Balancing the Head and Heart of Wine Investing w/ Tom Gearing, Cult Wines

As the wine investment business leader with $275M of assets under management, Cult Wines has been a pioneer in the space for over a decade.  Born out of a passion for wine, Tom Gearing, CEO and founder of Cult Wines, tries to balance the head and heart elements of investing in wine with actively managed portfolios by CFAs and experiences with some of the top wineries of the world.  Tom shares all the details and great examples of why people should consider investing in wine, the Cult Wine investment process, and where Cult Wines is heading.  

Detailed Show Notes: 

• Tom’s background
  • founded Cult Wines w/ his brother in university
  • Father was an investment banker with a passion for wine, especially Burgundy
    • Traveled a lot to Burgundy as a child
    • Started an import company - Burgundy Cellar
    • The early 2000s - started Financial Wines - an online price transparency tool, but ran out of funding after the dot com crash
  • 2007-2008 - during Financial Crisis - people looking for alternative investments - Tom realized wine was a safe haven and should be more investable
• Based in the UK
  • Where the Wine trading is very well established
  • The UK has tax free status for wine trading for anyone in the world - can keep wine in a tax free warehouse where you don’t pay taxes (sales tax, VAT) upfront
  • Asian collectors used London to build collections before shipping it
  • Brexit impact - mostly operational (shipping is a lot slower) vs. tax,
• Why invest in wine?
  • Those with a passion for wine - Build a fine wine collection, can drink it, or sell it in the future
  • Those not passionate about wine - wine prices are more consistent and tend to go up in value because the supply goes down over time (people drink it), tends to be insensitive to financial market fluctuations (went up in value in 2009) - suitable for diversification
  • Vs. art/cars/other alternative investments, wine is more attractive:
    • Accessibility - lower barriers to entry - hundreds or thousands of dollars for wine vs. millions for fine art/cars
    • Liquidity - better than other alternative assets
    • Price transparency - more trading publicly and more visibility (though, still not as good as it could be)
  • Wine investment serves as a storage/aging function for the fine wine market with pristine provenance and authenticity
• Cult Wines Overview
  • Not a retailer - acquires wines on behalf of clients
  • Three warehouses - London, Paris, Bordeaux
    • EU changed storage laws in 2016 to hold wines without paying VAT (similar to the UK)
    • Have own warehouse and staff to ensure provenance and authenticity of wines (e.g., caught heat damage on a shipment of Scarecrow wine and made a claim with freight forwarder immediately)
    • Has own photography studio and processes 250 cases/day, and photos are immediately uploaded for inspection
  • Investment process
    • Has a managed portfolio service (min $10k investment)
    • Gather client objectives - risk profile, investment duration (3-5 years, 5-10 years, 10+ years), how wine fits into their entire portfolio
    • Build a personalized, customized portfolio
    • Store wine in physical warehouses (clients own bottles or cases, the physical asset b/c it’s hard to have liquidity for funds where people have fractional ownership of a fund)
    • Get access to investment platform
  • Top-down investment process - actively managed portfolios
    • Cult Wines has a Chief Investment Officer (CIO), and all portfolio managers are Chartered Financial Analysts (CFA)
    • Constantly reviewing the market and making asset allocation decisions
    • E.g., Trump Tariffs on European wine - team thought Bordeaux would go down in price, proposed reducing allocations from 40% -> 30% and re-allocate to Italy, which looked undervalued already and had no tariffs; in 6 months, AUM of Bordeaux went from 40%->36% and Italy 6%->13% and Bordeaux prices went down 2-3% and Italy up 12%
  • Assets Under Management (AUM) - $275M
    • UK/Europe is the biggest
    • Asia next
    • Americas (smallest, but newest)
  • Fees
    • Annual management fee - starts at 2.95%/year (with $10k investment), 2.75% (with $35k investment), 2.5% ($150k investment), 2.25% ($500k investment)
    • Benefits - portfolio allocation, customization of the portfolio, investment platform access, customer support, storage & insurance, trading on the platform (no feeds on trading to align Cult Wines interests with clients)
    • Higher tiers get more experiential benefits - access to producers, client-only events, educational activities, vineyard visits
  • Wine Buying
    • 35% direct from winery/new vintages
    • 65% secondary market - from existing investors, trusted suppliers/brokers, and trading platforms (e.g., Liv-Ex)
  • Wine Selling / Delivery
    • ~20% of wines have been delivered to people, can ship to 45 states, clients pay delivery fees
    • Some clients use Cult wines as a global cellar - e.g., a Japanese collector sent wines to the US when he was going to be there to visit
    • Wine sales channels
      • Cult Wines buys for other clients - for wines they believe will appreciate more
      • Trade team - sells to other wine merchants, brokers, traders, importers
      • Retail/Direct to Consumer - listed on Wine-Searcher and Cult Wines website for sale
  • Team - ~100 people total
    • Infrastructure based in UK (including ~24 tech and product folks)
    • Regional offices - relationship managers, portfolio manager (all CFA level; Hong Kong, Singapore, 2 in London, New York)
    • 8 in North America (3 in Canada, 5 in New York)
  • Company’s Growth
    • 1st 5 years - establishing proof of concept
    • 2nd 5 years:
      • 2014 - acquired competitor, Premier Cru Fine Wine Investments, doubled AUM and business
      • 2016 - opened Hong Kong office
      • 2018 - opened Singapore office
      • 2014-2019 - $7 -> $50Mm in AUM
    • Next 5-year phase (18 months in) - “reborn, evolution”
      • Fine wine investment is limited by market inefficiencies: accessibility, liquidity, price transparency
      • Focused on projects that will improve inefficiencies and that will naturally make the wine investment space grow
• Types of wine for investment
  • Opportunistic trading - capturing inefficiencies in pricing - there may be opportunities to buy in one region and sell in another at a profit
  • Benchmark wines - based on scores (with critics weighted differently by the impact), vintages, the value of an established baseline of wines (e.g., Bordeaux, Burgundy)
  • Finding new opportunities - wines with high quality that have a good chance of increasing in value, e.g., Pierre Gonon St Joseph - was 30-40 euros 3-4 years ago, now $150/bottle
• Auction houses - don’t work with them much
  • Hard to get certainty of provenance
  • A lot more mature/older wines which have already gone up a lot in value
  • Costs are prohibitive (10-20% on a transaction)
  • But the best place to get the highest/best prices (e.g., 1945 DRC from the Drouhin cellar got ~$500k / bottle)
• Next for Cult Wines
  • Launching new platform for managed investment service
  • Bespoke, public blockchain for security, authenticity, and speed of secure transactions
  • Continue to build North American offices (opened Spring 2021) in Canada and New York

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