New Reporting Issues for Offshore Property Owners

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New Reporting Issues for Offshore Property Owners – May, 2023

If you own or are contemplating buying property in the United Kingdom (and a number of other jurisdictions) you need to consider the reporting requirements and potential tax exposures that have arisen recently. These changes are more likely to trip up long-term owners, because we assume people in the process of buying offshore property are receiving professional advice.

Some of these changes have arisen to deal with clamor pointing to foreign ownership as contributing to unaffordable housing.  Sometimes, they are accommodating demands for increased transparency on cross-border capital flows and ownership.

Registration of Foreign Ownership

The U.K.’s Economic Crime (Transparency and Enforcement) Act, which came into force in August of last year, requires the beneficial owners of non-UK corporations or partnerships (and apparently trusts) that own UK real estate to register that ownership in a public register.

We understand that January 31, 2023 was a deadline to register existing ownership.  The registration process is more elaborate and time consuming than is the process elsewhere.  If you happen to own UK property through an offshore entity, you should investigate how to get onside, in a way that is not too expensive.

In addition to rather serious penalties for failing to register, you will likely be unable to sell the property until registration is complete.

Taxes on Foreign Owners

The UK has slowly been expanding the scope of taxation of residential property held by foreign holders, entities in particular.

Since 2015, non-residents have been taxable on capital gains arising from the sale of residential properties.  In 2019, this was expanded to apply corporate income tax to the gains for properties held by offshore entities.

Even prior to that, annual taxes were due on properties held by corporate entities (the so-called “envelope” regime).

Australia has had a register for foreign ownership of residential property for some time now.

Canada recently introduced new property taxes on residential properties acquired by non-residents (with some exemptions).  Existing owners do not need to worry about this – but the trend to increased fiscal costs is worrying.

Increased Focus on Occupancy

Some countries have introduced annual taxes on under-utilised residential properties.  The rationale is a mix of discouraging keeping residences empty and dealing with absentee owners enjoying the securities of maintaining wealth in a stable jurisdiction but not contributing to its tax base.

France has an occupancy tax aimed at second homes and unoccupied homes and would capture most properties held by offshore individuals / entities.  It has clarified its occupancy tax exempts primary residences; however, it will apply to owners of other types of properties, including foreign owners and those holding property through a Société Civile Immobilière.

In addition to temporary taxes on foreign acquirors of residential property, the Canadian Federal government and a few Canadian municipalities have introduced laws targeting under-utilised (read vacant) residential properties. The Canadian government now applies a 1% annual tax on under-utilised residential properties owned by non-residents, including private companies and trusts with non-resident beneficiaries.

There are number of practical exemptions, but offshore owners of Canadian property need to be aware of the new rules and filing obligations.

The new law mandates an annual filing by owners of residential properties, if for no other reason than to claim an applicable exemption from the tax.  The annual filing will require information about occupancy.

Many popular locations for holiday properties enjoy an exemption from the tax, but you need to verify this and you may need to make annual filings.

British Columbia has had a vacant residence tax since 2018.  Sensing a fiscal opportunity as well as addressing affordability, a number of Canada’s largest cities,  have added their own 1% tax and filing requirements. (This applies to Canadian citizens as well.)   An unused condo in Vancouver could now be subject to annual taxes, determined based on value, at three levels of government, exposing the owner to additional penalties if they were unaware of these new reporting requirements and failed to file and pay taxes.

Many countries immediately restricted access to existing registers.  However, in December the Court wound back its decision somewhat by saying that anyone with a “legitimate interest” should have access.

Not all countries will interpret this in the same way, but it will likely end up with a hurdle requirement for members of investigative organisations or the press generally needing to confirm a legitimate interest prior to being given access to a filing.  Marketing groups will no longer have indiscriminate access.

The obligations to register foreign ownership of certain Australian assets beginning July 1 this year, are consistent with this tilting of the balance back towards respecting privacy while giving law enforcement adequate tools.  The information will not be public, it will be available only to Government agencies for certain purposes.


Families with assets across borders and complex holding structures now need to pay close attention to increased registration or disclosure requirements in each of the countries in which they own assets or entities with respect to a wide range of assets.

It is not just ownership registers, but new tax-related filings and reports, including those testing economic substance, and local filings with respect to ownership and use of residential or vacation properties.

Organisations such as The Society of Trust and Estate Practitioners have been active in arguing that these registers, while adequately addressing their purposes, better balance privacy and security concerns.  Recent events give hope for a better balance.

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Ownership Registries Expanding

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Ownership Registers Becoming More Common – April 2023

Many families use offshore holding companies, trusts, family funds etc., to assist with complex family structures or succession planning.  Most are not engaged in money laundering, tax evasion or other criminal activities.  However, they are increasingly being caught up in regimes created to deal with money laundering through increased transparency of beneficial ownership of real property and entities.

As a result, the unintended consequences include families having to reveal more personal information relating to wealth, beneficial ownership and location than they would like.

Families often consider privacy is important in protecting their security and reputation.  At a minimum, they will want to ensure that information that is not required to be revealed, is not revealed simply because advisors or financial institutions were careless or unfamiliar with actual requirements when providing information.


The Common Reporting Standards, intended to increase tax compliance and transparency, resulted in additional information about families with complex offshore structures being shared amongst tax authorities.  This should not have been a major concern for families that are tax compliant.

However, major releases of private information, such as the so-called Panama Papers Scandal in 2016, highlighted how much capital is hidden behind offshore structures.  Initiatives to counter offshore tax avoidance (not adequately dealt with through CRS) included encouraging offshore jurisdictions to adopt Economic Substance reporting requirements.

Of course, these are less helpful when beneficial owners are determined to maintain secrecy.

Public Registers

The logical extension was to introduce registers where the owners, especially offshore entity owners, of certain properties would be required to reveal relevant information as to the true beneficial ownership of such properties.

The UK and EU members were quite responsive to the encouragement to create public registers for the ultimate beneficial ownership of residential real estate and domestic companies.  The next stage, was to expand the registers to include beneficiaries of trusts that owned assets situated in the country.

This had the unsettling potential of making the name, country of residence, nature of ownership and birthdate of each beneficial owner available to anyone with access, regardless of the bona fides of these enquiring members of the public.

Push Back in Europe

In Q4 last year and to the relief of many trustees and private client advisors, the EU Court of Justice ruled that the public disclosure as set out in the key EU Directive, was inconsistent with EU constitutional protections for the right to one’s privacy and the right to protection of personal data.

This did not affect the existence or requirements to register, but would limit who could access the registers.

Many countries immediately restricted access to existing registers.  However, in December the Court wound back its decision somewhat by saying that anyone with a “legitimate interest” should have access.

Not all countries will interpret this in the same way, but it will likely end up with a hurdle requirement for members of investigative organisations or the press generally needing to confirm a legitimate interest prior to being given access to a filing.  Marketing groups will no longer have indiscriminate access.

The obligations to register foreign ownership of certain Australian assets beginning July 1 this year, are consistent with this tilting of the balance back towards respecting privacy while giving law enforcement adequate tools.  The information will not be public, it will be available only to Government agencies for certain purposes.


Families with assets across borders and complex holding structures now need to pay close attention to increased registration or disclosure requirements in each of the countries in which they own assets or entities with respect to a wide range of assets.

It is not just ownership registers, but new tax-related filings and reports, including those testing economic substance, and local filings with respect to ownership and use of residential or vacation properties.

Organisations such as The Society of Trust and Estate Practitioners have been active in arguing that these registers, while adequately addressing their purposes, better balance privacy and security concerns.  Recent events give hope for a better balance.

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Significant Changes to HK’s Taxation of Certain Offshore Passive Income

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Significant Changes to HK’s Taxation of Certain Offshore Passive Income – January 2023

You may have noticed media headlines warning about substantial changes coming to Hong Kong’s taxation of certain passive offshore income.

The types of income impacted, which includes dividends and capital gains, might initially concern wealth management clients.

However, these changes will not impact individuals nor those that own a HK-based company simply holding passive investments.  This note expands on the implications of these tax changes.

Brief Background

Some multinational enterprise groups (MNEs) employ ownership structures and manage affiliate distributions in such a way that business earnings originating in high-tax countries end up not being taxed anywhere.  The creative use of double taxation agreements, hybrid products and entities resident in low-tax countries or those that have adopted a territorial-based system of tax, can substantially erode the tax base in the countries where income is originally generated.

The EU, while not attacking Hong Kong’s foreign-sourced income exemption (“FSIE”) regime broadly, is concerned that entities, with essentially no real economic activity taking place in Hong Kong are not subject to passive income derived from offshore affiliates.

The EU placed Hong Kong on its “grey list” of uncooperative jurisdictions for tax purposes, in October, 2021.  Hong Kong’s administration has responded by making amendments to its FSIE regime (the Bill dated Oct 28, 2022 is referred to as the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income).  Hong Kong’s IRD has also provided an explanatory note available on its website.  Legco approved the Bill Nov 2.

Under the revised regime, certain passive income, generated by business operations conducted outside of Hong Kong, and which was not previously taxed upon being remitted to Hong Kong may become taxable if that income, or the income from which it was paid, was not taxed elsewhere.

This can include dividends, capital gains from disposals of equity interests, interest and royalties will become subject to Hong Kong’s profits tax, unless exemptions or exceptions apply.  The inclusion of capital gains on the sale of foreign shares is obviously a fundamental change in Hong Kong’s existing tax regime.

The new FSIE regime will apply to Hong Kong resident entities that are part of a corporate group that operates in more than one jurisdiction and which receive passive income in Hong Kong.  The Bill defines the type of HK-based entities that are covered; and to grossly simplify, it covers entities that are managed or controlled in Hong Kong, carry on a trade, business or service in Hong Kong and are an affiliate of an MNE group.  Accounting concepts are used to help define this affiliate status.

Individuals, local companies or corporate groups operating solely within Hong Kong are not subject to this regime.  One would not expect the regime to apply to a HK-entity that has small, passive investments in the publicly-listed shares of many foreign companies.   Entities operating under SFC licenses are exempt.

However, trusts are treated as entities. Families have set up international structures that include trusts and holding corporations, where one of those entities is resident in Hong Kong, will have to examine their structure and possible exposure to this new regime.

Specific Exemptions

The receiving Hong Kong entity will be exempt if it meets Economic Substance requirements, a concept which has been employed for a number of years now in offshore tax havens.  Whether relevant requirements are met will depend upon the activity undertaken.  But generally, if an entity is a pure equity holding company, then complying with corporate filing requirements in Hong Kong may be sufficient, assuming its human resources (actual or outsourced) are adequate.  This is not generally seen as burdensome.

If an entity is making strategic or investment decisions with respect to its assets, is managing risks and investing in more than passive equity positions, then it will not be a pure equity holding company.  However, Economic Substance safe harbours still exist, but the resources required and the quality of those resources will be heightened.  Resource requirements can be outsourced, so long as they are undertaken in Hong Kong and the entity is monitoring their execution.  Additional guidance on meeting Economic Substance requirements is expected and will be welcomed.

Even if the Hong Kong’s entity does meet the Economic Substance criteria, there is an additional set of exempting rules, broadly described as the “participation exemption”.  Exemption will generally be met if the gains or dividends, or the income from which they were paid, was taxed elsewhere in the hands of an affiliate within the MNE group, at a 15% rate (as a headline rate).

There are no de minimis exemptions, which is unusual for tax regimes designed to deal with MNE tax avoidance.

The new FSIE regime will include anti-abuse provisions; but will also include provisions to deal with scenarios resulting in double taxation.  Taxes will be subject to credits for taxes paid overseas, including withholding taxes (and in the case of dividends, on the underlying income generating that dividend).  Existing double taxation agreements will apply.  But even where a DTA does not exist, the receiving Hong Kong entity should be able to avail itself of the type of credits generally available under DTA agreements (what some are calling a “unilateral tax credit”).

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Vintage Wine Market Update – November, 2022

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Vintage Wine Market Update – November, 2022


Harvest 2022– A promising year for France.

2022 looks like a great year for French winegrowers. High temperatures and minimum precipitation during the maturing season, led to high concentration and disease prevention. Across the country, the harvest brought in ripe, healthy, concentrated grapes– although in smaller quantities than normal. Of all the wine growing appellations, Champagne will certainly offer the most spectacular wines.

2022 is noticeably a vintage where the effects of climate change are becoming more apparent. For example, temperatures in the Bordeaux region have been above the 30-year average by 1 to 3 degrees Celsius since February. The impact on winegrowing is becoming less and less negligeable.


Fine wine market

After a strong boost in September, mainly due to the weakness of the pound, the fine wine market is starting to react to uncertainties in the world. Signs of prolonged recession coupled with the lack of Chinese buyers (Hong Kong included) have led to the sense of unpredictability and led to a cooling down of the market in general.

In the past, fine wine has proven to be an effective hedge against inflation and shown that it can ride out price increase and economic storms. Will it continue to do so in the months ahead?


Auction results and trends

After 2021, a year which broke all records and a strong first half of the year, the last quarter of 2022 is showing signs of cooling down for the fine wine auction market. Most major players such as Acker and Zachys remain optimistic but latest auctions from Sotheby’s and Christie’s show a softening of demand especially from buyers in Asia. Most sales went for under their high estimates.


Focus on Champagne

According to Liv-ex, Champagne represents now 12.4% of the secondary market compared to 2% in 2012. It is the most traded fine wine region after Bordeaux and Burgundy. Like many other luxury products, Champagne seems to have benefited from the pandemic, the war in Ukraine and inflation. Over the past 2 years, Liv-ex Champagne 50 (the index which tracks price performance of the most recent vintages of the 12 most traded Champagne) has risen by 72.7%. UK and the rest of Europe represent 70% of the market followed by the US. Asia has yet to show its taste for the bubbles with only a 7.4% market share.

Vintages play an important role within the Champagne market. Among the best vintages produced lately, 2008 undoubtedly offers a premium. As proof, Louis Roederer Cristal 2008 has been not only the most highly rated Champagne this year but it has also been the most traded fine wine in 2022.

Champagne has a strong image of a luxury product reinforced by the well-known and prestigious brands such as LVMH.


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Alternative Investments Part 2 – October 2022

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Alternative Investments Part 2– October 2022

Our last post introduced Private Equity and Private Credit. This post introduces other Alternative investments.

Real Assets

This category includes real estate (e.g., residential, timberland, farming), infrastructure assets (e.g., transportation, power generation and transmission, ports), commodities or natural resources themselves, and intellectual property rights (or “intangibles”).

The primary rationale for holding real assets, and Alternatives generally, is the assets’ impact on total portfolio diversification.

Most wealthy families already own real estate as a principal, and often other, residences.  But in a discussion of Alternative assets, real estate usually refers to a broad range of real estate sub-categories including: residential housing, multi-family residences, student housing, office buildings, malls and other retail properties, warehousing and logistics and special purpose buildings.

Many jurisdictions have promoted vehicles that invest in real estate pay out most of their income to the fund holders (e.g., Real Estate Investment Trusts, or “REIT”s).  Some REITs comprise assets that are not land but rather mortgage-backed instructions or even mortgage servicing rights.

Of more recent interest to institutional and wealthy investors are investments, either directly or through PE funds, or other investment vehicles, into infrastructure assets.  These include pipelines, highways, electricity distribution, storage or export terminals; or regulated or systematically important assets such as public transit, airports and ports.

The appeal is the long-life nature of the assets, often supported by either regulated returns, or given their local importance, reasonably certain income stream. These assets are thought to produce returns that are not well-correlated with traditional equities.

“Real assets” also include art collections, wine and more recently vintage cars and sports memorabilia.  Historically, stamps, coins and noteworthy historical documents would be included as well.  These asset classes will probably remain the domain of wealthy families that have a particular hobby-type interest in the actual assets.

Hedge Funds

Hedge funds are investment pools that invest primarily in traditional assets but in ways that are different from traditional investment funds.  They may use leverage, including derivatives, or short selling to generate returns that differ from those available through conventional funds.  They may also include non-traditional assets such as derivatives, currencies or commodity exposures.

The common theme of hedge funds is the objective to generate superior risk-adjusted returns.  Those can come in the form of higher absolute returns without taking on a commensurate level of additional risk, or more commonly, to reduce volatility without sacrificing expected returns materially.  Many of these strategies, including market neutral strategies, accept that they will underperform in good markets and prefer to set absolute return objectives as opposed to compare their periodic performance against traditional asset benchmarks.

Historically, because hedge funds cannot meet the regulations applied to registered funds, they raise funds from institutional and wealthy investors privately.  In this regard, they are similar to the PE and private credit funds discussed earlier.

However, hedge fund-like strategies or exposures are now being packaged into instruments that can be sold to retail investors.  The underlying strategies may have to be somewhat modified, and sponsors may use a “feeder” vehicle into the underlying strategy.  The most common modifications give these instruments the suitable liquidity.

Just as is the case with a traditional asset portfolio, it is important to diversify an Alternatives portfolio across asset classes, managers and strategies.  Some institutional advisors believe that a hedge fund allocation should be spread across at least five managers.  This assumes the allocation would be across strategies as well.  Given the minimum subscription amounts for many Alternative funds, it becomes clear why hedge fund participation is more suitable to the very wealthy.


Because alternative investments are complex and tend not to be regulated, it is often difficult for non-professionals to evaluate the suitability of any particular fund.  Alternatives funds have wrinkles in terms of custody arrangements, potential leverage, liquidity constraints and less transparent valuation processes that much less common with traditional asset funds.  This makes it difficult for those with limited experience to select appropriate Alternatives managers and strategies.

PE firms seem to be constantly seeking additional commitments to new funds.  Unlike an investment in a traditional fund or account, PE investors will “commit”, for example, $25 million to a particularly PE fund and then wait for the PE fund to request payment.   Given the amount of dry powder held by these funds, you might have to wait a few years before the entire commitment is called.  During this wait, you may receive requests for additional commitments with other managers with whom you wish to continue a good relationship.  This constant marketing is causing some investor indigestion.

As a response to

  1. the uncertainties created by this process.
  2. the significant fees earned by PE firms;
  3. the difficulty of determining the actual returns earned by PE funds generally, and
  4. the increasing expertise, experience and networks held by advisors working directly for wealthy families (in family offices for example),

many wealthy families are sourcing and investing directly into Alternative assets; perhaps alongside a PE fund or in combination with other institutions or wealthy families.  The challenge, of course, is in sourcing attractive deals before they are picked over by the legacy PE funds.

In many financial centers such as New York, Zurich and Singapore, family offices or agencies have created formal networking and sourcing clubs, creating more opportunity for families to access more deals, on better terms while focusing on the exposures with which they are comfortable (e.g., geographical preferences or those based on responsible investing, or length or size of the commitment).


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Alternative Investments Part 1– September 2022

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Alternative Investments Part 1– September 2022

Over the past 10 years, one of the most significant developments in terms of investment allocations amongst the very wealthy has been the huge growth in their allocation away from traditional products into alternative assets and strategies.  However, due to practical and regulatory issues, retail investors are unlikely to be involved in investment products or strategies beyond the traditional.  This is first of two posts which attempts to introduce the “Alternatives” space; but we are not recommending any particular investment approach with respect to Alternatives, nor exploring issues such as historical returns and appropriateness.

“Traditional assets” refer to publicly traded equities, bonds and cash, both in segregated form or bundled into funds that trade or offer regular (usually daily) redemption opportunities.

Alternatives” can be divided into two broad categories.  First are private assets – generally any investable asset that is not a traditional asset.  This includes private equity, private credit, infrastructure assets and real estate.  [Private meaning issued by companies that are not publicly traded and have therefore generally not made public detailed operating and financial information.]

Second, are strategies or funds that use short selling or leverage and other strategies not normally seen in traditional funds.  The entities managing these strategies are often referred to as “hedge funds”.

Investment vehicles offering Alternatives tend to have the following attributes:

  • are less liquid, less regulated and require a larger minimum commitment that is usually the case with traditional investments;
  • the underlying assets have a return profile that is not highly-correlated with traditional assets, or
  • the underlying assets are traditional assets, but the strategy generates return or risk characteristics that are different from those of traditional assets, perhaps through leverage or complex trading strategies, or
  • The returns from the underlying assets are structured to provide different risk return profiles to different investor groups.

We see more non-traditional assets and strategies becoming available to retail investors, perhaps because:

  1. the proportion of Alternative assets within institutional client portfolios has exploded, raising their profile and public awareness, encouraging asset managers to replicate strategies or access to asset classes for a broader pool of investors;
  2. many retail investors are wealthy, and non-traditional assets could likely serve a useful purpose in their total portfolio; and
  3. the increased use of computing power has reduced the scale required to profitably manage certain strategies.

Alternatives are often considered exotic, high-risk strategies reserved for the very wealthy, who can afford to suffer significant losses.  However, many Alternatives are designed to reduce risk and could be appropriate in many portfolios.

For example, many family offices are more concerned with preserving capital and earning a reasonable return, than with maximizing returns on that capital.  They are prepared to give up some of the potential upside to generate steadier returns over time.

Private Equity

Private equity (or “PE”) funds originated as funds that purchased shares of public companies for the purpose of taking the company private.  This was achieved sometimes via a hostile take-over or working with existing management (often referred to as a Leveraged Buy-Out, or LBO).

PE funds tend to use significantly more debt than is typical for a public company and bring more intensive or aggressive management to the business, with the intention to increase its profitability, extract capital and one day sell (to a strategic buyer, other PE firm, or take public in an IPO).

Over time, due to perceived superior returns, PE firms have built enormous capital pools and have expanded their range of investment strategies.  They have funded platform-based industry roll-ups, activist approaches, minority positions in growth companies and managing the premium pools of acquired insurance companies.

The term private equity could also refer to Venture Capital and Growth Capital, because these investments are made prior to a company going public.  Growth Capital, is invested at later stage than is VC; typically once a start-up has established its business model and is growing revenue but wishes to remain private for longer.  More than 50% of the funds deployed by PE firms in 2021 could be described as Growth Capital.

PE firms are estimated to have $3.4 trillion of committed but unallocated capital, with approximately a third of that in buy-out funds.   Despite much slower capital markets year-to-date 2022, the PE firms are reportedly still raising record levels of funds, with financial advisors estimating that the ultra-wealthy Family Offices continuing to increase their over-all asset allocations to PE.

Private Credit

Historically, large companies could borrow by selling bonds to institutional investors or borrowing from banks.  Over time, adjacent lending markets have developed to exploit opportunities around these two main pillars.

After the 2008 financial crisis, Regulators raised the cost of risk taken on by banks through higher regulatory capital and buffers and new reporting standards.  This caused banks to pull back from some credit markets tending to push costs higher in those markets.

The higher returns on offer drove capital into the private credit space.  Credit funds, some sponsored by existing PE firms, raised billions to make available to companies that could not easily access the senior lending bank market or public bond markets – due primarily to size but perhaps a combination of size and credit quality.

The rationale for this enlarged private credit market is that:

  1. Diversifying a total portfolio, especially those heavy to equities and investment grade debt;
  2. With bank lending cut back, there were more opportunities to lend to borrowers with adequate credit quality than was previously the case;
  3. Central bank liquidity expansion had materially reduced yields on conventional investment grade bonds to the level that return expectations at many institutions could not be achieved, whereas the private credit market offered returns above 6% without unreasonable risk;
  4. Leveraged lending (like all bank lending) is typically floating rate, which appeals to many investors; and
  5. As a market perceived as local, illiquid and perhaps inefficient (e.g., lack of credit ratings and publicly-available financial information), the narrative developed that returns relative to risk taken could be attractive across the business cycle.


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Vintage Wine Market Update – July, 2022

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Vintage Wine Market Update – 2022 July

As discussed in our update last November, 2021 was undeniably a challenging vintage.  It has become known as the miracle vintage as the savoir-faire of winemakers made all the difference.   If one knows where to look, there will definitely be some very tasty bottles to buy.  This vintage is often described as aromatic, fresh, low in alcohol and well balanced.  White wines are showing very well across all appellations.

2021 is also a vintage where properties with financial resources played a decisive role.  Chateaux had to invest both money and labour into a vintage that in the end produced very low yield.

With the en-primeur campaign now drawing to a close, it is fair to say that, in general, the 2021 vintage for Bordeaux does not offer value for money and did not attract excited buyers.   Save for a few of the best wines such as Carmes Haut-Brion, Cheval Blanc, L’Evangile, Figeac, which might offer potential increase in value, the rest offers little financial interest at this stage.


Fine Wine Prices Continue to Increase

Prices continue to increase, despite an initial sudden drop at the beginning of the COVID pandemic Liv-ex indices have maintained their steady climb.   In 2021, the Liv-ex 100 (100 of the most sought-after wines on the secondary market) rose by 22%.  Since our last report, Liv-ex Champagne 50 and Burgundy 150 prices have risen an additional 9% and 14%, respectively. Italy and California wine prices also continued their steady climb.

Increased global wealth, coupled with wine-drinking being perceived as one of the few authorized pleasures during prolonged COVID-related social restrictions and lockdowns, led to a surge of interest in fine wine.

A new and increasingly important factor pushing up prices is the effect of climate change on wine production.   Burgundy, for example, already known for its smaller crops, has been heavily impacted by a combination of hotter, dryer growing seasons and extreme climatic incidents such as destructive hail or late frost.


Auction Market

Despite the pervasive social restrictions due to the COVID pandemic, global auction revenues increased more than 50% from 2020.   2021 was, by far, the best year in terms of sales for auction houses, big and small, with revenues from live and online wine auctions reaching USD 582 million.  2022 looks to be another promising year, with the major auction houses such as Acker, Sotheby’s, Christie’s and Zachys already recording increased sales in Q1.  Acker, the largest in terms of revenue over the past two years, forecasts a further increase of 8-10% this year.


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Currency Fluctuations

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

Currency fluctuation is an ever-present factor that investors should take into account.

We have come a long way since pre-Bretton Woods, but there remain serious challenges for investors and portfolio managers in dealing with currency fluctuations.

Currency exchange rates fluctuate constantly, impacted by many economic and sentiment factors. These can be exacerbated by a country’s poor economic policies, its exposure to increasing commodity prices and reversing capital flows from foreign investors.

Nearly all Central Banks have been or are about to start raising interest rates significantly, with the view to moderating inflation by tightening financial conditions.  Historically, tightening financial conditions has impacted some economies, particularly emerging economies, more than others, including by triggering significant foreign exchange rate volatility.

Our comments will focus on the role currency selection and the associated risks may play in your own personal investment decisions.


There are many economic factors that lead to the strength or weakness of one currency versus another. A nation’s trade, current and capital accounts, and its government’s fiscal and monetary policies, including the local-currency yield curve, are important factors.

For example, a country experiencing a decline in its currency may see increased exports of locally produced goods or services. A country can support its currency by raising local interest rates.

During periods of calm, investors often move funds from low interest rate countries to higher interest rate countries.  However, during periods of heightened uncertainty, investors unwind carry-trades or seek safety in securities in currencies perceived as safe, such as US dollars, Swiss Francs or the Japanese Yen.

Of course, economic analysis is unfortunately never that simple — multiple factors, both internal and external, simultaneously impact a country’s currency movements, with some tending to have short-term impacts and some are felt longer term.

Minimize Currency Effects

While foreign exchange risks are only some of the many risks to which your investment portfolio is exposed, there are ways that professional managers mitigate or avoid these risks.  They may manage foreign exchange exposure to match clients’ liabilities, or they may hedge certain exposures, or they may diversify appropriately.

Professional advisors and economists also use various models or theories to help forecast currency movements, e.g., the purchasing-power parity theory. These models incorporate many factors mentioned above and include interest rate differentials, relative economic strength and inflation expectations.

Your Investment Objectives

If you need regular income from your investment accounts, then the currency mix chosen for your investments should match up well with the currency or currencies in which your expenses are based.  For example, if you are retired in the United States, then you would be more comfortable with a significant portion of your portfolio producing a USD income.

However, your specific objectives might be best met by a good, internationally-oriented, discretionary investment manager. Your currencies exposure would be directly related to your specific asset allocation.

A good portfolio manager will include currency-related risks when assessing investment opportunities.  For example, currencies are a relevant factor in determining a company’s cost structure and competitive position.

Currency implications are unlikely to drive investment decisions or portfolio construction, but we suggest that these issues be included in discussions with your financial advisor when evaluating returns or matching your portfolio parts with your long-term financial objectives.


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Selecting Undervalued Stocks

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.


Financial analysis is a key to out-performing in investment management.  We explain the best ways for individual investors to do investment research.

The ultimate goal of investors should be twofold: to acquire undervalued assets and to dispose of those assets as soon as they become overvalued. A key benefit of purchasing undervalued assets is that there are two different groups that can influence the trading price of your assets.

The first group comprises industry players that wish to grow through acquisition. This is especially so in situations where markets are not performing well.  In such circumstances, companies often buy other companies if they are undervalued.  That is, if the cost of purchasing the target company is cheaper than building up the parent company in order to expand its operations or enter a new industry, a company will purchase another.  A premium is generally paid for the target company, resulting in an increase in its share price.

The second group that can influence the price of assets is the market itself, which includes investment funds, pension funds, other portfolio managers, as well as individual investors.  These entities buy and sell stocks based on a number of criteria unrelated to those of the industry players.

As such, an investor can look to two avenues for his or her assets to increase in value, rather than relying solely on the market.

The purchasing of undervalued assets requires one to look at stocks not simply as tradable commodities, but as the foundations on which companies are built. Whether you buy 1,000 shares or one million shares you are buying part of a company. This is an important concept.

The most efficient way for individual investors to know when to sell and when to buy is through thorough financial analysis.

This type of analysis is not the same as technical analysis, which studies the demand and supply of securities and commodities based on trading volumes and price studies. Technical analysts use charts or computer programs to identify and project price trends in the market. It has never been clear, however, whether this type of analysis is useful for investors. It may be of use to traders, but not to investors.

It is important for individual investors to know how to go about conducting their own financial research if they so desire, as well as how professional analysis is carried out and why it is important.

Is financial analysis simply a matter of looking at a company’s financial statements? Certainly not. Financial analysis provides information about a company’s past and present performance. It also quantifies future expectations.  Financial analysis is sub-divided into the following three groups

  • Economic analysis is the basis used to determine capital market and industry performance estimates. Furthermore, it provides projections for the total economy in terms of GDP, inflation, profit, monetary and fiscal policy and productivity.
  • Capital market analysis provides value and return estimates for the securities markets.
  • Security analysis studies industries and the securities of individual companies to develop value and return expectations for those individual securities

The information required for your analysis is available if you know where to look for it. The first place to start is at the original source, such as information prepared and sent by the company itself to its shareholders and to the financial press.

You can simply write to the companies to request quarterly and annual reports. Many companies have web sites that allow you to e-mail your requests.  In fact, it is much easier and cheaper to source as much information as you can from the Internet.

Another important original source of information is that which is filed by the company with a regulatory body.  For companies that trade in the US, quarterly reports and annual reports comprising complete audited balance sheets, cash flows and income statements can be obtained from the Securities and Exchange Commission web site.  For local Hong Kong companies, an investor can request the latest annual report directly from the company.

Subscription services such as Moody’s and Standard & Poor’s are also available which summarize almost all original company information such as balance sheets, cash flows and income statements. These services provide much more than just sovereign ratings and corporate debt ratings.

Finally, there are many online data providers. Useful features include a comparison of a company’s valuation ratios, dividends, historic growth rates, financial strength ratios, profitability ratios, and management effectiveness ratios with the industry ratios and the S&P 500.

Furthermore, companies often provide information to industry and trade organisations, and to supplier and customer groups. This information is then circulated amongst their respective members.

Brokerage reports can also be useful for industry overview and the financial models they often contain.

Given the losses seen in equity markets in the past months, investors may be skeptical of the value of sell-side financial analysis.  Sentiments swing to undue market pessimism in periods of crisis and recession, and back to undue market optimism during periods of prolonged prosperity.

However, purchasing undervalued assets will always provide superior investment returns. The most foolish decisions are most often made in purchasing assets rather than in selling them.  As such, taking the time to determine which stocks are undervalued will probably make the decision to sell, when the time comes, much easier and more comfortable.


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Vintage Wine Market Update – November, 2021

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The Liv-ex 100 index, which is the leading benchmark for the vintage wine market, rose by 2.2% in October and 19% to the end of October. It is now back to its pre-2011 level. Overall every wine region is showing solid price increases with Burgundy, Champagne, Italy and Rhône performing the best.
Burgundy continues its steady ascent towards new highs as recent low yielding vintages coupled with continuous high demand continue to push prices higher.

The top white Burgundy wines are stepping into the limelight. According to Liv-ex, the amount of white Burgundies traded has increased by more than a 1,000% over the past ten years. Domaine Leflaive, Coche Dury, D’Auvenay are just a few names which make Chardonnay lovers dream. Traditionally, the UK and US markets have driven demand but the Asian market, particularly Hong Kong, is showing some interest in this golden libation.

Among Bordeaux first growths, Chateau Lafite Rothschild is again very popular, commanding seven of the top ten searches on Liv-ex so far this year, as well as being the most expensive.  Paradoxically, when it comes to highest average scores, Chateau Haut Brion takes top rank . Again according to Liv-ex, the average price for a case of Lafite is £7,000 compared to £5,000 for the other four estates. The Lafite brand is appealing to many more consumers than ever.

Growing diversity best describes the fine wine market in 2021. More wines from a larger pool of regions are trading than ever before, giving investors and wine lovers even more opportunities and choices.

Auction World

Following in the footsteps of a world record breaking September auction in Hong Kong, Burgundy wines were the stars of Acker’s latest auction on November 8th. Domaine de la Romanee Conti (DRC) wines led the pack, with one lot of 3 bottles of Romanee Conti 1999 selling for US$ 96,387, followed closely by wines from Domaine Leroy and by the great master of white Burgundy, Domaine Leflaive.  According to John Kapon, Chairman of Acker Wines, the appetite for outstanding wines continue to grow not only for Burgundy wines but for a large range of collectible bottles.

The November auction in Hong Kong realised sales of US$5.8 million.

Sotheby’s two day sale in Hong Kong last month saw 100% of the lots sold for a total amount of US$ 12.6 million. An average of 75% of the wines were sold above their high estimates as 2021 is set to be a record breaking year for Sotheby’s in Asia. Christie’s will hold its annual Fall auction in Hong Kong starting on November 25th with an impressive selection of great vintages from Domaine Leroy and Armand Rousseau, Chateau Petrus and Romanee Conti.

France harvest 2021: A Winegrower Vintage

2021 will be remembered not only as one of the smallest crops since 1977 but also as an extremely complicated vintage to produce. Every wine region in France was affected. A combination of spring frost, mildew, constant rain in June and a cool month of July led to low yields. The growing season was unusually time consuming as wine growers had to keep going back to the vineyard to check and treat the vines. This year will probably also be remembered as a costly vintage to produce due to the amount of treatments necessary to keep a very small crop healthy.

2021 is a technical vintage which will require lots of finesse to attain high quality. The saving grace of the vintage was the late summer ripening (mostly September) which allowed the more fortunate estates to produce good to excellent quality wines. In Bordeaux, producers are praising the vintage as offering great balance between acidity and alcohol, with excellent merlot grapes and well-ripened cabernet.  It is certain that 2021 will produce less alcoholic wines in contrast to the past three years and many wine professionals are looking forward to tasting these more classic Burgundies and Bordeaux.

Focus on Spain. The renaissance of a great wine-growing country

For many, Spanish wines are synonymous with affordable, mass produced Rioja reds.  Although, this might still be the case, the wine scene has changed dramatically over the past two decades. Quality driven winemakers in Rioja and in Ribera del Duero, such as Peter Sisseck, Carlos Lopez de Lacalle, Benjamin Romeo and Telmo Rodrigues, have created new wines going back to more terroir-focused production making better use of local, indigenous grapes. This renaissance of the traditional Rioja and Ribera del Duero is paving  the way for other wine regions to emerge.  Priorat, Toro and Bierzo are now producing much sought after wines of very high quality.   Clos Erasmus, Clos Mogador,  Descendientes and Bodegas Numanthia (LVMH group) are just a few of the top producer names in these newly discovered regions.  Many of Spain’s new wines are made in small quantities, fetching high prices and are slowly becoming investment grade.   More than ever, Spain offers great quality wines at affordable prices.


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