectors. There is a thriving market for rare and collectable Whisky’s, and collectors are often willing to pay a premium for highly sought-after bottles.
Invest in a distillery: Investing in a Whisky distillery can be a way to potentially profit from the growing demand for Whisky. However, this can be a riskier investment strategy, as the success of the distillery will depend on several factors, including the quality of the product, the strength of the brand, and the effectiveness of the marketing and distribution strategy.
Distillery/Dealership buyback: Once a cask has reached its optimal level of maturity, there will be times of supply and demand issues that will press the distillery to buy back the casks for a premium. On the other hand, if acting through a Whisky Consultant or Investment Company they will sometimes offer a buy back guarantee where you need access to your capital sooner than expected. As the Whisky may not have reached its optimal level of maturity. This may come at a discount, therefore potentially incurring a loss.
Another way, yet one of the most time-consuming and potentially highest yielding would be to:
Bottle the Whisky: When the Whisky is ready to be bottled, you'll need to work with a bottling company to package the Whisky in bottles. This will involve selecting the appropriate bottle size and shape, designing the label, and coordinating the bottling process.
Market and sell the Whisky: Once the Whisky has been bottled, you'll need to market and sell it to potential buyers. This may involve working with distributors, attending Whisky events and tastings, and developing a strong online presence through social media and other channels.
KEY RISKS
Making an investment is what I like to consider as an educated gamble. There are no certainties but one can manage risk by means of diversification. Whisky definitely has its part to play when building an investment portfolio. Read on for some key risks to consider.
Market volatility: As with any investment, the Whisky market can be subject to fluctuations in supply and demand, which can impact the value of your investment. Prices for Whisky can be influenced by factors such as changes in consumer preferences, economic conditions, and global trade policies.
Liquidity: Investing in Whisky can be illiquid, meaning that it can be difficult to sell your investment quickly if you need to liquidate your assets. It may take time to find a buyer willing to purchase your investment at a fair price.
Storage and handling: Proper storage and handling of whisky are crucial to maintaining its quality and value over time. If you're investing in Whisky, you'll need to consider the cost of storing your investment in a controlled environment with appropriate temperature and humidity levels.
Counterfeit risk: As with any high-value collectable, there is a risk of counterfeit bottles in the Whisky market. It's important to do your due diligence and work with reputable dealers and auction houses to ensure that you're purchasing authentic bottles.
Regulatory risk: Whisky is subject to various regulations and laws, including those related to production, labelling, and distribution. Changes in these regulations could impact the value of your investment or limit your ability to sell your investment in certain markets.
A Final Note
It is known, amongst many that scotch whisky is certainly an acquired taste. And if it’s not quite for you then let me leave you with this, as overheard from a Scotsman: “There is an art to teaching yourself to like whisky, it’s quite a challenging drink in many respects. You’ve got to get past that. What matters is where it takes you when you’re drinking it and the emotional journey that influences your mood and how you feel. It is the sensory characteristics that make it more agreeable to you”.
If you wish to invest in the Whisky, please reach out and I will happily offer you the correct guidance.
Editorial Note: This blog does not constitute financial advise and any information presented here should be used solely for educational purposes. I offer guidance on investing and If you aren’t sure whether investing is right for you, or which investments are right for you, please consult an authorised financial adviser.