When you start looking at whisky investment many companies are keen to impart some enticing numbers; anything from 10% to 20% per annum returns, to the whisky market increasing more than 500% over 10 years.
If you think that sounds tempting then you are not alone. However you should be cautious of these claims and we will run through exactly why.
A Richard Feynman quote seems apt to start this article: “The first principle is that you must not fool yourself – and you are the easiest person to fool.”
This was true in the post World War II era, and is even more true in the world we now find ourselves living in where ‘Fake News’ spreads faster than real news and the internet makes it increasingly easy to find the answers you want (and ignore the ones you do not).
Whisky cask scams are not an issue confined to the past. In 2022 the FBI arrested a British man in connection with a multi-million dollar whisky scam in the USA. In the opening weeks of 2023 there were articles featured on BBC Radio 4 and in The Telegraph urging caution to potential investors. In May 2023 The Telegraph reported on a man who had bought casks from cask investment company without a delivery order, and when he got them transferred into his name at another warehouse they were different from what was on his certificates and contracts. By June 2023 The Mirror had released an article about a distillery ‘losing’ privately owned casks worth tens of thousands of pounds.
Historically the whisky cask market has been prone to scams and it is idealistic to think that the same practices are not going on today. Businesses want to make money, that is a completely normal state of affairs, however when companies are making money by misleading purchasers then that is, at best, bad for the industry, and at worst fraud.
So what is the truth about cask investment, and can you really make 10 – 20% per annum and 500% over ten years?
Myth one: 10-20% per annum returns
The principle behind cask investment is simple: the value of whisky in a cask increases with time due to a perceived increase in quality due to interaction with the wooden cask and because the scarcity of whisky increases with age (see Graph 1 below). Scarcity increases exponentially for two reasons:
- Firstly, casks are not bottled evenly throughout their lifetime; 90% of all whisky is used for blends, of which the majority are less than 12 years old.
- Secondly, a cask’s volume and ABV decreases throughout its lifetime due to evaporation and absorption into the wood, which is known as the angel’s share. The total amount of liquid in your cask will drop by 1 – 4% per year on average. Generally the rate starts high, settles around 2% per year then increases as the cask gets older, however there will also be seasonal and climate driven variations in this rate..
There is also an increase in quality as the cask ages, whereby older whisky is deemed to be higher quality and therefore is worth more. Studies suggest quality peaks around 18 years old, however the value tends to carry on increasing with age, so this is a more complex influencer of cask value.
The relationship between quality, scarcity and age means casks are cheaper when they are younger and get more valuable as they get older. However, the relationship is not linear, as value tends to increase slowly for the first 10 – 12 years and increases more rapidly once the whisky reaches its teenage years; the relative jump in price between 5 and 10 years is smaller than the jump between 15 and 20 (see Graph 2 below).
When looking at certain casks you can create some impressive numbers by breaking the increase in value between a 0 year old and 20 year old cask of whisky into an annual figure. This is misleading in two ways, firstly breaking it down into annual returns is not a realistic representation, and secondly if you only look at casks that perform above average then you are not providing a realistic reference.
Phrasing it as per annum returns is misleading for several reasons:
- You do not get annual returns from a cask. You only make a profit when you sell the cask and therefore the returns should not be represented as a per annum figure.
- The rate of return will vary hugely over a 10 – 20 year period. Because the value increases slowly when the cask is young if you sell early you aren’t going to get those average figures, and similarly if you buy too old a cask you’re not going to benefit from the value possible from younger casks, which will reduce your potential returns.
- It almost certainly does not look at a representative data set in order to generate the advertised figures. If the data is only collected from the strongest performing casks then it is not providing a good representation of the full spread of potential.
- These returns are therefore only (possibly*) relevant if you buy a young cask, don’t overpay, and keep it as a long term investment (10+ years) until it reaches the premium age (15 – 20+ years old).
Why are companies offering you the chance to invest for 10-20% pa returns when they could get a small business loan at around 5% (or use their 2.5% Covid bounce-back loan) and still be making 5-17.5% on their money?
Myth two: Investing in older casks
Looking at Graph 2 above it can be pretty tempting to think, well why can’t I buy a 15-year-old cask and sell it as an 18 year old cask in order to short cut the maturation process and get a quick return?
As we have explained above, the value of older casks increases more rapidly than younger casks. If you have the capital to invest in the right older cask, for a fair price and keep it for a medium amount of time there is potential to see returns. This comes with higher risk and more need for active management of your asset.
However, the reality is that this option is not suitable for most investors and as older casks are even harder to value, you are far more likely to overpay and reduce your potential returns.
You also need to be aware that casks do not age indefinitely. Even if you have no plans to do it yourself, all casks are eventually bottled. The angel’s share – the loss due to evaporation – means if you left that cask long enough the whisky inside will either evaporate completely or the alcoholic strength will drop below 40% and you can no longer legally call the spirit inside whisky. This means you need to be careful about which cask you choose to buy; you must by a healthy cask with a robust RLA and a good ABV suitable for older age maturation.
Why does ABV and RLA matter?
Casks are generally valued on a price per RLA (regauged litres of alcohol). The longer you keep your whisky cask the more liquid will evaporate and the lower the RLA. However, the value of the whisky in the cask generally increases with age so the price per RLA increases. This creates something of a paradox when trying to decide when to sell your cask.
Simply put, although the value of your whisky per litre will increase, the number of litres you have will decrease.
For example, if you have a value of £100 per RLA on a cask with 100RLA then the value is £10,000. Let us hypothesise that the cask is mature, from a sought after distillery, has an ABV well above 40% and experiences an average loss of 2% per year due to evaporation; if the price per RLA rises at 10% per year after 2 years the price per RLA is £121 but the RLA is 96 so the value has risen to £11,616 (rather than £12,100 if the RLA had remained at 100). For the same cask and rates of change, in five years the price per RLA would have risen to ~£160 but the RLA may have dropped to 90L. You must also remember that a high ABV commands a premium, and the ABV also drops at an average of 0.5% per year, which will also impact the rate of increase in the price per RLA.
As you can start to see, the per annum value change for a cask is not a simple relationship. There are multiple factors at play, which change as the cask ages, and can vary significantly between casks. Even for casks filled on the same day and maturing in the same warehouse you will see differences in maturation that can cause variations worth tens of thousands of pounds over a 20 year maturation.
Myth three: anniversary year value jumps
Another myth that often appears with the suggestion of investing in older casks is the concept of anniversary years significantly increasing the value of a cask. The whisky sold in supermarkets is predominantly from certain anniversaries: 10, 12 15, 18 years old etc – therefore the suggestion is that whisky at these ages is more desirable than the ages either side of these years. That is then used to imply that if you buy a 14 year old cask and sell it as a 15 year old cask you will get a premium.
This is simply not true.
It takes a long time to do anything with casks. So if your cask is healthy (and by that we mean it has a good RLA and an ABV significantly above 40%) any sensible offer on your cask as a 13 year old or 14 year old will take into account the fact that it will likely survive to 15 years. As such it is the ABV and RLA that has a bigger impact on the value than the specific age.
In addition, most independent and private bottlers do not care about anniversary years; they bottle casks at whatever year they think will produce the best whisky for them (most do not have long running age statement series like distillery release do, and do not have to adhere to supermarkets’ requirements). Often it makes no odds to a private buyer the specific age of the cask so long as that cask is healthy and meets their needs at the time. There may be a premium for a 20 year old cask versus a 15 year old cask, but that increase in value will be smooth; in general the value of a cask will not jump significantly between years – unless you have a leak or the ABV drops below 40% in which case your cask’s value is likely to drop rather than rise.
Myth four: Casks and the Knight Frank Index
Since 2019 Knight Frank have included bottles of rare whisky in their Knight Frank Luxury Investment Index. Their index specifically looks at ultra-rare high end bottles and the addition of bottled whisky to their index in 2019 caused quite a stir thanks to some impressive numbers. The 2019 index reported a 582% increase over 10 years and 40% over 2018. These numbers have dropped over successive years (373% and 3% in the 2023 report), but the 10 year average in particular is widely used across cask marketing despite it being completely irrelevant to whisky casks.
Whisky casks and whisky bottles are fundamentally different products. What’s more, the Knight Frank Index looks at one specific section of the whisky bottle market (ultra-rare, ultra expensive) so cannot even be used to indicate the bottle market as a whole. A better index might be distillery specific or some kind of independent bottler index, however there are still limitations.
Using an index for bottles to predict the performance of casks is like comparing the price of bricks and mortar to the value of a luxury, penthouse apartment in a nice part of London: One can be used to make the other, but without the other key ingredients that go into making a premium, sought-after product (brand, desirability etc.) you simply have a large quantity of building material.
In the case of whisky casks that building material (the spirit in your cask) has historically increased with age due to an increase in perceived quality over time and increasing scarcity; the fundamental premise of investing in casks. Once bottled the quality of whisky is set, and therefore it is branding and desirability that will cause the increase of a bottle of whisky to increase. The market for each product is very different, and it is important to understand this when looking a buying bottles or casks as an investment.
Myth five: What The Scotch Whisky Association Say
The Scotch Whisky Association (SWA) recognise that casks can be a personal investment opportunity so long as the potential investor is aware of the nature of the Scottish whisky industry. You can read their full guidance here.
The SWA guidance is often misquoted regarding delivery orders. The specific guidance on delivery orders is as follows:
“If the cask is located in a warehouse that belongs to someone other than the seller, you should ensure that the transfer of ownership is properly recorded and acknowledged by the warehouse keeper. Traditionally this was done by way of a delivery order, a document setting out the details of the cask to be transferred, signed by purchaser and seller and then delivered to the warehousekeeper. Nowadays an invoice or owner’s certificate may suffice. Before completing the purchase you should check with the warehouse keeper what documents they require and ensure that the seller can deliver them to you.”
The final part in bold is the section that is usually left out by dealers trying to sell casks without a delivery order.
If you are buying a cask without a delivery order and have not had contact with the warehouse to confirm that they accept whatever else you have been offered, then the likelihood is that you do not own that cask at the warehouse level. This increases your chances of being scammed.
Myth six: You do not need a delivery order
Many dealers will tell you that you do not need a delivery order, or that you need to register under WOWGR in order to receive one. Neither statements are true.
A delivery order is a document signed by the seller and purchaser and acknowledged by the warehouse. It allows for compliance of other legislation that warehouses must adhere to, including their WOWGR certification. A delivery order is not a legal requirement for owning a cask, but if you’re not getting one, as per the SWA guidance, you should find out what your storage provider requires instead.
You do not need to register under WOWGR to get a delivery order. WOWGR specifically covers revenue traders, and as long as you are a private individual owning 5 or less casks then WOWGR does not apply to you.
A delivery order is the best way for you to ensure you are taking full ownership of a cask at the warehouse level, which will give you full autonomy over your asset. If a cask broker or dealer is not providing you with a delivery order, or worse telling you that you cannot get one, then at best they do not understand their own industry, and at worst they are purposefully misleading you.
So, are casks a good investment?
At Mark Littler Ltd we know that casks can be a good investment. We can be confident in this assertion because we have sold millions of pounds of casks for customers who have made anything from £5,000 to over £300,000.
The important thing when buying a cask is to stick to four simple rules:
- Acquire a sound understanding of the whisky industry
- Understand that casks are a long-term investment
- Pay a fair initial price for you cask of whisky
- Make sure you take full ownership at the warehouse level
If you want to learn more about cask ownership and investment we have written a 52 page guide. In it you will find explanations of the four golden rules as well as a comprehensive introduction to the world of cask ownership.
If you would like to receive a copy please complete the form below to recieve a copy via email for you to download at your leisure.