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Scotch anyone? Why whisky is making ripples in alternative investments

Whisky as an alternative investment has been gaining more attention as investors warm up to the idea that it may be more than just a popular drink. Pernod Ricard (LSIN: OHAT) with Chivas Regal and Jameson Irish whiskey under its belt has also reported a 17% increase in sales growth for the first half of the fiscal year 2022. Although Anheuser Busch In-Bev (LSIN:ORJI), the owner of Jack Daniels, has been struggling a little lately, investors staunchly believe that the company will pull through soon.

Across the board, high-end products have seen an uptick over the last few years, with the S&P Global Luxury index, comprising of the top 80 luxury goods companies globally, recording a return of about 12.23% over the last five years.

Pernod Ricard sees a surge in net sales for fiscal H1 2022 Credit: TradingView

These figures all point towards a healthy growing interest in whisky and other alcoholic beverages with investors starting to overlook the initial pandemic woes faced by a number of food and beverage companies.

Why should you invest in whisky?

According to Rare Whiskey’s DCI model, whisky lovers are mainly spread across three broad categories, drinkers, collectors and investors. Drinkers typically are concerned only by the quality of the whisky as well as the affordability.

Collectors can come in a wide range, focusing on a single distillery, multiple distilleries, a single year or particular editions. Investors on the other hand, are less likely to be sentimentally attached to a particular year and are more likely to focus on special editions or single casks, as well as particular distilleries with a proven track record of high quality.

With soaring inflation touching multi-decade highs, whisky is seen as a surprisingly good inflation hedge, which is much likelier to appreciate in value, if unopened, than other luxury investments such as cars, wine or watches. This allows investors to gauge the market at will and sell at the best time, without being pressurised by deteriorating quality.

The numbers back this up as well. The Knight Frank Luxury Investment Index, a rare whisky benchmark index, has seen a mind-blowing jump of about 564% in asset value over the last decade. This equals to an annual return of approximately 18.9% in the last 10 years, an attractive figure by most measures. The index itself has inched up about 9% in the last year.

In 2018, Scotch whisky accounted for about £5.5bn of the UK economy, which further encouraged investors to open up to this offbeat investment. In recent years, the investment landscape has also seen a distinct shift from intangible assets, such as bonds, mutual funds and stocks, to more tangible assets. Whisky investments, being tangible, as well as having considerable intrinsic value are profiting quite a bit from this shift.

With additional crackdowns and regulations by the Scottish government mostly, investors are now provided with an added layer of safety and quality satisfaction, greatly reducing whisky forgeries. Casks are now largely required to be held in government bonded warehouses, with limited accessibility.

However, one of the greatest advantages of investing in whiskey is perhaps its dynamic quality, as it can be stored in casks, waiting to appreciate in value, or in bottles, for immediate or delayed consumption, offering greater flexibility while selling and purchasing. This also gives investors much needed control over the size of investment, as many would like single bottles, but not whole casks.

Whisky investors can choose to focus on a particular distillery, styles of whisky or expressions, which are specific bottle releases.

What to consider before investing in whisky

One of the most important things to consider before putting down your first investment in whisky is the rarity of the bottle or distillery that you’re looking at. Since a lot of distilleries are family businesses and have been around for decades, if not centuries, they’ve had time to build up an impressive reputation. However, others, not so much.

The rarity and brand of the whisky has a vital role to play in how expensive it is currently, as well as how much it’s likely to appreciate. Aim for special or limited editions, as well as bottles from no-longer functioning distilleries, all of which are likely to have considerable value in the secondary market for other collectors.

Another thing to watch out for is the type of cask the whisky has been matured in, as these are paramount in giving whisky distinctive flavour notes and combinations. As such, some types of casks are naturally more coveted than others, which may be a deciding factor in choosing your investment.

Whisky casks are mainly made from two varieties of oak, European oak or American oak and are often ex-wine or ex-sherry casks, which are used to infuse a range of distinctive and delicate flavours into the brew.

It’s also a good idea to use specific whisky indexes, in order to get a better idea of which bottles and categories are doing well currently. Rare Whiskey 101 offers a Japanese 100 index, a Vintage 50 index, a Single Grain 100 index amongst others and provides excellent insight into the market.

Above all, investors should remember that whisky investments are often a long-term investment, sometimes spanning several generations, before reaping rewards. Thus investors with a similar mindset stand to benefit most from this particular investment choice, especially if they can resist the urge of knee-jerk reactions.

Which are the top whisky manufacturers to invest in?

According to the Whisky Investors Index, which measures the percentage change in value in a distillery’s bottles since the end of 2008, Springbank has been doing the best, with a jump of about 97.1% in value.

Based in Campbelltown, Scotland and owned by J&A Mitchell and Company, the distillery is famous for its single malt and offers a variety of options ranging from 10-year-olds to 25-year-olds.

Following up close behind is Rosebank, with a surge of 92.8% in value since 2008. Rosebank, based in Camelon, in Scotland as well, was closed in 1993, but has now been taken over and reopened by Ian Macleod distillers. It is one of the best Lowland Single Malts, which is triple distilled and non-peated.

Brora coming third with an appreciation of 92.4%, also saw a hiatus between 1983 and 2021 and is now owned by Diageo. Originally producing a heavily peated whisky best suited for blending, the distillery has since moved on to a Highland-style lightly peated one. It is also well-remembered for its 1972 Brora 40-year old release in 2014, which was one of the most expensive at the time.

Ben Wyvis is also a close contender, with an increase of 92.3%. Bottles from this distillery are relatively harder to source nowadays, since very few independent bottlings were made available, due to the distillery mostly being responsible for providing unpeated whisky for the Whyte and Mackay blend. Hence, investors who are lucky enough to get their hands on one of their own bottles should find that they sell for a pretty penny.

Killyloch is another worthy investment, with a rise of 90.5%. This is another distillery which was mainly used to provide material for blends, in this case, lightly peated whisky. Inver House had released a 36-year old single malt as an independent bottling by the distillery in 2003, which is one of the few still available today.

What are some of the risks to keep in mind?

One of the greatest risks of whisky investment is being lured by one-off events of extraordinary gains, which may cause investors to choose the wrong kind of cask or distillery, thus effectively falling prey to a bubble. Without adequate research, this is an extremely common likelihood, especially with offbeat or alternative investments, which don’t always follow traditional investments.

Similarly, another common pitfall is investors often failing to realise that not all whisky will appreciate, thus investing in a number of different types, brands and casks indiscriminately, leading to several losses.

In some cases, depending on market conditions, your whisky price may dip, in which case you may have to either wait longer than anticipated to sell it, or take a loss, especially if the market has shrunk since you bought it.

Your whisky may sometimes also not be deemed suitable enough to be used as a blend, while still not being coveted enough to be a single malt.

As with all alternative investments, caution is greatly recommended while still testing the market, with it being a good idea to never invest more than you can afford to lose, no matter what stage you are at.

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