A Different Hangover

Disillusioned with stocks and other traditional investments, more and more Americans are putting new kick in their portfolios by buying warehouse receipts for Scotch whisky. Their interest has been piqued by growing demand for the drink and a spirited direct-mail ad campaign by U.S. and British whisky brokers, who promise annual gains of 15% to 20%. Some investors really do that well -- but others, operating in an unregulated business largely controlled by brokers, blenders and other experts, emerge with an excruciating financial hangover.

An investor must usually put up a minimum of $1,500 to $2,000 to buy a "parcel" of raw new spirits that his broker has bought from a Scottish distiller. In return, he gets a receipt from a bonded warehouse in Scotland giving him title to the whisky and bills for storage and insurance costs. After waiting out a three-year aging period specified by British law, he tries to sell his whisky to blenders who run short, or to other investors.

On average, over the past two decades, the value of newly distilled Scotch has doubled during the aging period. But lately, overproduction has watered down prices of some types as much as 40%. Prices for full-bodied malts, which give Scotch its smoky flavor, are strong now because of rising world demand; the Japanese, for instance, import malts to blend into such "Scotch-type" drinks as Suntory whisky. A supply glut, however, is still depressing the prices of grain whiskies, which are blended with malts to give Scotch its lightness.

The investor in Scotch is heavily dependent on his broker. No daily price lists on Scotch trades are published in the U.S., and the Securities and Exchange Commission has been unable to establish regulatory authority over the business, although it contends that the warehouse receipts are investment contracts. Scotch plungers also are prey to arcane worries; for example, if much of the investor's whisky evaporates in storage, the price of his barrel goes down. If all the uncertainties drive an investor to drink, he cannot even readily imbibe his own booze. To bring it into the U.S. he would, in effect, have to start a liquor company, and go through the tortuous process of getting an import and bottling license from the Treasury Department.

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