Investors Have Been Raising A Glass To Whiskey’s Returns

Whiskey might not be your drink of choice, but you don’t need to be a connoisseur to invest in it. Just like fine art, collectible cars, watches, and even high-end handbags, whiskey belongs to a group of luxury alternative assets that are gaining popularity with retail investors. And whiskey’s returns have been among the most intoxicating of the lot.

Why are so many investors… ahem, hitting the bottle?

Alternative assets, in general, have the potential to increase your returns and diversify your portfolio. And whiskey is seen as one of the more fun assets in the class. For the ultra-rich, collecting rare individual whiskey bottles is an investment and a treat. And it’s not exclusively the Western world that appreciates the liquor: rising wealth in Asia has increased the popularity of the drink among Chinese and Indian consumers. Like wine, aged whiskey from reputable distilleries tends to retain value even during recessions and inflationary periods.

In the past year, the booze’s returns might not have been anything to swoon over, but over the past decade, they’d have had you feeling warm and tipsy. According to the Knight Frank Luxury Investment Index, rare whiskey bottles have been the largest outperformer compared to other luxury investments over the past ten years, up 373%.

The Knight Frank Luxury Investment Index shows gains across various alternative investments on a 12-month basis (blue) and a 10-year basis (pink). Source: KnightFrank.

Is the hard stuff right for your portfolio?

With all investments, you want to pick your poison with care. So, if you’re thinking about investing in whiskey, ask yourself these three questions:

1. Are you a long-term investor?

If you’re hoping to make a quick buck, you’re probably better off trading in the public markets. With whiskey, experts recommend a minimum holding period of three years to realize decent returns. In fact, the value of a whiskey cask increases more rapidly after 12 years, and it’s only after 15 years that it begins to be classed as a premium product. So, the longer you can wait, the better: buying a younger cask is cheaper and reduces your risk if you’re willing to wait for it to mature organically. Unlike stocks, whiskey won’t pay a dividend, so you’re banking on capital appreciation to drive your payout.

2. Are you already well-diversified?

If you’re new to investing, you probably don’t want to start with whiskey. Ideally, you should already have a core portfolio consisting predominantly of stocks, bonds, and cash before you dabble with this tipple. As a general guideline, no more than 15% of your portfolio should be allocated to alternative investments. The longer your investment horizon, and the stronger your appetite for risk, the higher the proportion of your portfolio you can consider allocating to whiskey or other alternative assets.

3. Do you have time to do your homework?

Whiskey is a niche and specialist asset, so you’ll need to do your research before investing. And you should be aware that there are fraudulent investment schemes out there, with scammers attempting to sell casks that are overpriced or nonexistent. The situation is made worse by the fact that whiskey investments tend not to be regulated, meaning there’s little chance of being compensated in case of a scam.

So, how do you get started if you want to invest?

Like with all those glass bottles lined up behind your favorite barkeep, you’ve got choices in investing in whiskey. And, here, what you choose may depend on how much you can afford to invest, your risk appetite, and where you are on your investment journey.

There are three common ways to invest:

1. Single-bottle whiskey.

Investing in single-bottle whiskeys requires that you have at least some basic knowledge of the liquor itself. Once the whiskey is bottled, it won’t age anymore, so you’ll need to be able to identify rare bottles, brands that will appreciate in value, and highly regarded distilleries. You’ll also need to pay up for storage and know which bottles to buy. The index on Rare Whisky 101 is a good place to start: it shows the most highly traded bottles at UK auctions for single-malt whiskey, and how the bottles have performed at auction over time.

The Rare Whisky Icon 100 Index. Source: Rare Whisky 101.

2. Cask whiskey

If you’re not sure which whiskey bottles to choose from, cask whiskey investments might work better for you. However, the upfront investment tends to be a lot higher, ranging from £1,000 ($1,240) to £65,000 ($80,790).

The process involves you investing directly with a distillery on a cask of whiskey that will age in their cellars. Since whiskey takes a long time to age, some distilleries are happy to monetize the casks they have sitting in their cellars earlier. When you’re ready to cash in on your investment, you can sell your cask to a whiskey broker, independent bottlers, auction houses, or even back to the distillery.

The value of cask whiskey as it ages. Source: MarkLittler.com.

Investing in cask whiskey is a long game. Like fine wines, a good whiskey appreciates in value over time. As the chart shows, the real increase in the value of a cask happens after year 12. That’s because the majority of whiskey goes into blends, and since most blends are 12 years or younger, casks of whiskey older than 12 years are harder to come by. A cask that is older than 15 years also begins to be classed as a premium product. So for the best returns, you have to be prepared to wait.

3. Whiskey stock.

The simplest way to invest is by buying shares of companies that produce whiskey. And your choices here are aplenty: like Remy Cointreau, Pernod Ricard, Constellation Brands, Diageo, and Brown-Forman. Liquidity in these shares is a lot higher than investing in cask whiskey or single bottles, and you’ll have much lower transaction fees, but you’ll lose some of the portfolio diversification benefits of actually owning the whiskey. Plus, the price performance of the stocks is also driven by factors other than the price and demand of the whiskey.

But “whiskey is risky”, right?

Well, no investment is complete without an exit strategy. While whiskey returns have been buzzing over the past decade, these returns are often gross, meaning they don’t include the annual fees and costs associated with insurance, warehousing, bottling, transactions, and taxes. Management fees can range from 2%-3% annually if you invest on a platform, and some brokers also charge a hefty 10% fee for selling your cask whiskey. Since whiskey investing can take years, these costs can quickly add up.

The biggest problem, of course, is that the industry is unregulated. This means you’re taking on a much larger risk, and it’s up to you to make sure you’re investing on a credible platform and paying a fair price. Lastly, like with all physical assets, you take on the ownership risks. Your cask could become worthless if the alcohol by volume (ABV) drops below 40% or if the contents evaporate completely, regardless of its age or distillery.