With diamonds being promoted as the next big investment, new funds are popping up to take advantage.
Diamonds were in the news again last week, with the announcement that Anglo American (LSE: AAL) is to pay $5.1 billion to buy out the Oppenheimer family's 40% interest in De Beers.
But it's fair to say that the shiny gems have been attracting more interest as an investment over the past couple of years, as investors seek out safe havens amid the turmoil.
An investor's best friend
And safe havens have been hard to find, with even the traditional investment of gold seeing significant falls on occasion. For those willing to look further afield, 'alternative investments' such as wine and violins have sometimes seemed attractive, but the risks involved in buying such 'emotional assets' are huge.
Joining the list are diamonds which, like most other alternative investments, do not pay a dividend. As Warren Buffett said of gold, "it doesn't do anything but costs you charges and stares at you".
But unlike gold, each diamond is unique, and its value is based on a complicated consideration of factors such as colour, clarity, inclusions, and so on, and the fashions and preferences vary over time. This makes it difficult to establish a definitive index of diamond value, although there are benchmarks such as Rapaport Group's RapNet Diamond Index (RAPI) and the Polished Prices Index.
It should also be noted that, according to the Polished Prices Index, the stones lost 22% of their value during the 2008 financial crisis, and are down 16% since August. So while diamonds may be 'alternative', they are not entirely uncorrelated with other investments.
Enjoying exposure to diamonds
Probably the easiest way to buy into diamonds is to buy shares in a diamond miner, and there are plenty on the London market: Petra Diamonds (LSE: PDL), Gem Diamonds (LSE: GEMD), Firestone Diamonds (LSE: FDI), Namakwa Diamonds (LSE: NAD), Paragon Diamonds (LSE: PRG), Diamondcorp (LSE: DCP), Stellar Diamonds (LSE: STEL) and Botswana Diamonds (LSE: BOD).
All of these shares have seen better days, which of course does not necessarily make them a buy, but Tony Reading's recent article on Petra Diamonds will give you a flavour of what's on offer. Buying a diamond miner also means buying the risks and opportunities related to that specific company and management.
Another option is to buy the stones themselves, but when you consider the likely spread between the buying price and the selling price, the complexity of valuing each diamond, and the depth of your knowledge compared to the knowledge of the seller, you might like to reflect on whether this approach is a good idea. How sure can you be that you're buying right?
In recent years, and especially in the past year, a number of diamond funds have been established to capitalise on the growing interest.
And given the uniqueness of each stone and the inefficiencies in the market, a skilled management team should, in theory, be able to bring some value to a fund.
The easiest fund for UK-based investors to buy is Diamond Circle Capital (LSE: DIAM), the first publicly listed fund to invest in diamonds. It is run by Diapason Commodities, but its website provides no information without logging in.
Rapaport Group, run by industry veteran Martin Rapaport, is planning to introduce a diamond investment fund aimed at the financial community. It is expected to start with around $10 million, increasing to more than $100 million. "Diamonds are going to track exponential growth of wealth in developing markets," Rapaport is reported as saying. "Chinese demand for diamonds is simply fantastic, so is Indian."
Diamond Asset Advisors, established in Switzerland at the start of 2011, along with Harry Winston Diamond Corporation (NYSE: HWD.US), is planning to raise $100 million by the end of 2011 to launch a diamond fund, with another $150 million expected to be invested during 2012. The fund is targeting an annual return of 12% after fees.
The Novel Diamond Fund, based in Hong Kong, targets a 20% return from its investment in coloured diamonds. Jim Rogers is among the directors.
Also focusing on coloured diamonds is the Sciens Colored Diamond Fund, which intends to "take advantage of arbitrage opportunities available due to the extreme opacity and inefficiency in the pricing of coloured diamonds". It employs three strategies: short-term trading, improvement of diamonds, and holding as prices rise. High net worth individuals will need at least $2 million to participate, while institutions will need to put up a minimum of $5 million.
The Malta-based Diamond Capital Fund counts insurance entrepreneur Clive Cowdery among the founder investors in its $20 million fund, launched this summer. It will trade as well as just hold diamonds.
Cayman Islands-based KPR Capital's diamond fund was launched in March 2009, targets a 10% return, and applies a hedge-fund style 'two-and-twenty' fees structure. Minimum investment is $250,000.
Fusion Alternatives, another fund targeting high net worth individuals, was set up by former senior managers at the Rapaport Group. Its fund specialises in investment grade polished diamonds.
The Global Diamond Fund: Not much information on this, but on general principles I'd avoid any company that does not have full contact details on its website, and whose site is hosted by Yahoo! (NASDAQ: YHOO.US).
So a very mixed bunch, not for the faint-hearted, and mostly not for the average man in the street.
The nature of diamonds probably makes them unsuitable for a physical exchange-traded fund, but can it be long before more accessible funds become available to the mass market… and what would that mean for valuations?
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