A common misconception is that investing in wine will automatically provide risk diversification to your wider financial profile. Many outfits provide ready-made portfolios that fail to address a client’s investment goals and ultimately leave them suffering from opportunity cost. As we have discussed, within wine there are different levels of risk and timelines associated with types of wine. As a result each wine needs to be ranked in relation to risk and then the sum of these parts considered to provide an idea of how a wine investment will contribute to your overall investment profile.

If outright risk diversification is the goal, then a composition of wines can be created to simply shelter capital from inflation and downside risk. On the other end of the spectrum, if a client wishes to use capital to chase Alpha, a composition of wines can be created with almost no regard for risk. This broad spectrum needs to be accounted for and taken advantage of, with the only way to do that being an analysis of individual wines and an open conversation about goals with a client.

Sharpe Ratio Utilised For Portfolio Analysis and Creation

The sharpe ratio is a method developed to assess the dynamic between risk and return. It enables us to evaluate individual elements within, or across entire, portfolios. To complete the review, you must find the average return earned in excess of the risk-free rate per unit of total volatility. 

The greater the Sharpe Ratio, the better risk adjusted performance that each reviewed asset or portfolio has. A Sharpe Ratio of more than 1 indicates an excess of returns for each unit of risk undertaken.

When a truly risk averse wine portfolio is added into an investment portfolio it can more than double the overall Sharpe Ratio to over 0.8. This is true for a wide range of portfolio compositions, including any arrangement of equities, commodities, real estate, bonds or hedge funds. If we were to add in crypto investments the effect is even greater. The interesting thing is that even with a highly aggressive wine portfolio the impact on an overall sharpe ratio is still positive. A nod to the overwhelmingly secure fundamental characteristics of the asset class.

Even if fine wine as an asset class didn’t have the potential to create alpha, or an active return, the ability to balance risk alone shows it has a role to play within the modern-day investment portfolio. A good investment manager should be able to provide stability and returns.

Even if fine wine as an asset class didn’t have the potential to create alpha, or an active return, the ability to balance risk shows it has a role to play within the modern-day investment portfolio.

Sharpe Ratio and Sortino Ratio Multi Asset Comparison

(Source: Bloomberg)