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  1. Wealth
  2. Wealth Management
September 1, 2008

Rock Solid

By Spear's

Coloured diamonds may not be an obvious safe choice for the astute investor, but their track record speaks for itself — these precious gems have been increasing in value by an average of 10 to 15 per cent per annum since the early 1970s, when formal records started.

Twenty years ago a one-carat, fancy, vivid, internally flawless pink diamond would have sold for approximately $70,000 a carat. Today, that same diamond could be worth more than $750,000. In October 2007, Sotheby’s Hong Kong broke an auction record, which had stood for over twenty years, when it sold a 6.04 carat, internally flawless, emerald-cut vivid-blue diamond ring for US$7,981,835. The per carat record was once again topped at Sotheby’s this year in Geneva when a fancy, vivid-blue, pear-shaped diamond ring sold for a record of US$1.328 million per carat.

Perhaps you are thinking that the credit crunch will influence demand? Think again, at least when it comes to coloured diamonds. Even through the recent market downturn, coloured diamonds have appreciated. As James Allan of South African finance group Allan Hochreiter says, ‘If you are actively involved in the production and sale of diamonds, the future looks extremely bright.’

So, it is little surprise that, at a time when other assets are experiencing heavy turbulence, high-net-worth individuals are looking for new ways to diversify their holdings. Codiam, a new fund focused on the acquisition of rare coloured diamonds, offers such diversification. It allows its investors to gain exposure to this market with a starting investment of $1 million and a maximum of $10 million dollars, with $100 million as the target total size.

Codiam’s founders, Mahyar Makhzani and Philip Baldwin, believe the gems to be both a highly attractive investment and also a hedge against market turbulence and political crises. The fund does not touch rough diamonds, which are far too risky. Instead, the diamonds are acquired through traders or cutters in New York, Tel Aviv, Geneva and London or through auction houses and private sales. Although the price of white diamonds fluctuates, natural fancy coloured diamonds remain the most valuable gemstones as measured on a price-per-carat basis. Alan Bronstein, curator of the Aurora Collection (the world’s most famous collection of coloured diamonds) and leading adviser to jewellers and investors, explains that, for long-term investors in particular, ‘coloured diamonds are a fantastic investment’. In order to maximise the benefit, he recommends the gems be kept for at least five years. ‘However, if it is just a hold for intrinsic value, a hold for diversification, then a year could be fine.’

Unlike most funds, Codiam offers all investors the right of first refusal (ROFR) when it sells stones, so the fund’s backers not only have the opportunity to invest in gems but also keep them. Makhzani identifies two reasons why investors are attracted to Codiam. One is Codiam’s expertise, which allows ‘professionals to do the job, because most people have absolutely no idea about the diamond world.’ The other is that gemstones are ‘a little sexier than anything else out there today… It is one thing buying an emerging-market stock and it is another investing in coloured diamonds.’ After all, who would want a ROFR on Gazprom stock?

Codiam’s founders have a combined 50 years of experience in the jewellery and diamond world. Makhzani’s career has included roles as managing director of Bulgari South Africa, and group managing director of Enigma South Africa. Baldwin has worked as a precious-stone buyer for Baldwin Pither & Rabey, general sales manager of Tiffany & Co and managing director of Bulgari UK. This experience, Makhzani emphasises, is important, especially given that ‘the jewellery business is not really an investment. It is [an investment] because it is gold and stones, but you cannot rely on making money unless you have a professional [advising you] and these are the people that trade on a day-to-day basis and follow the market.’

This is especially true of coloured diamonds, whose rarity makes them as precious as ‘a Picasso’. But a coloured diamond’s value may be very volatile — it might sell for $1 million at one auction and much less, or much more, at another. ‘I can say that this is a wonderful piece and worth a million,’ Mahzani adds, ‘but they don’t really know whether it is worth a million or two hundred thousand.’

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Alan Bronstein is adamant that in order for a diamond investment to be profitable, it requires ‘real super expertise’ as it is ‘a very niche kind of market’. He stresses every word as he says, ‘All leading fancy coloured diamonds are not appreciating at the same rate and are not necessarily a good investment. Just because a diamond is a million dollars or more, it does not mean that it is a desirable or liquid diamond.’

Codiam, according to Makhzani, wanted to remove mistrust in the diamond business, making it more transparent. The company will tell investors what it buys and how much it pays — a significant change for an industry where, until now, historic prices on landmark transactions were a closely guarded secret. ‘We created some enemies in the market for ourselves,’ says Makzhani with a laugh.

Their timing is impeccable. The mining industry produces about 80 million carats of rough diamonds per year, of which only 0.001 per cent are considered fancy coloured.Codiam’s target market is even more limited than that. ‘We are only dealing with intense or vivid coloured stones and very specific colours as well,’ Baldwin says. ‘So, we are really narrowing the criteria for top, top stones, which reach top prices and where demand is greatest.’

The duo expects the industry will only be able to supply stones to cover 20 per cent of the demand. ‘The difficult part,’ Makhzani says, ‘is not necessarily selling them, but finding the stones.’ Red and intensely green diamonds are particularly difficult to find, since fewer than ten of these are found each year. Even the mining of pink diamonds, which are much more common than the red, purple or green varieties, is declining rapidly. The Rio Tinto-owned Argyle Mine, which is responsible for 90 per cent of the world’s supply of pink diamonds, is predicted to run out by 2018.

As inventory levels drop, demand is expected to rise by up to 50 per cent, fuelled by the emergence of the new super-rich and the stones’ increasing appeal. ‘Today, if you walk up and down Bond Street,’ Makhzani assures me, ‘and you ask for a round, 5.5 carat in vivid yellow, which is the most common coloured diamond, no one will have it.’

‘You are dealing with something that you have a tough time to find, and everyone is looking for it’. He laughs mischievously. ‘If you have it, you are the only one who has got it, so you can ask whatever you want for it.’

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