Nobles Crus: some comments on their letter to investors (11.11.12)

The Ernst & Young logo

In mid-October Elite Advisers hired Ernst & Young to give a second opinion on the valuation process of the Nobles Crus Wine Fund, which had been audited by Deloitte (Luxembourg) earlier in the year. 

On 11th December 2012 Elite Advisers wrote to their investors giving their summary and comments on the completed Ernst & Young report. The letter in full is available in a separate post.* Understandably it is intended to provide reassurance: 'We hope that this communication now allays any residual concerns you might have had.'
(* 17th December 2012: following a request from Elite Advisers' solicitors – Mischon de Reya – this post has been removed on the grounds of confidentiality.) 

 

If I was an investor in the Nobles Crus wine fund I'm not sure that all 'residual concerns' I had would be allayed by this letter. Firstly it is stated that Ernst & Young 'did not perform an audit or a review'. EA explain that 'E&Y analysed the compliance of the valuation methodologies applied in respect of the largest reference values in the portfolio. E&Y also examined the application of the methodologies to 25 lines chosen at random from the portfolio. Together, the sample covered more than 80% of the Nobles Crus portfolio.'

There are some sections of the letter where investors may well have found it useful to have had some further details/background. I put several questions to Elite Advisers on Wednesday morning (12.12.12) and received a detailed response from Jess Ayres of the Brunswick Group who handle the public relations for EA. I have incorporated these responses here. My apologies that this has taken longer than I expected as I had hoped to post this yesterday.     

Questions to Elite Advisers on the Nobles Crus wine fund

Following your letter to investors 11th December 2012 I have a few questions please:

Liv-ex data including Cellar-watch?

Jim's Loire (JL): 'On several occasions you mention data extracted from Cellar-Watch. In emails (24.10.12 and 7.11.12) sent by Jack Hibberd, head of data and research at Liv-ex, to Christian Roger and copied into Miriam Mascherin it is made clear that the only pricing measure that Liv-ex ‘allow to be used for fund valuations is the mid-price. Why then did Ernst & Young use Cellar-watch? Did you inform Ernst & Young that Liv-ex consider that only the mid-price should be used for valuing wine funds and that Cellar-watch is inappropriate.'

Extract from email from Jack Hibberd to Christian Roger (copied to Miriam Masherin) 24.10.2012

'Having looked at your usage logs we have noticed that you have done a great deal of wine searches on Cellar Watch. I would just like to point out that Cellar Watch is a consumer site with limited data available. It should not be used for commercial valuation or benchmarking, particularly of a wine fund.

We are more than happy to help you with your research and provide Liv-ex Mid Prices – the only pricing measure we allow to be used for fund valuations – in those cases where it is appropriate.  

I also noted that you quoted a number of Liv-ex Market Prices in your recent letter (19 Oct) out of context*. These are not prices that we supplied and they should not be used for the purposes you applied them to. We have never pertained to be able to provide mark-to-market valuations for wines such as Latour Pomerol 1961. We would refuse to do so if asked. The only Liv-ex Mid Price that was correctly used in your communication was that for Lafite 2009 (€744). 

Valuing wines using the Liv-ex Market Price (essentially a best merchant price) is a gross distortion of Liv-ex’s valuation process. The full details of our valuation logic are detailed  in this recent blog post (see here: http://www.blog.liv-ex.com/2012/10/liv-ex-valuations-explained.html). I have also attached  the full logic for your consideration. If you would like to use Liv-ex Mid Prices for a benchmarking project, I would be happy to supply them to you, or to Ernst & Young.'

(* EA: 19^th October 2012 letter to investors: A price was attributed to Liv-ex for Latour à Pomerol 1961, which is significantly lower than Nobles Crus’ valuation of €9,001. However, no mention was made of the fact that the wine for which Liv-ex was quoting that price was bottled by the distributor and not at the chateau, hence the enormous price differential.) 

Extract from email from Jack Hibberd to Christian Roger (7.11.2012)

'As I mentioned in my previous email to you, the “Liv-ex Mid Price” is the only pricing measure that we allow to be used for fund valuations. I am also providing you with a licence to publish this data if you so wish. 

Please ensure that no other Liv-ex price data (be that “Liv-ex Transaction” or “Liv-ex Market Price”) is used. The publication of any other price would both misrepresent our data and contravene the Terms and Conditions of your Liv-ex Cellar Watch membership.'

 
Hibberd sent the mid-price data for 'all of those wines in your portfolio where there is sufficient data available to perform a robust valuation' with this email. 

Jess Ayres (Brunswick):

Ayres and I had a lengthy discussion over this, Liv-ex data and the make up of the Nobles Crus fund. Although I can understand that EA/Ernst & Young (E&Y) would have wanted to look at complete data as possible, it still does not explain why Hibberd's clear warnings were ignored. Nor is it clear at the moment whether these warnings that the use of Cellar-watch data was inappropriate were passed to the E&Y team.   

We also alluded to the wide gap between what EA/E&Y believe were relevant Liv-ex mid-prices and what Liv-ex and others thought was relevant (50%). EA's letter suggests that only 22% of the mid-price data match the wines in portfolio and that 'for 78% there were no wines' mid-prices available on Liv-Ex and Cellar Watch that could be provided to E&Y.'

Hibberd sent mid-price data (as of 30th October 2012) for 275 different wines from Bordeaux, Burgundy (mainly DRC), Italy and California. The oldest vintage was 1982.

Taking the mid-price data (3.10.12) and comparing this with the stock held by Nobles Crus as of 31.8.2012 shows that the data supplied by Liv-ex covered 50.70% of the Nobles Crus portfolio by value – then with a total value of 98,434,152.65€ million. Bordeaux accounting for 51,265,797.19€m, Burgundy – 45,418,401.21€m with others at 1,749,954.25. Although Burgundy features strongly in Nobles Crus, Bordeaux is still the majority but with a lesser percentage than other wine investment funds.

Using the Liv-ex mid-price data values the 50.70% of the fund at 36,982,293.80€m, while the Nobles Crus valuation is 49,902,298.33€m – a difference of 34.94%. (NB: These figures should taken as indicative as the mid-price data is 31.10.12, whereas the Nobles Crus is 31.8.12.)    

Ayres insisted that Nobles Crus valuations are robust and that when they had sold wines the prices achieved were in line the valuation.          

‘into account the crucial provenance and storage conditions of a bottle’

JL: 'Did Ernst & Young check the provenance and condition of the pre-1990s wines in the Nobles Crus fund?'

Quote from EA letter: 11.12.12:

'For 78% of the sample, there were no wines’ mid-prices available on Liv-Ex and Cellar Watch that could be provided to E&Y. Comparing Nobles Crus’ prices with possible Liv-Ex mid-prices, had they been available, would have nevertheless been inappropriate since such prices do not take into account the crucial provenance and storage conditions of a bottle. These elements are indeed fundamental to an accurate valuation of a bottle since their impact can affect the market price of a bottle by 20 to 30%'. 

This is incorrect Liv-ex's mid-prices do take into account the condition of the wines as this extract from their regulations shows: 

From Liv-ex's rules and regulations:

Condition

Original wooden packaging, levels into neck or better, capsules original and undamaged, labels clean and undamaged. No stock re-imported or carrying strip labels from Asia, USA or non-European regions.

Jess Ayres

Ernst & "Young did not view the stock in Switzerland. Instead they assessed whether the valuation process had been applied correctly.  The assessment of the stock in Switzerland is done as part of the annual audit by Deloitte, who make a physical check of the wines and look at their purchasing history seeking to establish that "it is what it says it is".

JL: 'It is not fully clear what exactly is involved in the due diligence carried out by Deloitte and the Nobles Crus buying team and Ayres is asking for further information. Establishing whether old vintages of much sought after wines are genuine is a very specialist job.' 

Extract from Deloitte's auditors report for the year 2010:

‘Opinion

In our opinion, the financial statements give a true and fair view of the financial position of ELITE’S EXCLUSIVE COLLECTION and of each of its sub-funds as of December 31, 2008 and of the results of their operation and changes in their net assets for the period from November 19, 2007 (date of incorporation) to December 31, 2008 in accordance with the Luxembourg legal and regulatory requirements relating to the preparation of financial statements.

Emphasis of Matter

Without qualifying our opinion, we draw your attention to note 2 of the financial statements. The sub-fund ELITE’S EXCLUSIVE COLLECTION – NOBLES CRUS includes wine assets valued at EUR 10,973,119 (100.8% of the net assets) as at December 31, 2008, whose fair values have been estimated by the General Partner in the absence of readily determinable fair values. The General Partner estimates are based on information provided by a limited number of wine merchants and other sources of information, which are in accordance with note 2 of the financial statements.'

Given the 'emphasis of matter' it would appear that the physical checks Deloitte carry out as auditors on the wine stock in Switzerland may be quite limited in scope.  

Ayres pointed out that there is always a degree of risk. This is true but older vintages inevitably bring a greater degree of risk. Fake wine bought in good faith is likely to be worth nothing. See video here on fake wine. 

Laurent Vialette
Quote from EA letter: 11.12.12:

‘Laurent Vialette, the internationally renowned, independent wine valuer is contracted via the independent company Wine Expert Limited. E&Y have checked both this contract and the shareholder register and noted that Laurent Vialette does not appear on such shareholder register of Nobles Crus.’

JL: 'Did Ernst & Young wonder why Laurent Vialette was willing to value the Nobles Crus wine fund between 14th October 2010 and 31st December 2011 for no more than 755€ – less than 54€ a month? Wine Expert Ltd had a turnover of 755€ for this period?'

Jess Ayres

"Wine Experts Ltd is not part of Elite Advisers – is an entirely separate company." Ayres was able to assure me that Laurent Vialette is paid considerably more than 755€ for his work. Although he wasn't able to disclose Vialette's fee, it is commensurate with his abilities. 

Naturally while I'm pleased to learn that Vialette is not being paid below the minimum wage, the purpose of Wine Experts Ltd remains unexplained. Nor is is clear why as Vialette is contracted to Wine Experts Ltd his fees do not appear on the company's books. Ayres confessed that "I don't know how this works."     

James Miles
Jim's Loire: 

'We are pleased to note that one of our more vociferous critics has accepted his allegations were wrong, has withdrawn his assertions and released, on his blog, a written apology

“I have apologised to Nobles Crus for my recent [statements] about it and how it values its wine. I was wrong-sorry for any distress/damage caused”.'

JL: 'This is surely misleading. The apology (incidentally on twitter not a blog) refers to an incautious remark that was made by James Miles on his private twitter account. The apology was for the remark on Twitter and not an endorsement of the methodology used to value the Nobles Crus wine fund.

Although Miles was happy to apologise for his incautious remark, it remains the view of both Miles and Liv-ex that the Liv-ex mid-price is the only suitable measure for valuing a wine fund. See emails sent by Hibberd on 24.10.12 and 7.11.12).'

The twitter apology was to be posted for 26 days. This period is now up and it has now been removed.'

Jess Ayres

"Not misleading. This refers to the false suggestion that EA was 'deliberately engaged in a mis-valuation of its wines'." 

JL:: 'This is fair comment for those in the know. However for an investor not aware of the background, it is not unreasonable to think that Miles now endorses Nobles Crus' valuation, although Ayres agrees that Miles does not endorse the valuation methodology.'   

‘In recent weeks we have engaged with those who have written about our fund to ensure they are fully informed of our views and processes.’ 

JL: 'This statement is inaccurate with respect to myself. You kindly answered my first series of questions on 4th October but I have had no response to any of the subsequent questions I have put to you. See here.

  
I have had some replies through Brunswick, in particular this afternoon. However, questions about the provenance of the old wines and the role of Wine Experts Ltd have gone unanswered by Elite Advisers.'         

Ernst & Young report

JL: The report on paperJam (22.10.12) indicated that the Ernst & Young report would be published. In the event it appears that it is only available to investors who travel to Luxembourg and sign a confidentiality agreement. Why hasn’t the report been put into the public domain?

Jess Ayres: "It was one of the conditions by Ernst & Young when taking this on that the report would not be published. There were a number of inaccuracies in the paperJam report." 

Redemptions in March 2009

JL: 'Can you confirm that in March 2009 you had a number of redemptions – around 20% when the fund stood at some 20 million Euros.  I understand when the Nobles Crus Fund attempted to sell stock to cover the redemption the offers were between 20%-30% lower than the fund’s valuations. In the event the crisis was averted by injected further capital into the fund.' 

Jess Ayres: "What happened in March 2009 is no guide to what might happen now if there were a substantial level of redemptions. It was a particularly difficult time. There were many fund managers who didn't realise valuations when they came to sell. Although the Nobles Crus fund valuation is 30% higher than through Liv-ex, we would still argue that in the five year window that we will be able to prove that we can achieve these valuations.

Elite Advisers are being fair to investors by giving them the option to redeem monthly."            

In view of your laudable desire to be transparent will you now clarify these points with your investors? Are they not entitled to see the full picture?

Jess Ayres: "Elite Advisers has been transparent through giving market data, portfolio breakdown and many investor forums. Every quarter it is possible for investors to visit and see their wines and they will be able to come to Luxembourg to see the Ernst & Young Report."

**   

The view of Sarah Clar-Boson, Palladio Alternative Research Group

"I have had a long term interest in wine investment funds. I followed the launch of Nobles Crus in 2008 but quickly disregarded it because it was self-valued at that time.

"Over the valuations my biggest concern is the refusal to use Liv-ex price data where applicable, particularly for recent vintages of blue chip Bordeaux. On these there is a large difference between the Liv-ex mid-price and the Nobles Crus valuation. This cannot be justified. Liv-ex isn't perfect but it is the only reliable data source we have.

"Other concerns include relying on one key person – Laurent Vialette – for the valuations rather than a proven platform. The risk is high. I'm surprised that investors are not asking more questions about Wine Experts Ltd either. Elite Advisers have not provided an answer about its role.

Monthly liquidity (being able redeem your money within a month – JL) is also a big risk given the illiquidity of wine." 

Conclusions

If I was an investor with Nobles Crus I would want to know more clearly what the role of Wine Experts Ltd is. How can its turnover have been only 755€ over the period from October 2010 to December 2011 when Laurent Vialette is contracted through the company. Although this company is independent of Elite Advisers, it was surely created at their behest. It simply isn't credible to think that the two directors in County Mayo dreamt up the idea of forming a company on the off-chance it might be able to provide a service for Vialette.

I would be concerned that the Nobles Crus wine fund does not use the Liv-ex mid-price when it fits the portfolio with respect to recent vintages of Bordeaux and Burgundy. I would note that in the letter to investors (19th October 2012) that EA place great store on valuations through wine-searcher. While an excellent tool and something that has done much to promote price transparency in the industry, wine-searcher records retail prices. 

Extracts from the letter from Elite Advisers to investors (19th October 2012) outlining Nobles Crus ability to strike a good deal and the benefits of using wine-searcher for valuations:

‘As a regular buyer in size with good relationships with merchants and cellars, Nobles Crus also benefits from its ability to source sought after stocks of valuable wines of all prices which in many cases are significantly below merchants’ listed prices. This accounts for some of the outperformance versus other collections as well as providing a degree of insulation against short term volatility.’

‘Winesearcher, which is an independent data aggregator, by contrast, covers 3,614 regions and sources prices from 36,602 merchants and retailers around the world. Winesearcher carries more than 5.4 million prices annually, which makes it far more accurate. Winesearcher also gives detailed information about the source of the price, and how recently the sale took place, enabling us to gauge qualitative information such as provenance which, in turn, helps us to get a much more accurate read-across to our own stocks. Likewise, sourcing prices from recognised merchants gives us much more qualitative information, as well as, in our view, being more representative of achieved market prices. The price variation for some of these wines can be as much as 200%, depending on factors such as its condition, format and whether it was bottled by the chateau or distributor.’

My suspicion would be that if there were a substantial number of redemptions that the price achieved might well be much closer either to Liv-ex's mid-price or the good deals that Nobles Crus strike when buying rather than the current Nobles Crus valuations. 

With the exception of the crisis of March 2009 the valuations have yet to be put to a real test as there have so far been relatively few redemptions as the 2011 Nobles Crus report indicates. 

During 2011 4.2% of the wine fund (total bottles on 31.12.11: 36,322 bottles) was sold and achieved a price 1.39% above NC's valuation. With the exception of a parcel of 1995 Lafite all the wines sold were from the 2000 vintage or later.   

Taking the 23 different wines sold the total sale price was 15% above the purchase price. With respect to individual wines sold there was, however, a wide variation between the % profit and loss. 60 bottles of 2006 Pavie was sold at 24% below the purchase price, while 12 bottles of 2006 Les Forts de Latour were sold at 200% above the purchase price. 

I would be more reassured if wines when added to the fund were valued at cost or very close to cost. Better to have a conservative valuation than one that may prove to be over-optimistic. Buying at below other merchants' prices and then valuing at retail as described in the letter to investors (19.11.2012), does provide an immediate boost for the valuation of the fund when new wines are added. The as yet unanswered 100€ million + question is will Nobles Crus valuations prove to be accurate, robust and credible when faced with significant redemptions? That is a worry!          

I might also wonder why Elite Advisers have used other forms of data from Liv-ex, such as Cellar-watch, when they have been very firmly advised that this data is not appropriate for valuing wine funds. Furthermore Liv-ex has from the beginning of this controversy declined to value older vintages whether from Bordeaux or Burgundy.

I would hope that the buyers for the Nobles Crus wine fund were sufficiently skilled and diligent to have avoided unwittingly buying any counterfeit wine given that their sources include private collections, auctions and restaurants. I'm alarmed by the amount of counterfeit wine there appears to be around as this thread on the Wine Berserkers indicates.