28 Jul

The money has to go somewhere!

While the COVID-19 situation in Victoria, South Australia and Queensland appears to be improving, things are going from bad to worse in New South Wales, with lockdowns quite possibly set to be extend into September.

The social, economic and financial market impact of these lockdowns, which is already profound, will only grow more severe the longer it lasts, with more debt and more money printing absolute certainties at this point.

Financial market volatility is also set to increase, which is encouraging astute investors to look at the best ways to protect and grow wealth.

This week’s report reinforces why pink diamonds are a sensible investment opportunity, especially in the current investment climate, looking at some of the tailwinds that will support hard assets in the years to come, and the latest trends which highlight how strong the pink diamond market is today.

Investors to shift asset allocations in the years ahead

Earlier this month we came across an interesting report looking at the way institutional investors allocate client money, and how that is likely to change going forward.

These institutional investors would include the Australian superannuation funds managing your retirement money (unless you have a SMSF, which a lot of clients of ours either do, or are looking at getting).

The chart below comes from that report and shows the percentage of each portfolio that is invested in a range of asset classes today, from equities to commodities to cash, and what the percentages are expected to be three years from now.

In our view, the chart highlights an interesting trend that will support the case for hard assets, including pink diamonds, in the years to come.


Allocations Inching Towards Alternatives and “Other” Categories

Comparison of current category allocations and allocations in three years time

Note: *Based on 442 respondents. **Based on 382 respondents. ***Other is approximately 40-50% real assets, which include real estate and infrastructure.
Source: Coalition Greenwich 2021 Institutional Gold Allocation Assessment.

The data makes it clear that over the next three years, these funds plan to reduce their cash and fixed income exposure, most of which is now earning negative real yields, from 37% to 34% of total investments.

That money, which has to go somewhere, will be utilised to increase their exposure to alternative and other assets (which includes real assets) from 29% to 32% of total investments.

Whilst these movements in percentage terms might not sound like a lot, it’s important to remember when looking at charts and information like this that the investors being surveyed are behemoths.

They are typically investing at a minimum $1 billion, often up to $10 billion, and in some cases up to or even more than $100bn. They are the equivalent of a Titanic in the ocean and can’t change course easily.

They also have to answer to regulators who influence what they can or can’t invest in, or at least the degree to which they can invest in certain asset classes.

Despite those challenges, these institutional investors are making it very clear that they want to increase their exposure to real assets, and where possible, hold fewer financial assets.

You don’t do that unless you are expecting the next few years to be very challenging for investors holding traditional portfolios.

This aligns perfectly with the message we communicate to clients at Australian Diamond Portfolio, highlighting the risk that exists in paper assets like cash, and why you may wish to reduce your exposure to it, as well as the opportunity that exists going forward in assets like pink diamonds.

Our clients also have the added advantage that they are able to be far more flexible in terms of their asset allocation relative to institutional investors.

This leaves our clients perfectly positioned to benefit from the tailwind institutional investors will provide as they move a portion of their assets out of cash and fixed income and into real assets.

Records set in Australian diamond market

As we’ve stated many times in the last few months, the market for pink diamonds, both here and around the world, has been heating up in the last year, with the closure of the Argyle Diamond Mine seeing pinks rise by upwards of 20% on average.

Further local evidence of this was seen recently with the sale of the 2 carat Fitzpatrick Diamond, which sold for more than $2.2 million earlier this month.

Sourced from the Argyle Diamond Mine, the Fitzpatrick Diamond fetched more than double the record for any high-quality gem or piece of jewellery auctioned within Australia.

We don’t expect this trend to stop anytime soon, with the investment case for pink diamonds as strong as ever.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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