Turning to drink may be bad for your health but it’s increasingly good for your portfolio – with whisky proving an especially buoyant market of late.
Once the preserve of the connoisseur, whisky as a commodity has become a serious proposition over the last decade owing to the complexity and diversity of the product, and its often limited supply.
Now whisky investment has gone mainstream with the establishment of the Single Malt Fund, the first fully regulated investment fund that specialises solely in whisky.
At the time of writing, there is literally no other regulated whisky investment fund operating in the world today – although that may soon change should the market continue to expand.
We sat down with Christian Svantesson, the founder and CEO of the Single Malt Fund. A jovial, keenly intelligent Swede – he’s multi-lingual, and reels off industry statistics like they’re yesterday’s football scores – Svantesson is adamant that, for whisky, the good times will be rolling for at least another decade.
And if not? Well, you can always drink it…
Tell us about the Single Malt Fund...
We are the world’s first, and thus far only, properly regulated fund investing in whisky.
We are under the supervision of the Swedish FSA.
And we invest in whisky: not in securities, not in stocks – we treat whisky as a commodity, an asset in itself. We invest specifically in rare and limited whiskies.
Whisky is quite an established alternative investment, but thus far has been reserved for enthusiasts, really knowledgeable people – whisky geeks, you might say.
It’s similar to art, coins, classic cars. It’s been a really lucrative investment; there are even indices following the whisky market as an alternative investment.
The broadest index is called Apex 1000, which is put together by a company called Rare Whisky 101. Over the past nine years it’s appreciated more than 550%. Amazing growth!
The idea behind the Single Malt fund is to avail this investment for a broader public, or sophisticated investors who aren’t whisky enthusiasts.
Looking ahead, it looks an equally strong market, so it’s a very interesting alternative investment, and we’ve created a regulated vehicle for it.
What kind of investors are you seeking?
Sophisticated, qualified investors. We’re regulated, and we’ve passported the fund to Britain, Ireland, Luxembourg and Cyprus, which means that we can also reach out to qualified investors in these markets.
Is there a limit to the number of investors you can have on board – and what’s the minimum you can invest?
The fund is capped at €25m, and I’ve good hopes that we’ll fill it. The soft start is over, and now it’s full throttle.
The minimum investment is £100,000.
How do you choose the whisky?
We have a very professional set-up, of course. We have an advice report with some independent, world-class whisky experts.
They can be journalists, people from the trade, experts from all over the world.
What’s unique is, like all funds, we invest in a market we believe will appreciate, we buy X, Y, and Z because we believe after analysis that it’s going to be a good investment – but that’s only half our business model.
The fund is capped at €25m. The soft start is over, and now it’s full throttle
We treat whisky as a commodity, but whisky’s not a commodity, whisky is a consumer good; which means that it doesn’t merely have a market price but a wholesale price, an export price, an import price, everything.
And like all consumer goods, there’s a big line of distribution behind it, and there is money to be made there – trade margins, trade discounts, etc.
Because we’re regulated, the industry has welcomed us very, very well; which means that we can invest below the market price.
So, for example, we could buy a dollar for 80, 70 cents, and that’s thanks to the fact we’re investing in a consumer good.
Why do you think you’re the first fund to have done this?
Legal reasons. It has been more or less impossible to set up such a fund. When I had this idea, I was looking elsewhere to do it. I wanted it to be on-shore, because whisky is such an exotic investment to begin with that I thought, ‘that’s enough of exoticism!’.
Apart from the whisky, I wanted everything to be as plain vanilla as possible. It must be on-shore, it must be regulated and under the supervision of the authorities to give security to investors.
But it was not easy! I went to Luxembourg – more or less impossible to do what I wanted. I went to Ireland, where a lot of the AIFs (alternative investment funds) are located – more or less impossible there as well. To my surprise, the solution was actually in Sweden.
I have a background as an entrepreneur and I’m happy for that, because it’s been a very entrepreneurial, legal process.
So, once I invest my £100,000, what happens next?
The fund shares come in the form of participating debentures. That’s the technical vehicles. Thereby it’s a close-ended fund, with a lifespan of six years.
We like to present it as ‘buy and hold’ investment. You participate in the subscription of these debentures, and then hold onto them for six years.
There is a 2.5% management fee per annum, and at the end of the six-year investment period there is a 20% performance fee on the net, after tax.
We project that we can deliver 16% per annum back to the investors. That’s our goal, and that should be feasible.
We have made a soft start: we became operational nine months ago. Before we reached out, we wanted to have proof of concept because it’s so novel.
We wanted to find out, can we get accepted by the industry? Can we secure below market price, because that’s a key USP for us?
Now we’ve proven that, we’re pushing forward.
Why has whisky become such a profitable commodity in recent years?
First and foremost, if we think about whisky as an investment, we usually categorise its appreciation through three types of buyers.
You have the drinkers – the consumers – and the demand worldwide is absolutely surging. Whisky is in established markets.
People are shifting from blends to single malts, from cheaper to more exclusive, everywhere. Single malt constitutes more than 30% of Scotch exports now, and that’s increasing every year.
In developing markets, whisky is spreading; one of the world’s biggest whisky fairs was held in Jakarta in 2018, for example.
People collect it like fine art. And of course, supply and demand drives the rarity and drives prices.
Second category is collectors. Whisky, especially Scotch and Irish whiskies, has a really nice culture about it.
There’s so much to it; people collect it like fine art. And of course, supply and demand drives the rarity and drives prices.
Finally, you have pure investors who have noticed this market, and that has its own economy.
What’s interesting, if you look at the whole market, is that some people might argue we’ve peaked, but I don’t agree. At all.
Why do you say that?
Well, first and foremost, you have to look at the macro and micro fundamentals. Looking globally, if you see this surge in demand, that has taken the industry a little bit by surprise.
The industry has not been good, historically, at keeping and treasuring a lot of their old whiskies – they used them for blends!
Now, people are shifting to more exclusive drinks, and many distilleries are out of old whisky.
You’ve seen signs of it with NAS whisky – Non Age Statement. There are distilleries that have more or less abandoned aged whiskies – e.g. 18 year-old, 25 year-old – and instead call it ‘Distillers’ Edition’ or the like.
Why? Because they don’t have enough 25 year-old whiskies.
Whisky takes time. Ten years, 12 years, 15 years – that’s what it takes to create good whisky.
Last year, the FT wrote about the Japanese whisky crisis. That’s because Nikka and Suntory have been forced to withdraw certain brands of whisky – eight brands have been withdrawn – because they can’t supply. NAS whisky is proof of that.
What does the industry do? Invest like crazy. Edrington, the owners of Macallan, inaugurated its new distillery about a year ago – a fantastic distillery, the biggest in the history of the company.
Edrington has increased production by 70%, I believe. William Grant & Sons, who own Glenfiddich, they’re the world market leader for Single Malt, and they’ve doubled their production capacity.
They do these massive investments to try and catch up with the demand. But whisky takes time. Ten years, 12 years, 15 years – that’s what it takes to create good whisky.
The situation we have now is not even close to solving itself. I think we have another ten years of a market imbalance, where the market demand totally outweighs the supply.
You can’t solve it. There are no shortcuts.
Why the surge in whisky’s popularity on a purely consumer level?
If you ask whisky connoisseurs, whisky is more similar to wine in terms of nuances, flavours, scents. You can really dig into whisky on a nerdy level.
Whisky tastings, whisky books, all the different scents and flavours. At blind tastings, people can tell you what wood has been used in the cask, how many years it’s been aged.
Then there’s the culture: when people get involved in something, they like to know everything about it, and there’s a lot to know.
There’s a lot of culture surrounding whisky, specifically Scotch.
To what degree is Scotch the main focus of the Single Malt Fund?
I hope HEDGE doesn’t spread to Ireland! Whisky was invented in Ireland, but today Scotch is the cradle of whisky making – I would say the best whisky in the world is made in Scotland, and that’s also where the bulk of whisky is being sold.
That said, Irish whiskey is projected to be the fastest growing segment in the world in the coming five years.
Japanese whisky? Fantastic quality, very high floor. But the bulk of our interest goes to Scotland.
Who has the final say on the choices?
We have an investment advisory board. There are three regulatory members – I’m one of them – and then we have five independent experts.
We discuss what we should focus on, should we overweigh on certain markets, etc. This sets the agenda, but the decision making is made by the fund itself, and that work is headed by Mr Ed Forest, our managing director.
Are you worried about the impact of coronavirus?
Who’s not worried about it? However, one of the main USPs of our fund is that whisky is very, very low correlated to the stock market, and that’s very important right now.
In a well-diversified portfolio, it’s healthy to have maybe five, ten, 15% of low-correlated investments.
Typically, these low-correlated investments, many of them are unregulated – they’re direct investments in property or art.
What we bring to the table is a fully regulated alternative for alternative investment, with a low correlation.
In turbulent times, low-correlated investments have and will play an important role in portfolio management.
And what happens to the actual whisky?
We keep the stock! We have a bonded warehouse in Glasgow, and one in Dublin.
And you will eventually sell it?
Oh yes. One of the reasons the industry has welcomed us is that we turn over; we are actively managed and we plan to turn over this stock.
We’re going to sell direct to consumers: we’re setting up our own online shop called singlemaltshop.com.
It’s launching in the spring. And when we realise our investment, we’ll sell direct to the consumer.
See more at thesinglemaltfund.com