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).
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. Historically the whisky cask market has been prone to scams and even today is rife with biased data. We have seen cases where limited examples are used to suggest all casks can make you 10-20%+ per annum returns and irrelevant data like the Knight Frank Index is used to make cask investment look more attractive to potential investors.
So, what is the truth about cask investment?
The Scotch Whisky Association recognises that casks can be a personal investment opportunity so long as the potential investor is aware of the nature of the Scottish whisky industry.
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. This reduction is often stated as an average at 2% a year, however the rate starts lower and increases more rapidly as the cask gets older (because the surface area available for evaporation increases as more and more evaporation takes place).
This means casks are cheaper when they are younger and get more valuable as they get older. However, the relationship between scarcity and age means that the value of casks increases more rapidly as they get older; the relative jump in price between 5 and 10 years is smaller than the jump between 15 and 20 (see Graph 2 below).
If you were to average out the change in value between a 3-year-old cask of whisky and a 20 year old cask of whisky you can get some impressive numbers. In our opinion this is where the fabled 10-20% returns come from.
However phrasing it as per annum returns is simply misleading for two 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.
- These returns are only (possibly*) relevant if you buy a young cask, don’t overpay, and keep it as a long term investment until it reaches the premium age.
*To clarify the possibly comment above, let us summarise why this is likely misleading by phrasing this in a different manner:
Why are companies offering you the chance to invest for 10-18% returns when they could get a small business loan at around 5% and still be making 5-13% on their money?
Graph 1 and 2 are visual representations of how casks scarcity and value change with time.
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? We run through the issues with short term cask investments below.
Myth two: Investing in older casks
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.
You also need to be aware that casks do not age indefinitely and all casks eventually need to be 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.
You also need to ensure you are paying the right price for your mature cask. This is another significant risk factor with older casks as there is no simple way for a member of the public to verify the value of an older cask making it easier for unscrupulous sellers to manipulate the price. Overpaying for a cask means you will have to keep your mature cask for longer in order to make a profit – something that must be balanced against the relative drop in ABV and volume within your cask.
What do we mean balance it against the relative drop in ABV and RLA?
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. However, the value of the whisky in the cask increases with age. 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, 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 each year so it is not so simple as simply saying a cask’s value increases at a rate of X% per year.
A cask’s value does not increase indefinitely; the RLA and ABV both drop as the cask ages. If the ABV drops below 40% your cask can no longer be sold as whisky.
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 whether the cask is 13, 14, 15 or 16 years old so long as that cask is healthy. They may pay 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.
The value of a cask does not experience steps in value at anniversary years.
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 caused quite a stir thanks to some impressive numbers (over 500% over 10 years and 40% over 2018). Knight Frank have continued to include rare whisky in their index, although the growth has been more modest since then.
Many cask companies quote the 2019 Knight Frank index as part of their marketing for cask investment. Firstly these companies only quote the years where the index increased and do not mention the more recent negative values of the index. However regardless of the results it is simply incorrect to imply that the growth in the bottle market can be used to indicate how a cask of whisky might perform as an asset.
Whisky casks and whisky bottles are fundamentally different products. What’s more, even if they were comparable the Knight Frank Index looks at one specific section of the whisky bottle market (ultra-rare, ultra expensive) so couldn’t even be used to indicate the bottle market as a whole.
Using an index for bottles to predict the performance of casks is like comparing the purchase of bricks and mortar to the purchase 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 always 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.
Whisky bottles are fundamentally different from casks and so the performance of rare whisky bottles in the Knight Frank Index cannot be used as an index for casks.
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.
That may seem like an obvious thing to say, as most people are unlikely to buy other investments without having a solid base understanding of how investments in that sector work: checking house prices, or researching share performance. However finding information and (impartial) guides on cask investment can be difficult.
What’s more, casks are not designed for the public; more than 400million litres of pure alcohol can be made in Scotland each year and only a tiny fraction of that makes it into public hands. There is no impetus to provide public indexes on price and performance and therefore there is very little information out there on what to expect if you buy a cask of whisky. This makes it very difficult for potential purchasers to get the required understanding of the market necessary to make an informed decision.
Myth six: You do not need a delivery order
The SWA also provide guidance on delivery orders, however this is often misquoted by potential cask sellers. The guidance says:
“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.” [emphasis added]
However the last sentence in bold is often left out. This final sentence adds critical context to the preceding one, so leaving it out is not only misquoting the SWA, it is also misleading potential purchasers.
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 then it is likely that you will only own that cask through the company you are purchasing from.
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.
