The EPFR Global is a financial intelligence institution based in the USA that tracks inflows and outflows of money into global funds, and they made an interesting observation. They claim that from February through September 2016, almost $100 billion were taken out of European equity funds, and the majority went into US funds. The reasons cited included various European instability realities, such as the struggling Italian financial sector, concerns about Deutsche Bank, and the UK Brexit vote.
When investor’s expectations are not managed properly, any deviation can result in hasty decision making with a simple press of “ENTER”. Money shifts around the world 24/7 and buying and selling has never been easier. This ease and the desire for change due to an emotional roller coaster together often prevents investors from making sound financial decisions. It is investors’ frustration that makes them change their financial position. (May I suggest diversifying into fancy color diamonds? Keep this in mind until I explain below!)
The ease with which our technology can have us make big financial decisions even on a whim
Is It Really All About the Yield?
When discussing with investors their top priority of investing their hard-earned money, almost everyone would say that the yield is their top priority. They want to make a good return on their investment, but after further discussions and analysis, the reality is revealed that they are concerned about the stability of where their money is invested. Let’s say an American, or an Asian investor acquires a building or a hotel in Europe. If some unexpected change occurs like “BREXIT” and the value of the property drops, the reality is that the investor can’t really go, pick up his hotel with a crane in London, and plop it into Paris or Berlin, right? (Hint: this does not occur with fancy color diamonds).
Does anyone know how many equity funds exist in Europe? North America? Asia? Including in the total other funds as well, I would say that there are quite a few. How many different strategies exist in how the funds invest? Does each fund have a limit to how much money can be invested in it? We already know that a fund can have trillions of dollars in it, just ask Bill Gross how much his previous bond fund had in it…(I repeat – diversify into fancy color diamonds. Go on, keep it in mind!)
Bill Gross Image credit: CNBC
Then we had a surge in Alternative Funds, basically anything not traditional, such as equity and bond funds. With time, it further developed into “exotic” financial products. Now we are at a stage where we call them Passion Investments and they have been gaining traction over the last few years. It first started with works of art, and now, it is moving into cars, spirits, precious gems and fancy color diamonds as well as other types of real assets.
Not all redemptions from Europe are invested back into funds. There is a small but growing trend for wealthy individuals taking money out of the financial markets and investing directly in real assets as mentioned just above. There is a surge in real asset auctions, and who is buying? Obviously, it is those investors that are pulling their money out of funds.
What Should Asset Managers Do?
In short, asset managers of funds, both equity and bond, should take a portion of their fund (a portion small enough that they do not need to amend their legal documents) and start to invest in real assets. Seek the help of an expert in both financial practice and the asset (after doing some homework about the experts and ensuring no conflict of interest), and use them to acquire unique real assets.
I cannot really speak about certain assets that I listed above such as cars, works of art or spirits as i am not versed and knowledgeable enough about them and I do not want to give the wrong impression. However, fancy color diamonds are my specialty.
My research going back some 20 years into auction results (which is the only verifiable source of information currently available to investors) shows that the performance of fancy color diamonds has surpassed those of other financial products. When we start analyzing the nuances of the fancy color diamond world, you can see how some colors have performed better than others, and what carat weight performs best. Nevertheless, even in diamonds we diversify. This takes care of the yield concern. Even though there are some $14-$18 billion worth of polished diamonds that are available on the market on a yearly basis, only a fraction of them are currently considered “investment grade”. Can that change in the future? Absolutely! Why? Because as the demand increases, not only from a retail jewelry perspective, but also from an investment perspective, there will be less available on the market. Diamonds are finite in their availability which is key in the supply/demand/price model.
Some will say that fancy color diamonds are not liquid enough when we want to sell. This is true and is a great characteristic, although there will eventually be new methods to create even more liquidity. Not being able to sell them on pressing “ENTER”, helps in removing any emotional selling danger. How many times have we seen some company’s shares dive 20, 30, 40% and even more in a single session – at which point we had to invent a kill switch, and stop trading in that stock for a specific amount of time. What is the purpose of a kill switch? Obviously, it is to allow settling of the overwhelming volume of trading, but it also allows investors to calm down, and change their emotional status. In the diamond industry, although there are also cycles and we experience ups and downs, you still will never hear of a double-digit value drop in a single day anywhere in the world. So, illiquidity is a good thing!
Imagine an asset manager managing funds with only $50 million or $100 million per fund, or even as low as $25 million per fund. The asset manager has discretionary ability to use a small portion of the fund as he sees fit. As a certified financial planner by education, I always tell investors to diversify into various investment.
Dear Asset Managers:
In order to keep as much assets under administration as possible, take 1-3% of assets and buy investment grade diamonds to diversify. I will not go into details here of what, when and how to buy, but do it. Find the right person who will help you do it, someone who will not have a conflict of interest (all major diamond dealers have a conflict of interest! Their interest is maximizing profits for their business, not your responsibility as a manager towards your investors). An independent advisor, who you feel will have your and your investors’ best interests in mind should be used. The dynamic and chemistry between you and the advisor is extremely important. Find an advisor who knows and deeply understands the diamond industry, that has worked in the industry and who knows the who’s who in the diamond world. They will find the best value for your money and align their financial benefit as close as possible to that of your clients’.
During the upcoming summer months, where the diamond industry is in a relaxed mood, and not busy is the right time to get involved. Claim your stake in the diamond industry as quickly as possible because you never know what tomorrow will bring. Got any questions? Ask us in the comments or send us an email at email@example.com.