Not for the first time, we carry an article examining the heady delights – and possible downsides – of investing in fine whisky.

Outside the regular investment topics of equities, bonds, real estate and increasingly routine “alternative” areas such as private markets and hedge funds, this news service occasionally likes to examine the area known sometimes as collectables – fine wine, classic cars, art, jewellery, rare books and the like. Besides being colourful and fascinating, these entities – so advocates say – are useful ways for hedging against inflation or economic turbulence. (Whether that is true over certain periods is contested.)

One area that has come up in popularity is fine whisky. (See articles here, here and here.) Certain brands can sell for eye-watering sums, and the whisky investment story is an established trend. To write about this topic, and examine the pros and cons, is David Smylie, group head of GSB Private, a wealth management group.

David Smylie

The editors are pleased to share these views, and we invite replies. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com

The investment world is made up of all varieties of asset classes from traditional equities and bonds to alternatives such as private equity and debt.

But there is another sub-segment for high net worth investors – passion investments. Passion investments allow investors to invest in their hobbies and interests such classic cars, fine wine or even luxurious sports clubs.

One intriguing area of passion investing is whisky. I would rather class whisky as a passion “commodity” as it can be traded easily and is a liquid investment. Diversification is a core part of financial planning, and 'alternative assets' have a role to play – and whisky fits very well into a portfolio, offering stability and credibility to an HNW client's portfolio.

Positives
Assessing whisky as a passion commodity offers many positives for investors. Whisky investments are not linked to markets or indices, so values do not fluctuate as with traditional investments.

The whisky investment market is driven solely by supply and demand with one supplier, Scotland. Scotland produces a finite amount of single malt Scotch as most whisky goes into blends. Scotch whisky is a very simple commodity. Only so much is produced by a relatively small country. Most Scotch goes into blends such as Bells and The Famous Grouse. The remainder is rare and becomes more valuable as each year passes.

Whisky is sold across the globe, and demand is on the increase following the removal of trade tariffs in major countries such as the US, Canada and Australia, with India to follow in time. Whisky investment is on the increase. Also – another positive is that whisky is licensed in the UK by HM Revenue and Customs (HMRC) and, ultimately, HM Treasury.

Also, whisky is a tradable commodity and the key statistics back this up:
-- It is exported to 160 countries worldwide;
-- Scotch whisky exports bring £7.1 billion ($9.2 billion) into the UK economy;
-- Scotch accounts for 22 per cent of all UK food and drink exports; and
-- Sellable whisky assets valued between £2 million to nearly £20 million. 

There are different ways of investing in whisky casks, bottles, etc; however, initial due diligence is key. Investors need to do research and find out who they are dealing with prior to making any commitment.

Negatives
Of course – with investing there are negatives surrounding whisky. As with all asset classes, there are always “bad apples” out there; hence, we advise all clients to undertake as much due diligence as possible in this sector. 

We recommend that our clients work with highly-rated and compliant companies for instance the Vintage Whisky Group, which is a reputable cask investment group. 

In terms of investment risk, there are several considerations. Firstly, there is liquidity risk, as whisky is not as liquid as other investments such as stocks and bonds, and it can sometimes take time to find buyers, especially for very rare or high-value bottles/casks. It is also an investment that typically requires a longer-term commitment, and investors require patience and a long-term outlook. 

Secondly, there are the cask health risks. This risk can occur if you don't regularly check the health of your cask and/or don’t have the proper storage in place. Thankfully, companies like the Vintage Whisky Group, acting as cask custodians, have solid systems in place to ensure that your cask remains in top condition. 

Thirdly, and lastly there is the market risk. Whisky, like other asset classes, is not immune to market volatility, and prices can fluctuate based on trends, economic conditions and changes in consumer preferences. 

Thankfully, whisky, like many other alternative assets, is typically non-correlated to traditional markets and so investors can benefit from it acting as a diversifier in a wider portfolio of assets.

Portfolio allocation
As conversations on portfolio allocation continue, especially on the lifespan of the traditional 60/40, alternatives have become a major part of the debate – including how they fit into the modern investment portfolio.

Opinions vary about how much you should invest in passion investment asset classes such as whisky. 

We meet some clients with 90 per cent of their wealth in property or 75 per cent in authorised investments. 

In our experience, and considering diversification balanced with risk, 5 to 8 per cent of a portfolio should be allocated to alternative assets at the investor's discretion, of course. 

A whisky portfolio is built up over time by sourcing and selecting the right casks that meet the investor's needs. 

Investment process
For individual (retail) clients, there is a strict investment process:

-- Know your client (initial face-to-face/Zoom meeting to establish needs, wants and objectives);
-- Company brochure and due diligence pack sent to the prospective client for review;
-- Second follow-up meeting to present bespoke solutions based on the client's objectives and initial budget;
-- Written advice and recommendations sent to the client by email;
-- Once agreed, a payment on account is paid (fully refundable), and a receipt is provided to the client;
-- Casks are selected and purchased;
-- Client receives full ownership documentation; and
-- Client has a follow-up Zoom meeting to run through our secure online portal and discuss future needs.

For institutional investors, including family offices, cask investment groups will provide and request two-way due diligence documentation. The initial meeting is face-to-face, and they will establish the institution's objectives, timescales, and exit strategy in detail.

Future of passion investments as a diversifier
HNW clients should use passion investments as a diversifier. Diversification is a core part of financial planning, and not putting 'all of your eggs in one basket' is as true today as it has ever been. 

In recent years, some clients have been fed up with fluctuations and volatility in stock markets that directly impact traditional investments. Clients like the stable growth shown by whisky regardless of other factors such as the stock market, inflation and interest rates. 

The future of the asset class is looking bright – and there is more interest gathering year-by-year. Institutional investors and family offices are now getting involved and seeing the merits of this asset class as part of a diversified portfolio.