Challenges to luxury asset investment including authenticity, liquidity, volume and valuation. These can be at least partially mitigated using technology. Cask whisky is one area where liquidity and volume are improving, thanks to technologically aware broking companies developing and implementing cask portfolio management tools that help brokers conduct business with cask investors. Valuation is another area being developed for cask whisky, where casks are valued as a basket of options using historic auction prices and volatility. A valuation app could be used by brokers when an investor calls them to discuss buying or selling a cask, and the broker helps them select a cask that best suits their requirements (brokers currently conduct cask valuation manually using their market knowledge). Embedding the cask valuation app in a cask portfolio management tool would help the broking company automate the cask valuation and selection task of their business process, and offers the opportunity for broking companies to extend technology further – where investors buy and sell casks at cask valuation price via a bulletin board exchange, thereby rendering the current broking function obsolete. Broking companies would then transition to become cask portfolio management service providers and cask asset managers. Cask whisky investment clubs could diversify risk of direct investment in individual casks and allow asset holders to take advantage of alternative financing options e.g. loan notes and derivatives.
Cask valuation
In the primary market distilleries produce the spirit, cask the product, store and manage early maturity before selling excess product to cask investors. As the maturing cask provides the investor with the right but not the obligation to bottle their asset at a particular maturity, a call option is the appropriate model to use for cask valuation at any particular point in its maturity. Using the Black and Scholes option valuation model for a six-year-old cask of Blair Athol – age of cask at purchase – compared with the current market price of 12, 17 and 21-year-old Blair Athol, the cask valuation is calculated from the sum of the three options to be £291 + £2,078 + £5,098 = £7,467 compared to the current cask selling price of £5,250, so we conclude that the cask is currently undervalued. (See the upcoming September edition of Review of Financial Markets for a more detailed paper on this.)
Further developmentOpportunities exist to use blockchain to ensure authenticity in the whisky industry, from pre-filled casks through to bottling, thus combining users of the valuation models (brokers) and users of blockchain (cask management teams and auction houses). Cask management teams are currently transitioning to their own government bonded warehouse with tens of thousands of cask capacity from the current cask storage model (i.e. cask storage on distillery site) so may be interested in moving to an intelligent commodity blockchain solution as part of this planned transition. The valuation method may be extended to other luxury asset investment classes like wine and volatility can be modelled at distillery and regional level using the whiskystats.net database.