To what extent do fine wines contribute to the performance of a portfolio? Research focused on the Californian territory

Details

Supervisors

Vrins, Frédéric

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

This thesis studies the contribution of fine wine assets, particularly Californian wines, to portfolio performance. Using data from January 2014 to January 2024, it compares Californian wine indices (Liv-ex California 50, CultX) with global fine wine indices (Liv-ex 100, Liv-ex Investables, Liv-ex 50) and traditional American assets (S&P 500, S&P MidCap 400, S&P Small Cap 600, MSCI World, and US 10-Year Treasury Bonds). The study evaluates the diversification benefits and risk-adjusted performance of these assets using Mean-Variance (Markowitz, 1952) and Mean-Modified Value-at-Risk (Favre and Galeano, 2002) optimizations, alongside Sharpe (1964) and Modified Sharpe Ratios (Gregoriou and Gueyie, 2003). The findings demonstrate that including fine wine assets, especially Californian wines, improves portfolio efficiency by improving the efficient frontier, particularly for risk-averse investors. Californian wines show higher returns and lower correlations with traditional assets, making them strong candidates for diversification. Sharpe Ratio optimization suggests wine allocations ranging from 4% to 74%, while M-Sharpe Ratio maximization, which accounts for downside risk, recommends weights ranging between 3% and 72% for some investor profiles. These results highlight the favorable skewness and lower downside volatility of fine wine returns compared to traditional assets. Californian wine assets outperformed global wine assets in the period studied, offering better risk-adjusted returns and portfolio diversification benefits. However, practical considerations such as storage costs, limited liquidity, and investment access remain some challenges for this alternative asset. However, despite these practical difficulties to invest in fine wine, this study underscores the potential of Californian fine wines as valuable alternative investments, offering attractive risk-adjusted returns and diversification when incorporated in an overall portfolio.