Resolve Riffs on Worldly Wines as an Asset-Class with Atul Tiwari

One of the major trends catalyzed by the era of low interest rates and excess liquidity has been the drive towards real assets. Uniqueness and scarcity premiums are paid in assets as diverse as real estate, art, digital assets, and fine wines. With our friend Jason Buck (CIO of Mutiny Fund) as co-host, we were joined this week by Atul Tiwari (CEO of Cult Wines) for a deep dive into the world of investable fine wines. Topics included:

  • Atul’s journey – from reformed lawyer and finance executive to managing liquid, wooden-barreled assets
  • Separately Managed Wines – tailored solutions for different objectives
  • The industry’s original 800 pound gorilla and his point system – reverse-engineering for a single palate
  • Specialization and diversity – the multiple voices currently driving wine culture
  • The surprising existence of wine futures
  • Vintage ranges, consumption windows, storage and handling
  • Value vs growth dynamics, with no easily accessible beta – and some serious negative carry
  • Insurance, free ports and bonded warehouses – geographic diversification and avoiding double taxation
  • Bypassing auctions and buying only when authenticity can be verified

Enriched by Jason’s experience as a former restauranteur and Mike’s passion for the subject, the conversation also touched on underappreciated vineyards, great documentaries, and tips for finding appropriately aged wine in restaurants. A special thanks to sommelier Amanda McCrossin (@SommVivant) for joining our live chat (and adding tons of pedigree to Jason’s views). If there was ever an episode that you should consider pouring a glass for, this is it.

 

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Atul Tiwari
CEO, Cult Wines Canada

Atul brought his wealth of experience as a lawyer, asset manager and wine aficionado together in bringing Cult Wines to Canada with Tom Gearing in 2021.

He practiced law in Ontario and England and then moved into the business world by heading up Harris Bank mutual funds in Chicago. He then led the charge for BMO to enter the ETF business as the founding President of BMO Exchange Traded Funds, going on to serve as the founding MD/CEO of Vanguard Investments in Canada.

Jason Buck
Founding Partner, Mutiny Fund

Jason Buck is an entrepreneur and trader specializing in volatility, options hedging, and portfolio construction.

After living through 2008 as a commercial real estate developer, Jason became focused on how investors could better manage their risk. He spent the following decade consulting on portfolio construction and building bespoke long volatility strategies for family offices and high net worth individuals.

This experience in cross asset class trading spotlighted the need to create a diversified long volatility and tail risk fund designed to hedge the risks associated with economic downturns.

A former D1 soccer player and IMG academy graduate, Jason currently resides in Napa Valley, California.

TRANSCRIPT

Rodrigo:00:01:02All right.

Mike:00:01:04Wow, wow. Look at that. Shazam.

Rodrigo:00:01:10Look at the group of individuals we have, yes indeed. All right Mike, why don’t you go ahead and introduce everybody.

Mike:00:01:17Cheers to that. Another happy Friday afternoon.

Jason:00:01:20Cheers.

Rodrigo:00:01:22We got a couple of special guests here. And I will just remind everybody that nothing here is investment advice. If you’re looking for an investment advice show you probably shouldn’t be watching YouTube on Happy Hour, four o’clock on a Friday. So we’re going to talk about lots of stuff today. It’s going to be about wine, wine as an investment. Investable wine, what is it? Futures, all that good fun stuff. And we’ve got Atul Tiwari from Cult Wines here and we’ve got Jason Buck who is a wine connoisseur as well as a hedge fund manager. So, guest hosting this show is going to be awesome for you Jason. Thanks for joining us.


Rodrigo:00:02:02Yeah, did you do your prep? All the prep that I gave you before the call?

Jason:00:02:06Rodrigo. Let me know eight minutes before that you guys are going live. Thankfully, I don’t have to do much prep as I live in Napa Valley California. My girlfriend’s a sommelier. We should probably had her on instead of me. But I can be a wino with the rest of you guys.

Atul:00:02:19Lovely.

Rodrigo:00:02:24Say again Atul.

Atul:00:02:26I was saying eight minutes is just enough time to open a bottle.

Rodrigo:00:02:29Exactly. Adam was going to join us but he woke up with a random body ache, backache, turns out he’s got two fractured ribs. He has no idea how he got it. Butler’s the type a guy that might get it from just walking. I kind of feel like that’s just not his style.

Mike:00:02:50He stepped on a pump.

Rodrigo:00:02:51The great thing Atul and for Jason is that he’s in California. So it’s actually one o’clock for him and although it was eight minutes to get to the call, he’s just drinking a continuation of what he was having with lunch, I’m assuming.

Atul:00:03:06Perfect, you live in Napa you’ve got to do that.

Jason:00:03:12Exactly, it’s a forced lifestyle choice. That’s my excuse is it’s just I’m When in Rome.

Rodrigo:00:03:19Love it. All right, Mike’s frozen. So out of the people in this podcast I’m the one with the least amount of knowledge in wines. So I am going to let you guys go and I’ll pipe in with some novice questions whenever I can. But Atul, why don’t we begin with you giving us a little bit of your background which I think is kind of fascinating for the world to hear. I know we did this already for the Canadian audience. But this is this is now worldwide. Tell us your tale.

Backgrounder

Atul:00:03:52Great, fantastic. Thanks for having me on the Riffs, I’m looking forward to the chat. So my name is Atul Tiwari, I am a reformed lawyer as Rodrigo knows from the last time I talked about my past. I moved into the asset management world working for a Canadian bank, global financial institution called BMO, and spent a couple of years running the US mutual fund business for BMO. After BMO, I went on to be hired to start up Vanguard Investments in Canada. So I was the CEO for Vanguard. And that was about a seven a half year run, lot of fun. And after Vanguard I was looking for something a little bit different. I was always interested in wine and I knew that there was a popular culture, let’s call it, of wine investing in Europe and in Asia and I always wondered why has this never happened in North America to any large degree.

And so I put together a business plan, reached out to, for my research, who I thought was the best at this in the world and that’s Cult Wines in the UK. Cult was established in 2007 by Tom Gering who is our global CEO and his father, excuse me, and has a 13 year track record that we can point to in performance. We manage about 300 million, that’s Canadian dollars in assets, globally. And what we do is we provide a portfolio of fine wine that we’ll manage for you actively. And so that’s what we’re doing. We launched in Canada in April and it’s been well received so far, it’s a good time for real assets. And we actually opened a New York City office just prior to COVID and basically have relaunched that at the same time as we launched Canada. So that’s me in a nutshell.

Rodrigo:00:06:13Now, this isn’t a fund structure or anything like that. How is it that you think about providing access to this unique asset class?

Atul:00:06:23Yeah, it’s not an investment fund. So basically as a client when you on board, we’ll do your risk profiling, we’ll talk to you about your objectives, your duration of investment. And then what happens is, we buy the wine for you, so we acquire it, we store it in professional storage in the UK, we insure it, we make sure that when it’s transported it’s done without any vibrations or at the right temperature, etc, etc. So, basically, it’s your wine, you own it, you can decide whether you want us to manage it and at some point sell and you can take proceeds or reinvest them, or some of our clients decide, hey, this is great wine, I’m just going to pull it out and I’ll enjoy it, consume it and enjoy it. So that’s the way it works.

Rodrigo:00:07:21That’s a terrible investment. You’re just going to drink, you just going to drink millions away? That’s kind of crazy. So, as I get into the space, as I mentioned I’m not the wine connoisseur, but as you get into this space you start realizing that there are a few voices out there that carry a lot of weight in terms of the type of sales that one would expect, based on the blessing of one individual, one group giving you ratings or another. How does that work? Can you can you give us some insight as to how that the world of ratings and magazines play into the prices of wine and trying to find good wines?

The World of Ratings

Atul:00:08:04Sure, absolutely. So up until a few years ago there was one person who essentially moved global markets with ratings, and that was Robert Parker who a lot of people have probably heard of or come across his reviews, and it was amazing. I mean, he had so much power and influence. You think of, I always kind of think about sports or musicians and you kind of go like, who is the one person who dominates? And every now and then you might have somebody like Tiger Woods in his heyday or what have you, with golf. But, Mr. Parker essentially since the early 80s until a few years ago held that position. He retired and sold his business. And so now what’s happened is, there’s a number of influential critics now around the world and some of them have carved out niches where you’ll have in California, maybe Jason will know there’s Allen Meadows, who is called Burghound, and he’s an expert in Burgundy. And there’s great critics in Italy that are experts in Italian wine.

So it’s kind of neat to see what’s happening and from an investment perspective we need to follow all of them now, it’s not just one person. So it’s become a little more complex. But it’s democratized so it’s kind of, it’s good. And basically we keep an eye on critics’ ratings of the vintage and then critics’ ratings of each of the wines in the barrel, and then all the critics we rate once the wine’s in the bottle, and then they’ll schedule future ratings where they open the bottle and try and see how it’s doing. So one of the many inputs in our investment process is exactly that, which is tracking ratings and anticipating perhaps if an influential critic is going to raise a rating, obviously demand increases for that wine and the prices go up. So that’s part of what we do.

Jason:00:10:31Can you tell me like, Rodrigo is asking functionally it’s not an investment fund. You’re giving them advice and you’re basically buying and storing the wines properly for them. But I assume they’re coming to you because they want actual investment advice about what they’re buying. So is that primarily what you’re offering is like, look we’re buying these first growth Bordeaux’s? And are you buying the futures as part of the acquisition process? Like how do you give advice to the clients for building out a proper cellar?

Investing for a Cellar

Atul:00:10:55Great, Again, it starts with understanding the client’s objectives. And so for example, if you’re balanced and you’re looking for a balanced approach, then we’ll tailor the portfolio in a way that quite likely will include as you say, first growth Bordeaux. That gets reasonably conservative. You have a reasonable idea of return there and so long as we’ve done our work on vintages and if you can acquire it at a reasonable price then that would make sense. If you come to us and say, look, I’m a growth investor in wine. I’ll take the risk and I want to kind of try to shoot the lights out if you will, that’s fine. And in that case we’d look at other potential avenues for you to do that, which would be if it’s Burgundy, sort of up and coming producers that we know are great winemakers, and they’re starting to get acclaim. So that’s a pretty good bet if you will for growth.

And then we’ll look at potentially other regions and we talked about this, in the last time Rod and Mike and I were chatting, was some of the wine producing regions like Chile and Argentina, have some iconic wines that are now sort of getting more international acclaim, and therefore prices are rising there as well. So you can kind of think of that maybe as an emerging market sleeve in your portfolio.

Jason:00:12:33Go ahead Mike.

Mike:00:12:35I was just wondering, have we talked a little bit about the en primeur or the wine futures and how they work yet or, have we covered that?

Rodrigo:00:12:41Not yet.

Mike:00:12:41Okay, well, continue on, I just want to make sure we cover that off. Go ahead.

Atul:00:12:46Yeah, Jason I guess he did ask about futures. So the answer is, yes we do participate in the futures programs, mainly the biggest one is Bordeaux. And basically, what we do, we do our homework beforehand on the vintage because for those who don’t know, futures are essentially when you buy wine that’s still in the barrel, so it hasn’t been bottled yet. And basically, you hold that contract for two years until you get physical delivery of the wine in the bottle. So that said, we have to do our homework on the vintage, understand which regions within Bordeaux might do better than others. And then if, there’s a bit of art and science then to determine when the producers do release their futures, are they priced reasonably? And so you have to take it producer by producer, because if you look at this year, for example, the first producer to release their futures was Chateaux …and they released just a few percent higher than last year’s price. So everyone went, wow that’s amazing because last year prices were down because COVID had basically struck and people just didn’t know where the wine market was going to go. So we kind of got excited, we said, well this is awesome. And then as the campaign went on, more producers released at higher prices. And then we had to say, well, maybe some of these other names aren’t appropriate because they’re pricing too high.

So in the end, we likely didn’t buy as much Bordeaux as we thought we would and instead, what we did was we focused on a couple of back vintages where wines were available because we thought for clients that’s a better buy. And when you look at what’s happening in 2021 in France, unfortunately with the frosts, production is way down in Bordeaux and Burgundy. So, we think these back vintages will also appreciate because of scarcity in the vintage that we’re seeing this year.

Rodrigo:00:15:13So can I just understand, sorry, from a futures contract we deal with a certain type of futures, financial futures contract, how do wine futures differ from the traditional mainstream futures markets?

Wine Futures vs Futures

Atul:00:15:30Yeah, so a wine future isn’t a securities commodity contract, it’s not a commodity futures contract. So when we say futures in the wine world it’s really, you bought the wine and you’re going to get it in two years, sort of thing. We don’t make markets in futures contracts. So when clients buy in the en primeur, as it’s called the futures market, essentially what they’re doing is they’re buying the wine, it’ll sit in their account for two years, we’ll take delivery in Bordeaux, transport it to our storage in the UK and then it’s physically in your possession, in your account.

Jason:00:16:14And then Rod, maybe I’ll try to simplify and Atul can correct me. But what’s interesting is like, they’re probably watching the climactic conditions going into this year’s harvest … right? And they’re predicting, based on historical precedents is, is this likely to be a good vintage let’s say in Bordeaux? The vintage happens, they press the wine, they’re putting it in the barrel. At that time these trusted palates like the Robert Parker’s are now the new breed in the world, they’re tasting it right then before it’s aged at all and going, I think this is going to be a great vintage. So you’re getting the hubris of their palates in aggregate saying, this is going to be a great vintage, so then they’re taking that into account. But then you’re waiting two years for that wine to come out of barrel and into bottle, and at that point everybody’s going to retaste it and they may decide this is a better or worse vintage than we thought previously. But then it gets more complicated than that, you need it to age? So five years hence you’re like, this vintage was underrated. Now we feel it’s overrated, or you’re waiting 20 years after that and this is where you can find gems. So it’s really the alpha is Atul and his team assessing it, every step of this process and finding where they think there’s maybe underpriced or overpriced vintages based on historical precedents and how they view it versus how the palates of the world view.

Atul:00:17:27Well said.

Rodrigo:00:17:28You said you don’t trade in the futures contracts? I think rattled off like 27 steps. But in the beginning there was before it’s pressed, and then when it’s pressed and before it goes to bottling, are you able to liquidate your futures positions before the bottling and it gets delivered to you?

Atul:00:17:49You technically could. We don’t encourage it when we talk to investors. We do specify that you really should think of three to five-year duration for each holding, and ideally a minimum of five years. And basically, that’s because you want to give the wine an opportunity to appreciate in value. And in the early years it will start appreciating and then it plateaus for a bit and then demand and consumption increases and then it will take another, generally speaking it’ll take another rise in price, and then plateau again for a little while. So yeah, we wouldn’t encourage it. I think if you’re a client and let’s just say you had to liquidate your investments, we would find a way to sell the contract. But that said, I don’t know that we ever actually have, but it’s theoretically possible.

Rodrigo:00:18:49And how big is the futures market in wines? Dollar wise.

Atul:00:18:55You know I’m not sure. I’m not sure what the actual amount would be. But I’ll say Bordeaux is the biggest region doing it. Burgundy does a very little bit of it, but not much. So it really is a Bordeaux futures market. But what’s interesting, there are a couple things that are interesting there, which is some producers recently have decided to not issue futures. And they’ve said we’re not going to be part of this old structure anymore. And one of the famous first growths of Bordeaux, Chateau Latour is an example of that, where they say, look, we’re just going to hold our wines till they’re ready and then we’ll release them at the prices we think that they should command at that time. The other thing…. , yeah exactly.

Mike:00:19:48They can fund their inventory obviously.

Atul:00:19:51Yeah, well, they can afford for sure. But the other interesting thing is that we’re seeing more of this well is, it’s really hard to determine exactly how many cases of bottles each producer has produced. There’s a kind of a run rate and you can guess. But based again as Jason said, based on the climate and what happened, you try to figure out what their production was, because a number of producers are now releasing only some of their inventory into the futures market. So to Jason’s point, maybe they need some cash flow, but they don’t need to sell their whole production. So they’re going to get some cash flow, and then they’re going to hang on to the others hoping that the price is going to appreciate and then when they release it it’ll be at a higher price for them as the producer.

Jason:00:20:44Rodrigo, they want to obfuscate that as much as possible because that’s the idea of Cult Wines, is like for me a cult wine would maybe be 500 cases produced, but you’d be shocked that some of these first growth Bordeaux. they’re supposed to be cult wines, but they’re producing like 25 to 50,000 cases. So it kind of ratchet that expectation down of scarcity. So that part of the process as well and Atul it’s been years since I’ve looked at it, but I think if you really want to get a picture for the futures market it’s like Liv-ex and maybe other platforms that you have like a liquid options trading platform for the futures contracts where you could kind of assess prices in real time, is that maybe the best way to see where it’s at?

Atul:00:21:20Yeah, that’s a very good, you clearly have a lot of knowledge of the wine market. But absolutely Liv-ex is the stock exchange for wine, and it’s based in London because I think a third of the global trade of fine wine goes through London traditionally. So Liv-ex was started in I think the year 2000. Globally, there’s over 500 participants in the stock exchange or the line exchange let’s call it, and you have to be a professional. In other words, a merchant, or an investment firm like us. You can’t join as a private individual. So basically, you’ve got the professionals, let’s call it around the world, who are buying and selling these fine wines and trading them daily. So you’ve got a market. That was important to me as a reformed lawyer when I was looking into this, in setting up the joint venture with Cult Wines. One of the things with alt investments obviously is you want to make sure that there’s an ability to properly price the assets, and in this case it’s wonderful because you’ve got a third party exchange pricing daily. So as a client when you sign into your account, we will update your positions daily based on the Liv-ex feed.

Rodrigo:00:22:49So one of the questions up there was, do you fully pay up the futures? Or can you just partially collateralize them?

Atul:00:23:00In our case, we haven’t fully paid up but other offerors, let’s say of futures may just require a deposit. So in Ontario, and Jason I don’t know if you’re familiar with Canada much at all, but we have a very strict regulatory regime when it comes to alcohol. And in Ontario we have a body called the LCBO. And so LCBO will sell futures to Ontario residents, and I believe they ask for I think it’s 50% down and then when the wine comes in you pay the other 50%, so merchants could choose to do that.

Jason:00:23:44Yeah, as you know, we have the same Byzantine regulatory standards with our three tier system that actually comes out of Tide House, which is from prohibition. we’re still working with 100-year-old laws here and we’re trying to like distribute alcohol throughout the country within that system. And so, as you imagine it has a lot of the … and they’re taking their cuts, and it started, it’s very similar in Canada. I was thinking about if I come to you, let’s just say hypothetically I come to you as a blank slate and I’m like, I want to create a million-dollar wine portfolio. And we’re thinking as in general terms as all of us think is portfolio allocation, and basically you have your blue chips, well known system with first growth Bordeaux like you said, you got your emerging markets whether it’s Australia, Chile, Argentina, and then in between though you also have Burgundy, but Burgundy is very tricky, right? And there’s a lot of alpha that can be produced in Burgundy because it’s not quite, and purposely not quite as established system as Bordeaux is.

So I’m curious how you guys would give advice to building out that portfolio and how you almost tranche out that portfolio of what’s tried and true. What do you take your flyers on, what’s a little bit in between?

Tranching Futures

Atul:00:24:48Yeah. Again, it’ll start with your objectives and your risk profile and then from there we’ll build your portfolio. If it’s a million-dollar portfolio you can be very diverse and just like any other asset manager, we preach diversification for all of the reasons that we all know for Brinson and others. So when you look at if you go on the Liv-ex website, you can actually see their sub-indices for each region. And you can see how each region has performed in say over the past five years, and you’re absolutely right, you’ll see Burgundy kind of going like this. It’s had remarkable growth in price. And the dispersion between Burgundy and when you get down to let’s say, Rhone, or rest of the world is actually pretty meaningful. And again, we believe that you’d have to have a diversified portfolio by region and then based on your objectives you probably have your core of first growths, and if we can acquire Grand Cru Burgundy at a reasonable price and in the volume that you would need to meet those size portfolios, then obviously you would hold that too.

So you have to be careful with the construction of it, and we wouldn’t deploy at all straight away because of the amount, and so what we would probably advise you to do would be let’s do essentially a draw down, we’ll build the first 3 to 400,000, build the next 3 to 400, and then draw the rest down to complete your portfolio. So that’s sort of the approach we would take there.

Jason:00:26:43How do you think about like vintage dispersion? And so we talked about futures, but I’m sure you’re buying a lot of stuff at auctions, you’re buying private sellers. So then as you’re deploying that capital, how are you thinking about providing different vintages across the different regions and then how are you actually acquiring those vintages for the client?

Atul:00:27:01Yeah, one of the things that we are very good at, and we talked a bit about futures not this year but last year, we were the second biggest Bordeaux futures buyers in the UK, because it was outstanding value. So we have a very large buying program and really deep relationships with a number of producers. And so our first objective is to access as much wine as we can directly from producers, for two reasons. One is obviously price. The second is provenance. So the closer you can get to the producer in where you’re acquiring your wine, the less the chance that there’s going to be an issue of fraud which unfortunately in the wine industry is as we all know, is an issue. So we try firstly to secure our wine there.

Next, we’ll go to negotiant agents that are reveled in essentially once, from the producer. And that’s where we try to source most of our wine and we’ll source some from reputable merchants, which might be one step even further from the agent, but we do very little, in fact, I don’t think we do any auction buying. And we do very little and only if we can guarantee the authenticity of what we’re buying, because obviously it’s important. We can’t afford to have a fraudulent bottle. And knock on wood, we’ve managed 950,000 bottles over 14 years and not one complaint or one instance of fraud. So, we want to keep that going and if it ever happened, our policies we’d replace the wine for you or credit your account at the value if it can’t be replaced. So that that’s our approach.

Jason:00:29:13Yeah, people have no idea how much fraud is rampant in the wine industry? Mike and Rodrigo I’m sure you guys would love some of those documentaries. I’m like Rudy Kurniawan everything’s…

Mike:00:29:23Sour Grapes…

Jason:00:29:24Yeah, exactly. So you basically have to have a team that’s going into check like the authenticity and provenance of those bottles and are they checking fills, paper stock, ink. It becomes I would think the larger part of your business is actually authentication.

Atul:00:29:38Which is why we don’t do a lot of transfers in from private sellers or merchants that we don’t really know or haven’t done all our due dil on. Because it’s just in your right…it’s overwhelming. We do have a team at our storage facility which is, you might be familiar with this Jason is, there’s an independent third party called London City Bond. And they operate 2 million square feet of warehousing for alcohol in the UK, 8 million cases. So they’re our independent third party storage facility of 24,000 square feet there. And so together with London City Bond staff or reps, we have our own people too. So if there was going to be any sort of wines coming in that we thought didn’t immediately pass our strict screen, then we go into that mode where you’d have to really look at them all like you say, check the fills, check the labels. And unlike in the Rudy Kurniawan case where he got busted because he forged some wines that were never made, you have to do…

Mike:00:30:58Otherwise he had a great business. He would have just not said that he made a wine that was made by a producer that didn’t exist in that time frame for him. If he would have just not see. But he would still be printing wine by the way, which is not easy to fake. 2000 Bordeaux, that’s not an easy thing to fake.

Jason:00:31:04No. Used to be a winemaker with that nose and that palette that he was able to recreate. He should be just be a winemaker.

Mike:00:31:28Without a doubt, like except he could have been a wine critic, done anything. If you can fake people out for that amount of wine and with the meticulousness of finding the corks, finding the bottles. The bottles have to be right, like you were talking about earlier Jason, the ink, the font, everything has to be perfect. And then the wine has to sort of taste the kind of like what the actual wine is like, it has to sort of taste like whatever from that era.

Rodrigo:00:32:01I think notwithstanding you gentlemen and your fine palates, like recognition that the vast majority of quote unquote wine connoisseurs have no idea what they’re talking about or doing. You can sell to 90% of the market that claim to be amazing at knowing what a good wine versus a bad wine is in reality they’re just posing. So I’ll just say what everybody here is thinking, all 150 watchers of this podcast right now.

Jason:00:32:33Mike and Rodrigo. I’ll let you guys hang out because I have a million questions. But I don’t want to monopolize the questions.

Atul:00:32:39Can we ask Jason some questions?

Jason:00:32:41Oh, no. Please don’t ever ask good questions.

Atul:00:32:45No. Tell us about your girlfriend and her as a sommelier and did you guys watch SOMM, all of the movies together? What like those guys with wine?

Jason:00:32:58Yes, I’ve seen all the SOMM movies and actually we pretty much we know the director, the producers, all the guys that were in the films are all good friends of my girlfriend. So yeah, we know all of them very well, she’s been a wine director at multiple restaurants and she’s deeply ingrained in the industry. She probably knows vintage Napa wine better than probably there’s probably only a handful of people in the world that have tasted as much vintage…

Rodrigo:00:33:23Can you put the mic down and get your girlfriend here.

Jason:00:33:28Exactly. And then she branched out recently. And I know Rodrigo loves it, she branched out more and it does a lot more on Instagram and YouTube content. And almost like you’re saying is like, as people as we had to look for different trust agents than Robert Parker, that has changed the field dramatically and you had the different magazines that were produced. But now you’re seeing it much more on Instagram and social media to find your trust agents. And so she’s becoming that way. So we actually get caseloads of wine shipped our house daily that they’re hoping she’ll review. So we’re like oil traders in late 2020 where we’re just overwhelmed with wine every day. And everyone’s like, great, just send it to me. And I’m like, do you know how much it costs to ship wine? It would be better for me to just pour it down my drain, like it’s ridiculous. We have a great problem to have in our house, we have way too many wines to drink, I think there’s at least a dozen that are open on the table next to me. So that’s the world we live in.

Mike:00:34:23SOMMVIVANT, right?

Jason:00:34:26Yeah, great shout out. I appreciate that.

Mike:00:34:27She’s on right now. She’s dialed in bro.

Jason:00:34:34Now I’m embarrassed.

Mike:00:34:38Check out SOMMVIVANT everybody.

Atul:00:34:41I’ll Instagram as soon as I’m off this webcast.

Just Ask the Sommelier

Jason:00:34:45Great. And then my personal history is actually used to work as a lowly sommelier, more like a cellar rat way back in the day and I owned restaurants and everything, but my knowledge base of wine is maybe, it’s greater than probably 90% of the general public, but it’s maybe only 1% of what my girlfriend knows. And that’s what people don’t realize is like there’s really levels in this game. And the best advice I can ever give anybody, and I’m sure you guys would concur is like when you’re at the restaurant, just ask the sommelier. They’re happy, they want to make your experience the best possible, they’re not there to rip you off. It’s no longer these old white dudes that are really pretentious and trying to screw you. There’s a whole new breed of sommeliers that are just trying to give you the best experience at the best price point you can get. And just ask them for their advice. They’re going to know way more than you know and they’re going to know how to narrow down to exactly what your palate wants.

Rodrigo:00:35:34And that is such so much better advice than grabbing video and taking like 27 pictures of the menu until I feel like maybe a four star I can put in like, it’s quite embarrassing. Just looking at the four star wines that might be on your menu. It is intimidating though.

Mike:00:35:52My advice is…but be blunt with the sommelier in the sense that you have a budget, I am willing to spend $100 or $120 tonight and I like blah, blah, blah. So for me, I like wine with age on it, I would prefer a lesser wine that’s got more age, I do not like wine from the cradle, and not a huge fruit bomb guy. I want it to have at least matured, I want something at least in its adolescence which is hard. Depending on where you are, can be very difficult. In Ontario, it’s actually really hard to find appropriately aged wines at restaurants without having to actually give up an arm or a leg. But then in other places, it actually is quite achievable. So if I’m going in and it’s a wine cellar that a restaurant that I’m not familiar, there’s a couple tricks I have. One is look in the Magnum section. There’s always magic in the magnums. If you have a group of four or six people, make sure you look in the double bottles. They sell less, they turn over less so there’s a lot of times there’s a little bit more age in the bottle, and you actually usually get a slight deal on that second bottle. So if the bottle’s retailing at 100 and it’s going to be 200 for that, for the Magnum you get it for 175, it does age slower in the Magnum too.

Rodrigo:00:37:17That’s how you got me into wine 11 years ago. Remember that Mike?

Mike:00:37:19Yeah. Rodrigo:00:37:26We had just partnered that up.

Mike:00:37:26Tip on that. You go in, you say to your sommelier my price tonight is 150. I like something with more age on it. Send me, where should I be looking in this in this wine book, and they will help you.

Jason:00:37:39Before Rodrigo gets his story, that Mike is saying is excellent advice. But even more importantly, like if you’re in a business group or whatever and you don’t want to say that price out loud, they’re amazing. The sommelier’s are like Sherlock Holmes. All you have to do is point to a few wines you’re looking at, that gives them the hint of the price range, they get it and you point to the wines that you prefer. They also get your palate then. Like I remember my girlfriend when she comes to the table, she’s basically she likes Sherlock Holmes and she’s asking questions like, what hotel are you staying in? She’s looking at the watches that people are wearing, because the watch tells a lot about you and all those things. So she’s like, she’s slowly sleuthing down that funnel to try to narrow in this person, because she wants him to have a good time. And like Mike saying, it’s especially on the Magnum list, there’s a lot of stuff on there that maybe they’re not moving. So if you get to know that sommelier and they like you, they’re going to hand sell you that bottle, and they’re likely to give you a discount or a deal on it, because they want you to have a good time and they also want to turn over their cellar. And with that, Rodrigo sorry, you can get to that.

Mike:00:38:32One last thing on that. There’s nothing that does a restaurant more good than a Magnum on a bottle in the table of the restaurant. It gets everybody else looking for Magnums. You have that on the table, they’re like, yeah, they got a Magnum, you should get a Magnum, all of a sudden they’re rolling through some stuff. So I mean, it’s an experience, you’re having some special and if you’ve got four to six people, you’re going to go through two bottles anyway and there’s nothing that sort of represents a nicer time and more specialness to the event than doing the Magnum size. And then I remember introducing Rodrigo to wine and we were sitting at this place, good Italian restaurant. And he said to me, he’s like, I’m ordering some wine and he’s like, why would anybody ever pay more than $20 for a bottle of wine? I will never do that. And I said, I will bet that that is false and it’s not only false, but it’s false within this year, you will order a bottle of wine. It was within the week, I ordered a nice Amarone that afternoon…

Rodrigo:00:39:42A Magnum.

Mike:00:39:45A Magnum.

Rodrigo:00:39:48And I was like oh my god, Amarone. I’ve never seen anything like this before. And this is like, I was fairly young then still early in the career, went to the restaurant with my wife. I’m like, I’ll take an Amarone and like, that’ll be $250. I will take a Rioja.But today’s actually my anniversary. I’m taking my wife to a restaurant so I should take off my Timex sports watch and borrow Mike’s. I don’t know, what do you…

Mike:00:40:18Fill up the check, probably throw on JP’s Rolex.

Rodrigo:00:40:23That’s right. I’ve never actually used it…

Mike:00:40:27Timex is actually the right thing to wear.

Jason:00:40:31Exactly the right thing. It tells about your personality and that helps them figure out your palate. It’s all connected. All those aesthetics are connected. I’m curious like, though we talked about buying this as an investment. But let’s be honest, we’re talking about the enjoyment and enjoyment is the biggest part of it. And I remember back in the day we used to have a heuristic like decades ago that basically buy a three pack, sell one, flip it, make some money back, sell another one and drink the third one. And that’s maybe a terrible heuristic for the way you guys do it, much more sophisticated now. But I remember there was also these firms back in the day in like Luxembourg, where they would sell your wines for you but they would have like quarterly meetings, these were more funds, and they would pop the bottles in their wine cave, it was actually inside a bank vault. But it was also for the enjoyment on a quarterly basis.

So, I know you guys are giving the investment advice and you’re talking about bonded warehouses and on shipping, you got to worry about the bottle shock. But how do you suggest the customers really enjoy that wine, and I assume you’re also saying, hey, this is your vintage range, this is the time to be drinking this if you want to actually consume it.

When it’s Time to Drink It

Atul:00:41:34So again, since the clients own their wine, as I mentioned it’s open to anybody to take possession of their wine. There are some complications obviously in jurisdictions like Canada where you have to do it through your local liquor board, and there are taxes that are applied that might make it not worth doing. But that said, historically, what we have found is 80% of the wines are investments, so they get sold, clients will either redeploy or take proceeds. 20%, our clients will take possession of. So people are enjoying the wines, like you say, we like to say there’s two parts to this, there’s the head and the heart. The heart is that, it’s the romance of wine and we love wine, I mean we wouldn’t be doing this if we didn’t, and a lot of our clients do as well. So there’s that romance of the wine and drinking an amazing wine that’s been bought from the producer and cellared perfectly, and you’ve got your original wooden case. I mean, that’s a great experience.

But the other thing that we do is, we do provide those experiences for clients as well. So we’ll put on tastings in a number of our global offices. So we have six offices globally and around 80 people in the company, and so we do wine education. So we’ll host with classes and we get a number of people signing up and being part of learning more about wine, and we do trips for clients. And hopefully, when we can all take more of those trips, we’ll be able to do more of those. So I’d say, sorry, just make sure my laptop’s plugged in here. There we go. You know I’d say that historically the company started out more as a pure asset management shop, and we haven’t done as much of the hard part that maybe we could have and should have. But that is something that we’re now focusing more on and we’ve hired a customer experience CX individual who now has two people on his team. So as we kind of keep growing and expanding really in North America we have to spend more time on the CX part of it. And just the last point there is, we’re in the middle of refresh of our branding and in September we’ll roll out a whole new website that will be a lot more user friendly, and we will have a good portion of it dedicated to education. So you’ll be able to go on there and read about producers and wines and some of those other wonderful things that us wine people love to do. So you’re absolutely right because they do go hand in hand.

Rodrigo:00:44:47So let me pull on that thread and I’m going to read something out loud because I think it’s an interesting point of view. The way I see it is, think about the world of investing in stocks. You have value managers, which are the managers that everybody respects and intuitively believes that are going to tell you, I’m going to find really undervalued stocks and companies that are going to grow when they’re undervalued. You see the guys buying Tesla and everybody makes fun of them because they have no value, they’re not making any money, they’re constantly losing, they’re total frauds and yet one is massively outperforming the other. What you’re describing to me is a lot of value investing. But from what I understand with was it Parker and his point system, I’m going to read something that Raoul Pal wrote, is part of a string, just a couple of points here. It talks about how, this is a story of a man’s palate and how his scoring system changed the world of wine and globalized wine styles.

So he says the US became the biggest wine market in the world as Parker had made it easy to understand wine, but his palate changed wines forever, and wines became standardized to it in order to get the famous 90 score so they would sell for big dollars, and the world of wine began to get distorted by these super big high alcohol wines that was stripped of terroir and were fruited on overripe wines. You see, no one had a choice not to change their wines. So do those sell better and make more money? And those may be something good for your investment side of things but not for your heart. Like how do you?

Palates and Hearts

Atul:00:46:40Everybody’s palate is different. So I don’t know if we’re going to talk about the wines we’re drinking today, but my favorite Burgundy. So I’ve got right now a 2002 Charme-Charmbertin by the Drouin family. We know them quite well they are a lovely family, and that’s my taste. I love Pinot Noir, I love elegant wines that are balanced and like Mike with some age on them. But other people love the big like, call it a big fruit bump with a lot of jam and that’s okay too. Everyone’s got a different palate. To answer your question. obviously Mr. Parker again, when you wield that kind of influence and dominance it’s a business, right? So producers want to mostly get those high ratings. Not everybody, a lot of producers will just say, look, I make the wine I make and I’m going to market and sell it the way I want to make it and that’s great. Others may say, obviously I got to pay the bills, and I need a high rating and if a certain critic has a certain palate, I’ll make my wine to their tastes so I get a good score. That’s part of what we’re talking about in terms of inputs into decision making on investing in wine or not investing in wine.

I think again, the fact that now there are many recognized critics and as Jason pointed out with his girlfriend and others on Instagram, and otherwise people are consuming advice about wine in a different way, which I think is terrific. And so a roundabout way maybe of answering your question, there was also a very famous wine, I’ll call it a consultant. And if you ever saw, in Canada, it’s hard to see it again but there was a documentary called Mondo Vino, really interesting. A documentary, and Jason…

Jason:00:49:12It’s phenomenal.

Atul:00:49:13Yeah, it’s really good. It’s not on any of the services in Canada right now. So I’ve been trying to re-watch it but I’m sure in the US you can see it, really interesting. And they do have a feature on Michelle Roland, who is this famous wine consultant who would in fact go and consult with wineries to create a wine that could potentially get a higher critic score. And he was called I think The Flying Winemaker because he’d be flying all over the world with Chile, Argentina, Australia, France and consulting with all these wineries to create wines that would get high scores. So that happens.

Jason:00:50:04I took like half the things I wanted to say about also I’ll start off with two is, I’m drinking Ochota, from Australia. And this is actually just a field blend of both reds and whites and it’s actually a natty wine. And normally I don’t even like natty wines. But this one’s delicious and Ochota has been making, it’s a very small producer in Australia, that’s great. But I want to touch on a bunch of things, but that was just especially with Parker, is that by the way, Rodrigo, Raoul and I were on the same podcast talking about Parker and the Parkerized nation of the world. And we have differing views. Like to me what’s very fascinating to me is Parker came out of this idea of the 1970s, Nader’s Raiders and he wanted to actually really help the consumer because at the time wine was like a cabal, and it was difficult to break into.

So that’s kind of the 100 point scoring system was he was trying to democratize wine. And unfortunately then that metric can get abused. As we all trade volatility as well, it’s like when vol becomes a player within the market as well, it can distort the market, so to speak. But also, I don’t think it’s prudent to hate on Parker, because honestly he brought so many people to wine, it’s like, if I wanted to hate on Starbucks, right because I actually drink third wave coffee that’s very specific producers. But without Starbucks coming in, I would never have had the third wave producer. So I’m thankful for Starbucks. And so I’m also thankful for Parker, because it brings more people to wine and yes, a 100-point system could get distorted and I was going to bring up Michel Rolando and his micro oxygenation and everything.

But basically, it got to a point yes where at the high end, everything was built around Parker’s palate. And it’s not Parker’s fault per se, he just became the 800-pound gorilla. But the best part is like now this has become very dispersed again. But the best part is, even if that does happen, all of the value in the good stuff is always on the periphery of life. And so, you need the experts like Atul and his team or other sommeliers or different people in the industry, is if you don’t like Parker’s palate, great, it shows you the wines to stay away from and then you can search out these hidden gems. So it’s just like everything in the world has it has tradeoffs as we all deal with on a daily basis in our investment portfolios.

Rodrigo:00:52:14Yeah, I got into Riojas because at the time it was all I could afford, and it’s the only thing I liked. And so it was interesting to see Raoul talk about how undervalued the Rioja was because it gets no love. And it’s amazing, it’s like you can get a Rioja for like half the price of what you would get for something that’s similar tasting in a popular place…

Mike:00:52:41To me Riojas it was always about the age. The Rioja often aren’t even released for sale until they’re five to seven years old in sort of more traditional outlets especially in Ontario. So you’re either going to have a cellar in Ontario and you’re going to be buying an aging, or if you’re going to try and buy something off the shelf from Vintages, you’re going to have a narrow selection and a lot of what’s going to have age on it will be a Rioja type Spanish wine, Tempranillo or something like that. So that’s why I like them because it prioritizes my sort of less fruit balm, more aged wine that has a little bit of that acidity fallen off and give some of the smoother textures and flavors, but it’s very interesting.

Atul:00:53:31Yeah. I’m picturing Adam in traction in the hospital bed. But Adam is asking, what are the carrying costs on wine as far as on the investment side, as far as fees, storage…

Carrying Costs and Beta

Mike:00:53:43 You know, it’s fine as long as long as it’s not near Adam’s house. Like if Adam has a wine cellar within his reach, that is just serious negative carry on that. What happened? It was spoilage, honey. Atul, talk about that and I think it’s that’s probably, weaved into that is the actual beta that you get or the expected excess return that you are receiving minus those things. So maybe talk about that whole complex, why would wine increase in value, is it stored etc, etc.

Atul:00:54:23Sure, I will. So of course being asset managers we go, historical performance obviously, isn’t indicative of future performance. That said, October ’09 is when Cult Wine started maintaining records of its own index. So in other words, an aggregation of each client’s portfolio because they’re all tailor made and bespoke so you can’t run an index as you would like an S&P 500 for example. So that said, the annualized, average annualized return has been 12% in Canadian dollars per year since October ’09. So from that you subtract essentially, there’s a long explanation here, but the way we will describe it is about 3% per year if you hold position for five years, and at higher investment levels it will be lower. But on average, we’d say 3%. So you’d say essentially you could expect 12 minus three, 9% on average if the historical rates of return continue, so you have an opportunity to outperform equities but we don’t start our discussion with return because, like a lot of real assets, there are a lot of great benefits beyond return to your portfolio. So I won’t go into all the details. But basically, there are very low correlations to equities, low volatility with wine, obviously the basic economic principle of supply and demand works very well because only 1% of the world’s wines are considered investment grade. So obviously as time goes on consumption and demand drive prices up.

And then the last really great fact that I find really good is the low downside capture. So in other words, when equity markets go down and crash, wine goes down but not nearly as much and you can show that in the Liv-ex indexes. And you just take the year 2008 for example, S&P 500 was down 38%, the Liv-ex 1000 index was down 4%. So that’s kind of the buffer that an investment in alt like wine will give your broader portfolio.

Jason:00:57:04I’m curious though, along that line what’s kind of worried me recently, so obviously we can study look back centuries to see the returns on fine wine and real assets. Especially some great studies that came out recently showing like the last 100 years, like you were saying wine is almost outpaced any other asset class in real terms. But I wonder when we’re looking at that past back-test, it has at times changed, almost like part of that is we’re looking at it like from a P/E perspective, the illiquidity, I’m at the mark to market. So that’s buffering the volatility. But as times have changed and we start building out these funds where you can invest in wine, or we start fractionalized wine shares, we create a futures market, we create all these ways to access real assets, like I think about even in the art market, where things like Masterworks, where you can buy fractional pieces of art, is we’ve actually changed these things from real private assets that has a lack of granularity, to fractionalized investments that we can trade in fractions of a second is, do we almost have to throw out the last 100 year back-test when we think about these real asset classes?

Atul:00:58:05Well, you would hope that the increased interest is just going to drive up demand.

Jason:00:58:11In the short term, but it might increase volatility as well.

Atul:00:58:15It may, you’re right about that. I mean, one of the reasons why wine doesn’t drop nearly as much when equity markets crash is because if you look at the profile of the investors or holders of wine, they’re not likely to be panic sellers and…

Rodrigo:00:58:35They don’t need the liquidity.

Atul:00:58:38Right. Well, we know that from our client base. We know that when the equity markets are down, they just go, I got my wine I don’t have to sell it, I don’t need the cash. And so a lot of the private clients in the wine world, people who build their own cellars or invest with companies like us are going to be people who generally can withstand those short term plunges let’s say. There’s not a big institutional trade if you will in wine, so you don’t see the hot institutional money flowing in and out. And at the end of the day, it’s still wine. In other words, it’s wine. If you’re going to do it properly without a synthetic way to get the returns, you need to have the wine. So it’s a physical asset. So it’s an interesting point, a very good point because you’re right, there are platforms now where you can own fractional shares of wine. And then we’ve also seen a couple of essentially robo-type advisors coming up, who are taking more of a technological approach to wine investing. We like to think that we’re more of a traditional asset manager as opposed to kind of running it with algorithms. So although we do use algorithms, we also have a human fundamental approach to…

Rodrigo:01:00:10Is it through NFT’s or just a platform that offers fractionalized exposure.

Atul:01:00:16It’s a platform that I can tell the name, it’s called Rally. So if you look up Rally and in all fair disclosure, we actually provide some of the wine for their engine. So just to be clear, we’re friends. And it’s a really interesting platform. So they fractionalize trade, sports cards, I don’t know if they have Michael Jordan sneakers, but all kinds of collectibles. And when I was on there last week, my kids are crazy dinosaur fans. And I saw there was, it was a fractional ownership of a triceratops skull and I thought that’s really cool, but I’m not sure they’re going to appreciate the fractional ownership. They’d rather have the actual Triceratops skull, I’m sure.

Cult Wine Royalties and NFTs

Jason:01:01:06Rodrigo, I was exactly thinking of Rally. And what you brought up though with NFT’s is like I was trying to hold off in this episode, talk about crypto at all, but I want to get that in there for your viewers. But you got to say crypto, that way your view count goes up… but it is interesting how the ideas of crypto or blockchain or something along those lines can really help with this issue of provenance and wine. And so one, it can help you with that traceability and tractability.

Now, granted you have a problem when you’re converging to a real world asset to on chain, you have an Oracle problem that makes it slightly difficult. But what I think is even more fascinating that people aren’t talking about as far as the NFT route, is part of NFT’s when they’re released is that you can have follow on royalties. And so when you have these people that are actually producing these cult wines, and they’re selling it on for $500 bottle, and five years later you see collectors that are flipping that for $5000 a bottle, they’ve missed out on all that appreciation. But now you can tokenize it where they had 10% royalties. So as it gets sold five years from now or 50 years from now, they’re increased, they get a royalty stream from actually creating that cult wine. And I think that’s really fascinating from the producer level.

Atul:01:02:17That’s a really neat point. Just a couple things on that, we do invest heavily in technology, we’ve got data science teams, we have seven proprietary models that we run with all those factors that we talked about, price ratings, changes, climate, all kinds of things that inform our investment decision making process. And we actually did an NFT that I think closed last week or the week before. And what it was, it was an opportunity to buy a barrel of Chateau Anjou Lusse, and people were bidding on it and they would get the whole barrel bottled, you get a trip to the winery and have a dinner with the producer. And there was an artwork commissioned as well that went with the NFT that was purchased. So it is kind of neat.

Rodrigo:01:03:20That’s so cool.

Atul:01:03:22Yeah, it is cool. As far as I know, I think we were the second, I’m not sure but I think we’re the second out there to do an NFT because I think I actually did one with Lee J Belaire, an awesome producer out of Burgundy. So we’re starting to put our toes into some of that. I can say that we’re currently block chaining our inventory. So there’s a number of reasons why this is going to be really helpful to our operation. One being for example, because you own your wine and it’s segregated, it is all held separately and marked in your name at the storage facility. So if you as a client, so if Jason wants to sell Rodrigo a case and you’re both clients of ours, that’s great. But we now have to go and forklift all the cases on top of it off, get that case, find Rodrigo’s area and put the case there. That’s what you have to do. If you can blockchain that you’re already saving a whole bunch of time because you just ledger it.

And Jason to your point, ultimately we think and we feel that we hopefully can get to where your block chaining it right from the producer and that you’re absolutely right. Fraud. You can’t say that it won’t ever happen, but it’s going to be a lot harder for sure, when you’ve got records of where it was, what temperature is stored at, how it was moved, who owned it, who owns it next, that’s going to help.

Jason:01:04:56You could even implant chips to even think about humidity and temperature levels on storage capacity. That would be fascinating too. Are you using like the IBM hyper ledger to figure out is that the blockchain you’re using to figure out store the client’s portfolio allocations or what have you?

Atul:01:05:11Yeah, it’s not IBM. But there’s some good ledger’s out there and probably can’t say too much more on it right now.

Jason:01:05:25But if you think about it, how brilliant is it? I think about the analogy of, Lady Gaga wants to create a new album, but she’s going in studio, it’s going to cost money. So she sells each song for a million dollars and whoever buys it though can get a royalty stream off of it. So if you apply to wine instead of buying the futures, if I’m going to make it and I have at least two to three years before I can actually sell it, people can buy a barrel of that and then get the royalty stream. More importantly like you’re saying, you can go get a world class artists to put the art on their label and they get a royalty stream off of each bottle sold and in perpetuity as well.

Rodrigo:01:05:57It’s crazy that I saw the use case for artists. Artists sell their piece and then…Atul your wife and my wife worked in the same auction house in Toronto. Richie’s Auctioneers. So you know, the world there was interesting because they all had relationships with the artists and their artists were being sold at auction and it was almost sad to see their pieces go for such high prices that they got zero of. They would get kind of like a benefit that okay, my piece sold for X. Now my new pieces can sell at a higher price. But once it’s out of their hands, they get no benefit, no royalties, nothing.

So I saw the use case for NFT’s with being able to get that continuous royalty every time they sold. I saw the use case NFTs to fractionalize, to fractionalize wines to allow the masses to participate. But my God is it so much more enticing if you can get a trip to Bordeaux, meet the people who made it and get a little bottle of wine. It’s just that for sure 100% is going to make this market and of course, anything that you fractionalized and NFT much more appealing.

Atul:01:07:08Yeah. To Jason’s question, that’s part of the hard part which is you’re getting whatever it is 220 bottles, let’s say or whatever comes out of a barrel and you have dinner with the winemaker one year in so you try it out of the barrel, that’s your barrel. And then two years later you get it. To Mike’s point, Mike should have bought it because you can tell them however you want it bottled. Magnums, D-Mags for a big party, they’ll do that. And then you can even have your own label, which is kind of cool, like your name on it.

Rodrigo:01:07:42The winemaker is your Lady Gaga.

Atul:01:07:48Yeah, it’s a really neat space and I would say speaking about Cult I’d say, I don’t think there’s anybody, I don’t know of anybody else in the world sort of approaching it the way we are, which very much attracted me to the company because there’s so much that can be done. And with our scale and our relationships, we feel like we can probably, hopefully bring more transparency and trust to the market. And it’s very fragmented. So we think there’s some real opportunity to kind of increase our scale obviously. But to Rodrigo’s point, Jason, at some point, your girlfriend and my wife should speak because my wife was the head of the fine wine department at Richie’s, and so worked with Rodrigo’s wife which we found out the last time we chatted. But so she’s very knowledgeable, she’s got an amazing palate. And there’s a number of studies I think you’ll be familiar with it, Jason which will say that in terms of the sexes, women, there’s more a higher percentage of women that are super tasters than men. And I truly believe that, there are some amazing women who just their tasting ability is amazing.

And one of the critics who I quite like is Jancis Robinson, and she’ll talk about and she’ll say, I’ll be having wine with sort of the typical older gentleman drinking some more wine, and at some point in the conversation they’ll admit that their wife or girlfriend is a much better taster than they are despite the fact that they’ll talk more about it sort of thing. So it’s kind of the…

Jason:01:09:46You brought up the bonded warehouses in England where Cult Wine started and you said you have offices around the world. You also work with bonded warehouses around the world. Are you guys storing in multiple countries for clients around the world to get that geographic diversification instead of any natural disaster risk or anything like that?

Atul:01:10:03Yeah, good question. And I’m intrigued by that from a couple of perspectives. One is obviously we’re looking to grow right across North America and the US is a very big market. Traditionally speaking, you can store wine obviously in warehouses all around the world. The issue from an investment perspective becomes liquidity. So again, if you’re storing in London and you’re selling to Europe, it’s a lot easier to move the wine. If you’re moving to Hong Kong, it’s easier too. If you’re in the US and you’re selling to Europe or Hong Kong, then you’ve got to make sure that the wine is being transported properly and I think the way that generally speaking the world markets have developed, that’s part of the reason why you see more wine investment firms in Europe and Asia.

But my view, personal view is that if you can create more liquidity within the US market then that’s not an issue. If you’ve got enough buyers and sellers, and warehousing in the US, you should be able to match much more. So it’s going to be very interesting I think for us as we look at the US market as to… is that something that can be done? It hasn’t really been done by anyone yet. And so I do know Liv-ex has a representative in the US. I believe they have US trading hours, but you may just need that sort of thing where you need an exchange to facilitate these trades within the market, so you don’t have to worry as much about issues around transportation.

Jason:01:11:55Well, and this may be too a delicate question but it makes me think about what Cayman guys on here. But I was wondering, as you’re setting those up, can you basically utilize free ports for storage and bonded warehouses that free ports and kind of avoid international taxation as you’re moving your wine around the world?

Atul:01:12:11You know, I guess you could. Sure you could because…

Rodrigo:01:12:18You got a lot of space in the Gordillo household.

Mike:01:12:24In a hurricane zone. You are right on that one. On Cayman too. It’s a fine zone.

Atul:01:12:36I personally don’t know of the storage facilities, but I’m sure there’s some good ones that I don’t know about them. But I guess conceivably you could but I’m not sure. Well, I guess the advantage would be if you’re in the Caymans or somewhere else you could then take it out without taxes.

Rodrigo:01:12:56Atul, we have a large Cayman Islands audience, the Caymans and everybody listening. We cannot say that the Caymans is…

Atul:01:13:05Oh, sorry.

Rodrigo:01:13:06They don’t like it here.

Atul:01:13:08Let’s just say Cayman.

Rodrigo:01:13:09The Cayman. Cayman Islands is good. But just generally the Caymans has a negative connotation after The Firm.

Atul:01:13:16Got it.

Rodrigo:01:13:17That movie kind of ruined it for us.

Atul:01:13:20All right, we won’t make that mistake again.

Mike:01:13:22So I suppose the idea of a free port that is, you’re going to extract it and pay the tax in whatever jurisdiction would have that tax occur. I mean, if you’re coming into a region and that’s where the wine is going to be consumed, whatever the taxes are, the taxes in that region in the free port is just sort of prevent double taxation.

Jason:01:13:42Yeah, the idea too that people are unfortunately treating these as trading sardines and not actually as consumables. So you might want to just be moving it around free ports as you move around the world or adjust your allocation.

Atul:01:13:54Well, yeah, and that’s the beauty of blockchain is why move the wine? Move the ledger. So that will be something that’s going to be pretty neat for our business, and if there are firms out there with digitize tokenized trading and we’re just going to take it one step further.

Wine, Fraud and Insurance

Rodrigo:01:14:18So just going back to storage and disasters and losing wines, imagine there’s insurance involved. How does insurance work and does it also cover you for fraud for like the fragile wines?

Atul:01:14:32So we use Marsh and McLennan, and it basically covers loss, damage at the facility or if the facility storage was improper, those sorts of things. It doesn’t cover fraudulent bottles. That would be out of our own pocket and it doesn’t cover for example corked wine. I mean wine’s a natural substance that you can’t really insure against corkage or storing the wine for too long and it’s gone past it’s drinkability. Well, that’s not something that insurance will cover. And so basically, when you look at probably 80% of our inventory of $300 million they’re going to be invested in wines within the last 15 to 20 vintages. So we don’t go out and try to seek the 1929 Latour or the 47 Chevelle Blanc, or any of those types of wines. It’s just the risk/reward isn’t worth it there. So that’s one way we kind of manage the maturity issue. You can’t manage the corkage issue and fraud. We’ve talked about how we mitigate that.

Jason:01:15:56I’m just thinking about how much smart Atul is than the rest of us, as actively managed funds keep diminishing over time asymptotically, if you get into the wine business every year is that every year has a new vintage so it’s like you’re just re upping your expertise every year.

Rodrigo:01:16:13And also what didn’t come to me was the fact that it’s again, like certain cryptocurrencies where it’s a supply and demand thing, and supply goes down every year. So here’s my next question, when we, ReSolve adds this to their hedge funds for 50% of their allocation, how much liquidity can you take? What’s the ticket size where you’re like, okay, we’re going to need to push this out over a year.

Jason:01:16:46And pun intended on liquidity?

Wine “Liquidity”

Atul:01:16:50Yeah, that’s right. So liquid asset. So basically, our sort of rule of thumb is if you’ve got a portfolio that’s $100-150,000, we can essentially liquidate that almost right away. If it gets up to about 250-500, we need probably six to eight weeks and then if you’re talking like sort of in the millions then you want to ease it into the market. It’s not unlike, although there’s liquidity in both senses of the word in wine, at the same time you don’t want to have huge market impact. So if you’re moving a large position globally, everyone’s going to know you’re moving it. And so you want to ease that into the market so that you’re not having the market impact that you don’t want to have when you’re selling.

So it’s a bit of a managed process. Because we have managed portfolios and we do have portfolios that are into the millions. But we don’t often see and I can’t speak for the company on this one because I don’t know. I don’t think we really see the million, million and a half portfolios where someone says they need to liquidate right away, for example. If you institutionalized it, I think for us we would think about it in a different way and that might be to then create the actual investment fund and then you’d have to have some clear parameters around liquidation, etc, etc. for really large positions.

Rodrigo:01:18:35Okay.

Atul:01:18:37But Jason, your comment is kind of funny in a way because when I was at BMO, I started their ETF business. And at Vanguard, obviously, it was ETFs all the time, anytime. And so I’m a big believer in that approach to your core portfolio where you can actually, don’t try to beat the S&P 500. You can do it on asset allocation, but on its own, it’s really hard to beat the S&P 500. It was, there’s some opportunities now with the things that are going on in the tech world. But that all that said, I believe in at the core part, but it’s really interesting to me because although I definitely appreciate the value in active management, obviously it has to be in a space where you can create that alpha. I would say your beta should be free, your alpha you should pay for it. And I think everybody would be happy to do that.

So in coming into this space for me, it was it was really neat because I totally get the value of the active, because we’ve got people on the ground in all these regions, we’ve got relationships with producers, we’ve got scale, we’ve got definitely more data than any investment shop in the wine world, and so we kind of feel like it’s an advantage and it’s an advantage that we have, and there’s nothing illegal about that advantage. And so it’s kind of neat because you’re sitting here with all these levers and you’re going, this is kind of cool, right? You do really have an opportunity to outperform.

Rodrigo:01:20:40All those years to convert you into active, eh?

Atul:01:20:43It does make me think about we should have obviously addressed it at the beginning too when we were talking about first growths and the whole entire growth classification system goes back to the Napoleonic times. And so there’s like you said, there’s those five first growths, they’re like your blue chip that’s your ETF thing, of the world. But there’s a lot of room for alpha and so even if we go to Burgundy to make it more specific in that you’re saying you have grand cru and premier cru, they’re listed, and people can, that’s kind of your blue chips, but there’s a lot of wiggle room in there that I assume you guys derived your alpha, you’re also saying these are the hidden gems that we can find in Burgundy. And there’s a lot better chance of finding them the Burgundy than there is in Bordeaux. So how would like your expert staff, like if I’m saying, hey, I just want hidden gems, Alpha, Burgundy. How do you guys assess that market?

The New Wine Alpha

Atul:01:21:28So that’s where, you’ve got producers who were winemakers at great houses and they’ve gone off on their own and they’ve purchased some land, or they’re buying the grapes and making their own wine now. And so those are the kinds of producers we like to focus on because we know their winemaking skills, we know that they’re going to be good at selecting their grapes if they’re buying them or the parcels that they’re buying. And it’s just a matter of time for their wines to kind of catch on and hopefully appreciate some of the grand cru labels that we all know and love. So, that’s a bit of what we do and that’s important from the investment and analysis point of view where we have to constantly be on the ground talking to people and understanding what people’s plans are and when you kind of build those relationships over time, then obviously you’ll get allocations from the producer that are hard to get, especially in some of these smaller production producers.

So it’s a constant business like any other where you’re really concentrating on relationships with the ecosystem as well as with your clients. And in the UK, we’re actually a registered agent for wine. So over the years, we’ve developed some great relationships with a number of producers and we will get from some of the iconic Italian producers, we’ll get an allocation direct from them based on what they’re allocating to UK, so we’ll get our percentage of that. So that’s kind of something that we work on developing as well.

Rodrigo:01:23:31Is it like IPOs where the more business you give, the more business you do, the more access you have?

Jason:01:23:38Great analogy.

Atul:01:23:42Yeah, the President’s List you mean?

Rodrigo:01:23:44Yeah, the President’s, I haven’t heard that in years, my God. Yes, the President’s List.

Atul:01:23:50Partly yes. And I would say things have changed a little bit, well, a lot over the last two years even in the wine world where in the past, a number of producers obviously would have relied on restaurants and hospitality and probably not airlines for fine wine, but you know what I mean. Places where suddenly they weren’t able to distribute their wine. And so some producers thought about it and thought, well, maybe I’m a little too concentrated in how I’m allocating my wine to the trade, restaurants and otherwise. So what we have found is by speaking to the producers that we have relationships with, we were able to actually access wines that would otherwise have gone to some of the parties in the trade where we’ve said, we’ll help you out, we’ll take that. And by the way, we could commit to doing the same thing for the next X number of years. So we’re helping them with some certainty and then obviously they’re helping us with allocation.

So it’s interesting, it will be interesting to see kind of how things go, once hopefully, the world returns back to some degree of normality. And a lot of French wine got allocated out to French restaurants in France. And so when things get back to normal we’re not sure exactly how that’ll play out on allocations. But I do think a number of producers and agents have kind of recognized the value of private clients because they tend to be stickier, they tend to be able to buy year after year like we talked about, and so it’ll be something that we’ll watch.

Jason:01:25:57Actually Rodrigo made me think that maybe the good analogy right now is shipping. Shipping containers is like only the tried and true clients are getting allocations of the shipping containers coming across because people are worried about five years hence what happens when it calms back down? Like who’s going to actually pay my bills then. So the guys that have the relationships are the ones getting the shipping containers on…

Rodrigo:01:26:15But it’s always the case.

Jason:01:26:17Yeah, always. It’s always who you know.

Rodrigo:01:26:19It’s retail versus wholesale.  100%, you’re getting better prices.

Jason:01:26:26Sorry, I know you guys, with Cult Wine starting in England, understandably it’s going to be predominantly European focus but the at the risk of offending my neighbors here, you guys, especially as you’re bringing it to North America, are you guys investing in like Napa Valley cult wines, or do you have clients that are looking for those and then I assumed you have a team on the ground here to kind of assess those vintages and bottles?

Atul: 01:26:48Well, we’ll talk offline on that one. We do have some really good relationships with some of the iconic cult wines and get reasonably good allocation which is fortunate. But as, it’s interesting and then I don’t know the answer, and I might ask you this Jason, which is, traditionally again when you look at portfolio allocation and if you look at even the Liv-ex, they put the US in with rest of the world which is a small fraction of the investing world of wine. I kind of have a bit of a view that for us to build out in a bigger way in the United States that I believe that there’ll be an appetite for clients to see more US wine. So whether it’s Washington, Oregon, or California, I don’t really know New York that well, but there’s enough to choose from there in their portfolios. They’ll be just like in securities, there’ll be a home bias. So my view is, as we kind of build out, I believe we’ll need to develop more of those relationships with producers in the US as well.

Is There an Easy Beta?

Rodrigo:01:28:09So one last question with regard to asset management. If you had to go back to Vanguard and create a passive index, what is that, because I know you’re saying you’re an active manager and clearly you’re doing a lot of active stuff, but it almost feels like every beta that we know of, was at some point alpha. And it’s becomes either the easy beta at five basis points or the hard factor base beta at 50 basis points. Is there right now an easy beta to access in the world?

Atul:01:28:47No, there’s not? I don’t know. I guess theoretically, you would think you could synthetically create something on the Liv-ex index, but I think it would take some work to structure and obviously as a market maker you need to figure out how you hedge your exposure, etc, etc. So, I don’t know, it doesn’t seem like an easy thing to do but there’s some really smart people in the world and maybe someday they will kind of come up with a way to do it. But if you look at like gold for example, there’s two approaches. There’s synthetic and then there’s actually holding the bars in …, the fund as well. So maybe there’ll be a way to do it.

Cult Wines

Rodrigo:01:29:42And do you guys charge a performance fee or is it a flat fee? You said 3%, but it’s a flat fee, right?

Atul:01:29:47No, and I should have mentioned that. We do not charge performance fees, so that that’s something we don’t do. The other thing we don’t do is we don’t charge any commissions on trading. So when you exit your position, we don’t charge you anything for exiting. Obviously, our first place to go would be internal clients whose portfolio might do well with that wine and so you match the trade. And then we’d go to merchants and traders around the world. So we have offices in Hong Kong and in Shanghai, and so there’s a really great opportunity for us when clients are exiting to actually sell to people who are active traders in those markets of wine. So we do things like that to minimize the impact of commissions, we will go on Liv-ex but in that case, the commission we don’t charge too.

Jason:01:30:51A case like from the business standpoint when you’re raising assets, especially in COVID we had a large consumption of wine during COVID. So I was wondering if that was a nice tailwind of you guys raising AUM? And then frequently around here, they talk a lot about how do they get the next generation like Gen Z into drinking wine? And I wonder if that’s a false conceit.  It’s more of a, it’s not just the age cohort is that as we get older and we have a larger asset base and disposable income, we start collecting wine in our old age, not in our young age. So maybe you’re going after maybe the wrong demographic and so are you guys looking with for people with AOL email accounts, or how do you find clients?

Atul:01:31:28AOL. It’s mostly direct. It’s word of mouth, It’s our Trustpilot scores are amazing. Our retention rate is amazing. So basically when you when you become a client, you’re happy, you like it and you stay and you re-up, as you would say Jason almost yearly. So it’s a nice business that way. So it’s mostly individuals, it’s generally emerging high net worth, ultra-high net worth. That said, we do have a product. I can speak for Canada, in September when we do our brand refresh, right now our minimum is $45,000 for a portfolio manager and a person who’s going to give you advice, but we’re going to roll out a $15 to $45,000 product that will be automated. So you’ll do your KYC online and we’ll run your portfolio and rebalance for you.

So, our goal is obviously to make it more accessible and at those levels we might get more early investors. So that’s kind of how we view it, but you’re right, right now I don’t know the exact average age of our clients. But I know that as a cohort, it’s sort of 50 to 60 is the biggest cohort. That said, what we’re finding so far in Canada and in the US is that we’re getting a lot more in the 40 to 45 age. And so it’s a little bit different than Europe which is great. And I think as we roll out our lower minimum, then we should be able to drive down maybe the age of the investors coming in at that level.

Rodrigo:01:33:24Awesome. Well, guys, we’re coming up in an hour and a half and Mike hasn’t said a word in 45 minutes which is like the longest. I’ve never been looking at my work, he’s remained silent. So Mike, do you have any parting questions?

Mike:01:33:45None. I was taking it in, you were all over it. I’m like fascinated.

Rodrigo:01:33:50You know everything about wine. The curious mind took over.

Mike:01:33:55You guys were on fire.

Atul:01:33:58Well, I know from the last time we spoke that your wine knowledge is pretty robust as well Mike, so I was surprised you didn’t jump in with some zingers for Jason.

Rodrigo:01:34:11He’s been texting me about Jason’s hat…

Mike:01:34:14We said we weren’t going to talk over each other. So I’m like, we’re not going to talk over each other. You just talked for 45 minutes. I tried to say something, I waited for a gap, it’s taken this long.

Atul:01:34:29That was fun guys. Thanks for having me and it was a pleasure meeting you Jason and enjoy the rest of the day out in California, looks wonderful out your window.

Rodrigo:01:34:41Yeah, stick around for a post commercial conversation briefly. It’ll be about 10 minutes this commercial that’s coming up so everybody curb their loins. Thank you guys. Jason, thanks for coming in at such short notice, pinch hitter for Butler and Atul can’t wait to see you guys again, whether we’re in Toronto. I think Mike you guys going to see each other or not because you’re in Toronto.

Mike:01:35:07Maybe, my schedule’s pretty tight on the last weekend there. So I think I’m going to miss him.

Rodrigo:01:35:15Awesome. Thanks so much for your insights gentlemen, and thank everybody for sticking around.

Atul:01:35:20Thank you.

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*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.