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Why Do Diamond Traders Need A Diamond Fund?
Presentation by Stephan Mueller
Product Management & Development
The exclusive manager of Julius Baer Funds. A member of the GAM group.
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Product Idea – Key Elements
Product Innovation
Wrap the most precious goods in a transparent and fully regulated fund
Diamonds as an investment theme – the worlds’ first transparent diamond fund
• Diamonds are considered a hedge against inflation, uncertainty and crisis.
• Their popularity has risen since the 19th century as an important source of liquidity with
a diamond’s value not been determined by currency parity, government laws or
geopolitical concerns.
• Growth pattern similar to a synthetic bond (2% p.a. – 3% p.a.), due to the diversified
portfolio.
3
Source: PMD & PolishedPrices
Analogies between Metals and Diamonds – Suitability
The selection of standardised components and quality labels are the
prerequisite of product and portfolio engineering for financial assets
Selective diamond and metal segments are traded as commodities
• All segments from raw to refined diamonds cover pricing standards that facilitate
the trading and valuation. But not all of them are suitable for financial assets.
• Not all standards are suitable to match the needs of the financial industry as they
may not deliver the comfort level and transparency required:
4
Good
Valuation
Suitability re financial
asset
Remark
Precious metal coins,
medallions, semirefined bars
Auctions, individual
certifications by smelters
etc.
Not suitable: implicit
premiums can only be
discovered from auctions
Price determination and
methodology are not transparent to
the public
LBMA, LPPM precious Standardised price
metal bullion bars
discovery and publication
via BBG/Reuters etc.
Suitable: pricing standards,
good delivery rules are
worldwide recognized
Every bullion bar is an individual
good (fine weight, smelter, shape)
but its valuation is standardised
Raw diamonds,
jewellery, art pieces
Auctions, individual
negotiations
Not suitable: real value can
only be discovered from
auctions (affection is not a
price source!)
Like medallions and coins the price
determination is not standardised
and transparent to the public
Polished and certified
diamonds with GIA,
IGI, HRD international
digital passport
Pricing parameters are
standardised and certified
by laboratories and
published on BBG/Reuters
Suitable: pricing parameters,
standards, good delivery
rules are worldwide
recognized and public
The pricing of polished and
certified diamonds is transparent
and can be reconciled on its
standardised parameters
Source: PMD & PolishedPrices
Transparency & Liquidity
The combination of both is unique as the B2C market has no interest to
disclose pricings and profit margins
Support & project team
• The project is supported and critically assessed by un-conflicted stakeholders from the
diamond industry who bring in their particular expertise and whose independence and
credibility ensures the fund is fully transparent and carries no reputational risks in
relation to ‘conflict diamonds’ to realise the world’s first transparent fund on polished
certified diamonds.
Transparency
• The fund follows strict rules and regulations ensuring the traceability from the source up
to the purchase and trading of polished diamonds on behalf of the fund.
• The fund accounting and trading is based on the transparent methodology of
‘PolishedPrices’ an independent and transparent data provider that publishes up-to-date
wholesale diamond prices and indices on Bloomberg (PLPR<GO>) and Reuters
(<Diamonds/PP>).
Liquidity
• The investment objective is strictly linked to the most liquid and standardised categories
of polished certified diamonds (daily availability; i.e. colour distribution, clarity, cut and
carat weight).
5
Source: PMD & PolishedPrices
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Product Conception &
Implementation of Key Elements
Investment Focus
The fund invests exclusively in polished certified diamonds
Restrictions in favour of the investors’ security and liquidity
• The fund provides access to polished certified diamonds that are stored in our bonded
vault in Zurich.
• The cooperation with ‘PolishedPrices’ and the additional requirements for selected
brokers guarantee that every link of the value chain takes on the full responsibility for
the sourcing and traceability of every single diamond.
• The fund will not get involved in processing or trading rough diamonds and its concept
ensures that every single diamond is certified.
• The diamond portfolio is focussed strictly on liquidity and the most promising mix of
standardised, certified diamonds.
7
Source: PMD & PolishedPrices
Transparency
Official data feeds on Bloomberg/Reuters guarantee transparency to everyone
Methodology – fair value price model
• Prices for single polished price points are based on currently traded selling prices
that are weighted intraday to calculate a fair value price for every polished
category, provided daily by companies in the different market centres all over the
world.
• The portfolio is based on those diamond categories for which ‘PolishedPrices’ has
the highest level of direct daily price feeds; i.e. official BBG ticker for every price
point.
8
Source: PMD & PolishedPrices
Liquidity
Assessment of the core investment objectives
The fund focuses on the most promising categories re liquidity and price stability
• The selection of core categories are based on the insight of ‘PolishedPrices’ and access
the most liquid part of the standardised polished diamond market.
• The whole retail market carried retail turnover of about US$ 84 bn in 2013.
• 2/3rd of the portfolio are invested in the following categories:
•
•
•
•
Colour:
Clarity:
Cut:
Carat Weight:
F to J
VVS1 to SI1
Excellent or Very Good
0.3 points to 2.0 carat
• 1/3rd of the portfolio is designated to select market opportunities
9
Source: PMD & PolishedPrices
Portfolio Management & Implementation
Fully automated portfolio engine with real time link to Bloomberg/Reuters
carat_color
D
E
2
0
1.5
0
1
13,629
0.90
0
0.70
6,127
0.50
14,742
0.40
8,572
0.30
23,075
carat_color / distribution
F
17,766
53,280
88,368
16,615
30,791
70,643
33,827
76,579
G
42,714
65,712
138,191
20,682
52,466
82,474
39,257
91,277
H
91,476
87,024
231,168
40,581
97,658
141,269
65,348
151,837
I
97,104
87,136
271,677
43,847
125,349
155,801
61,900
155,050
J
128,583
150,624
341,040
60,370
130,373
185,209
79,901
201,661
86,079
89,952
194,712
39,358
65,712
130,923
66,599
176,730
5,018,837
carat_clarity IF
VVS1
VVS2
VS1
VS2
SI1
2
0
0
106,785
76,839
126,693
153,405
1.5
0
13,136
144,912
92,448
100,736
182,496
1
22,481
88,862
264,621
203,774
318,381
380,667
0.90
0
13,469
47,895
40,176
52,504
67,408
0.70
9,087
36,578
108,425
76,094
141,318
136,974
0.50
28,809
96,293
158,463
118,714
198,639
180,144
0.40
12,940
39,451
73,895
68,498
83,404
77,217
0.30
31,117
94,368
177,498
173,437
211,171
188,618
carat_clarity / distribution
D
400,000
400,000
IF
E
300,000
I
200,000
H
G
100,000
F
E
0
2
1.5
1
5,018,837
carat_clarity / distribution
carat_color / distribution
0.90 0.70
0.50
J
F
G
H
200,000
I
J
0
0.30
 All diamonds in the portfolio are 1:1 linked to the
corresponding BBG Ticker for the respective
category; i.e. similar to precious and industrial
metals.
 Changes in underlying prices are reflected realtime in the portfolio engine and trade templates to
facilitate the automated daily flow handling.
10 Source: PMD & PolishedPrices
SI1
VS2
VS1
VVS2
VVS1
100,000
D
0.40
VVS1
300,000
2
2
1.5
1
0.90 0.70
0.50 0.40
0.30
IF
VVS2
VS1
VS2
SI1
Systematic Exclusion of Conflict Diamonds
Strict procedures and controls to ensure proper sourcing of all diamonds
Prosperity diamonds only with approved certification
• The fund will under no circumstances get involved in processing or trading rough
diamonds but will strictly invest in certified diamonds only.
• All diamonds purchased are accompanied by certificates from Gem Laboratories*: GIA,
IGI, HRD or AGS.
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Source: PMD; *GIA = Gemmological Institute of America, IGI = International Gemmological Institute, HRD = Hoge Raad voor Diamant Antwerp,
AGS = American Gem Society Laboratories
Inventory Reports – Similar to Metal Custody
Customized logistics to provide state of the art vaulting and reconciliation
Every diamond is reported as a unique part of the funds portfolio
• Based on the GEM certification, every diamond is scanned with its specific parameters.
• Reconciliation, internal and external auditors as well as the portfolio management can
rely on the inventory report.
• Every change of the inventory is reported by end of each business day.
Audit SOP in relation to physical handling (Standard Operation Process)
• Auditors and GEM experts can physically examine the portfolio holdings on site.
• In order to avoid conflicts of liability custom made SOP have been developed and
implemented with special regard to the needs of internal and external audits.
Sample of inventory report
Barcode
number
Stone
GIA Report Shape and
number Number
cutting style Measurements
1111111111 BS001
6.90-6.97 x
123456789 Round Brilliant 4.20mm
1111111112 BS002
6.90-6.97 x
123456790 Round Brilliant 4.20mm
12 Source: PMD & BRINKS
Finish
Depth Table Girdle
Cullet
Polish
Medium to
slightly thick,
1.25 carat
60% 61% faceted
Very small Verg good
Medium to
slightly thick,
1.25 carat
60% 61% faceted
Very small Verg good
Weight
Finish
Symetry
Clarity Colour Flouresence
Very Good VS1
F
None
Very Good VS2
F
None
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Investment Characteristics
Long-term Stable Growth
Diamonds show a stable growth between 2% p.a. to 3% p.a.
Uncorrelated to equities, fixed income, currencies and other asset classes
correlation: Overall Diamond Index vs. World Equities (11 yr)
1.0
0.5
+ days
0.0
- days
correlation (100)
-0.5
-
Jan-14
Jan-13
Jan-12
Dec-10
Dec-09
Dec-08
Jan-08
Jan-07
Dec-05
Dec-04
Dec-03
Dec-02
-1.0
 Key to investors is to access diamonds through a regulated and transparent fund.
Source: PMD & PolishedPrices
Diamonds short in supply soon
Widening supply gap implies substantial price increase going forward, as
already seen for the last four years
Development of Polished Diamonds - Retail
Value in US $ bn.
USD 90
USD 80
USD 70
USD 60
USD 50
USD 40
USD 30
USD 20
USD 10
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
USD 0
 The left-hand chart aggregates rough production data. A majority of mining companies
have been reporting a stagnation of output since several years. Some of the expected
shortfall can be met by adding new mining capacity but the whole supply gap cannot be
closed.
 The shortfall in supply will lead to both, less available stones for the cutting centres, and
an expected price increase of polished stones (right-hand chart).
Source: PMD & PolishedPrices
Executive Summary
Wrap the most precious goods in a transparent and fully regulated fund
Summary
•
The fund invests in the most liquid and standardised part of the polished diamond market;
similar to precious and industrial metals.
•
Conflict diamonds are systematically excluded, i.e.:
- no involvement in sourcing or trading rough diamonds and
- all polished diamonds purchased are accompanied by certificates from reputable
gemmological laboratories and can be traced to the source.
•
The fund carries maximum transparency as all prices are based on actual traded prices that
are provided daily by contractual brokers in the different market centres all over the world.
The price feeds/constituants are contributed on Bloomberg, Reuters and are publically
available.
•
«Real Assets» such as metals and diamonds will be in demand once the “reflation” trade of
central banks has to be unwound.
Investment Characteristics
•
Un-correlated to EQ, FI, FX and commodities.
•
Growth pattern similar to a synthetic bond (2% p.a. – 3% p.a.) due to the diversified portfolio.
•
Positive performance in the commodity and equity sell-off periods from 2008 – 2014.
16 Source: PMD & PolishedPrices
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