Eight pitfalls of whisky investment… and how to avoid them
By Aaron Damiano Sparkes, Founder and Managing Director, Whisky 1901
Whisky as a drink has long been a passion for millions of people around the world. Today, whisky cask investment is becoming increasingly popular and, with prices starting at around £5,000, accessible to many more. Often referred to as ‘liquid gold’, there is a certain kudos, romance even, to whisky investment. But, as with any passion investment, the head must follow the heart.
There’s lots to consider when entering this exciting market, from which distilleries to invest in to whether to go it alone or work with an expert or broker. There are some common pitfalls to avoid when investing in cask whisky – the below pointers will help you make the best choices.
Legal proof of ownership
When it comes to whisky casks, nothing is more important than understanding the ownership structure. You need to be confident that you, the investor, are the legal owner of any casks you buy.
When investing via a third party, it’s not unusual to receive a certificate or receipt of investment, but this is not proof of ownership. Only a Delivery Order (DO) issued by a HMRC bonded warehouse or distillery confirms legal ownership of a cask. In the main, DOs are only issued to account holders, and these are typically companies or individuals with significant whisky cask holdings. It’s rare for an individual to get a DO, hence the appeal in working with an account holder.
Individuals should instruct a lawyer or engage a broker that has a legal partner who can provide a Bailment Contract, including the Unique Cask Number, a DO and the signatures of both parties. This common law agreement certifies that the company is managing the whisky cask on behalf of the investor, but that the investor is the legal owner. It creates a transparent and legally binding trail of ownership. In the event that the company goes into receivership, the cask is not considered to be the firm’s assets – the whisky cask belongs to you, the investor.
Ask to see the WOWGR licence
It is crucial that any broker or company you engage has a HMRC awarded Warehousekeepers and Owners of Warehoused Goods Regulations (WOWGR) licence – ask to see it! This licence proves that the company is legitimate and has been given the legal right to trade suspended goods by HMRC. Any company trying to sell whisky casks that can’t produce a WOWGR licence should be a clear red flag.
Avoid paying over the odds
Paying too much is one of the most common pitfalls with cask investment. Due to the growing appeal of the market, some companies with no background in whisky have sprung up offering consumers highly inflated prices. While we always advocate investing in quality over quantity, it is important that investors get value for money. We advise people to shop around. Just because a cask costs more doesn’t always mean it’s better quality.
Helpfully, some businesses provide a breakdown of the number of litres or bottles in their whisky casks. With this information you can work out how much you’re paying per bottle and check current market price based on the age of the product.
Investing in an unworthy distillery
Another critical factor to take into consideration is the distillery of the cask. Check distilleries based on merit, history and worldwide demand. A cask of rare Scotch whisky sold for £16m last year but this is the Rolls-Royce of the market. Sadly, there are companies recommending distilleries at the other end of the scale that are simply not worthy of investment. There are brand names that have been around for centuries and consumed worldwide on a consistent basis year on year. We advise working with the top 20-40 distilleries in Scotland owned by Diageo, Suntory Holdings and Edrington Group – those that invest their money back into marketing and tourism which, in turn, increases the brand value and credibility.
Beware of false data
While whisky scams rarely make news headlines, investors should be wary of misleading information from cask investment companies. For example, many reference returns based on the Knight Frank Luxury Investment Index, which covers various asset classes including fine and rare bottled whisky stock. Although there is no correlation to whisky cask investment, these firms are wrongly advising their clients of unrealistic returns based on a different market and model.
Mismanagement of the cask
There is a common misconception that whisky always improves with age, but casks do have a shelf life and need to be carefully managed. Typically, casks lose 1-2% in ABV and liquid per year (alcohol by volume)– this level is important because if ABV falls below 40% the product can no longer be called Scotch and its value diminishes. We advise against investing in anything below 50% ABV because that’s a high-risk investment – something any knowledgeable broker will know!
It’s important to produce a regular regauge report – this involves taking a small sample from the cask to check it. This ensures data is kept up to date regarding ABV and liquid level, which gives us a true value of cask, as well as providing a health check.. However, the reality is that not a lot of companies have the infrastructure in place to do this.
Failing to check the credentials of the cask, including the wood, size of cask, ABV and where it is stored could be a costly mistake. For example, the bigger the cask the slower the evaporation process due to its larger surface area. Storage is important too – with factors like humidity affecting the cask. It’s important to bear all these factors in mind to give you a better understanding of the longevity that a cask has to offer, including how long to invest your money and the when the product should be bottled.
Succumbing to high pressured sales
Unfortunately, the industry is marred by unscrupulous companies pressurising people into purchasing cask whisky using unethical and sometimes illegal sales techniques. This can include creating a false sense of urgency and/or promising ridiculous returns within a very short time frame.The reality is that whisky is a long-term investment, usually a minimum 5 to 10 years.
If a company is applying undue pressure to make a sale, they do not have your best interests at heart. Work with a broker that is consultative, willing to share facts and figures based on previous years’ experience and performance data, givesyou time to make up your mind and is transparent about its 14-day cooling off period and has a clear buy-out clause. For example, whether the investment was placed a month, two years or 10 years ago, we guarantee exit from the market within 21-days under normal circumstances.
Watch out for companies with no expertise or qualifications
The appeal of whisky cask investment has not only been a draw for consumers in recent years, but many brokers with little or no expertise or qualifications in the industry have spotted the opportunity and followed the trend. You must ensure the company has not just only been formed, or has recently changed their name from a previous company to give the impression they have been trading longer than they have.
We recommend doing your research to ensure you work with a knowledgeable and trusted company with the right credentials. Start by checking that a company’s brokers or sales people have the appropriate skills and hold relevant qualifications from respected institutions such as the Wine and Spirits Education Trust (WSET) and Edinburgh Whisky Academy.
It’s also important to scrutinise reviews on Trust Pilot, or similar, to check they are genuine – don’t take them at face value. Check profiles to ensure they are verified. Always remember that if something appears too good to be true, it probably is!