(Jan 19): Diamonds are set to slump further, according to a hedge fund whose bet on marijuana made it the world’s best performer in 2016.
Prices of the precious gem may slump as much as 10% this year as it loses appeal with younger consumers and faces challenges from synthetic alternatives, said Singapore-based Ben Cleary, who co-manages the US$500 million Tribeca Global Natural Resources Fund.
“ Diamonds are marketed on the idea that they will forever represent a pinnacle of luxury and materialist desire,” Cleary wrote in an email. “Our concern is whether a younger generation of millennials will have the same allegiance to the same products as their parents and grandparents.”
Polished diamond was one of the worst-performing commodities in 2017, with the gem’s reputation tarnished by fakes and stones mined in conflict zones. Demand may stagnate for another decade unless the industry spends more to lure consumers, Bain & Co wrote last month in its annual report on the industry.
The Tribeca fund surged 145% in 2016, the most of more than 10,000 funds tracked by data provider Preqin, fueled by bets on North American marijuana producers that benefited from the legalisation of medical and recreational cannabis use. It gained 25% last year, helped by recovering commodity prices and investments in at least 15 fundraising deals that allowed smaller resources companies to bring projects into production, Cleary said.
For this year, the fund is bullish on coal and carbon credits. Chinese production cuts have reduced supplies, boosting metallurgical and thermal coal prices. Free cash flow yields at North American coal producers are still “incredibly attractive,” Cleary said. Carbon credits rallied about 20% in North America last year on the back of state-backed trading programs.
The fund likes chemical producers that tap more environmentally friendly fuel sources. It has invested in a company that uses waste from palm oil production in Indonesia and Malaysia to make cellulosic sugars, he said, while declining to identify the company. New technologies are making biomass cost competitive with petroleum-based chemicals, nudging the industry toward renewable fuels.
Investors have flocked to lithium, cobalt, copper, nickel and graphite makers amid the electric-car boom. Supplies will remain tight for at least three more years, Cleary said. The fund is increasing investments in other metals for battery production, such as rare earths and high-purity manganese, which have worse supply shortfalls, he added.
The fund is broadening investments in medical cannabis producers from Canada to Germany, Italy, the U.S. and Australia. With looming federal opposition to cannabis in the U.S., it’s backing companies in states including Massachusetts, New York and Florida where referendums to allow medical use are unlikely to be reversed by federal moves, Cleary said.
Cleary recently moved to Singapore from Sydney as Asia chief executive officer at Tribeca Investment Partners, which manages A$2.1 billion (US$1.7 billion). Tribeca opened the office in the city-state as its investments become more global, and to be closer to its investor base, he said.