Gold Rout Prompts Shift to Diamond Miners

Leon Neal | AFP | Getty Images

An employee holds the 100-Carat perfect diamond at Sotheby's auction house.

Resource funds have had a tough run so far this year as panic selling hit the gold market in April and mining stocks tanked, but diamond miners have managed to emerge relatively unscathed, with many stocks surging this year, prompting investors to increase their exposure to the sector.

Neil Gregson, manager of JPMorgan's Natural Resource Fund said diamond mining stocks had managed to escape the "whipsaw" of gold equities and some exciting things were happening in the sector.

(Read More: Would You Buy a 'Man-Made' Diamond?)

"It is very hard to talk about benchmark price of diamonds, but on average rough stones prices fell by about 15 percent last year. So far this year– certainly a few months ago when we added they were trending up 5 percent or so," said Gregson.

"We have had less exposure to gold then we have had for eight or nine years. We reduced our gold equity holdings at the beginning of the year – before the sell-off in April, and were looking for areas to deploy that money and one of those areas was diamonds."

Gregson has added to his position in South African firm Lucara Diamond Corp. and Canadian miners Mountain Province and Dominion.

(Read More: Why Are Indians Suddenly Buying Diamonds?)

Lucara's Toronto-listed stock is up 27 percent so far this year, while Mountain Province's shares are up 33 percent and Dominion is up 8 percent. Compare that to the major gold miners: Barrick gold's shares are down 36 percent and Newmont Mining's shares are down 25 percent.

Gregson said demand and prices for diamonds had held up well because of a recovery in the U.S. and long-term demand in China for engagement rings.

Investor interest for diamonds has grown so much that the first exchange-traded fund (ETF) backed by diamonds is due to roll out sometime next year, once it has received the stamp of approval from the U.S. Securities & Exchange Commission.

GemShares, a Chicago-based financial firm behind the proposed diamond ETF patented a global standard for investment-grade diamonds last year so they could be used as financial instruments and filed to register its physical diamond trust in April.

(Read More: Diamonds Trump Gold as Investor's Best Friend: Pro )

"The shares are designed for investors who seek a cost effective transparent and convenient way of making an investment similar to an outright investment in physical diamonds," GemShares said in the filing.

"For many investors, transaction costs related to the shares will be lower than those associated with the purchase, storage and insurance of physical diamonds," it added.

'Rats and Mice'?

One problem for fund managers looking to up their exposure to the sector is that diamond miners are still small compared to other mining stocks.

JPMorgan's Gregson said diamond stocks make up just a 4 percent position in his funds after he slashed gold equity holdings.

(Read More: A 'Tug of War' That Puts a Floor Under Gold)

Evy Hambro, chief investment officer of the natural resources team at BlackRock, said the sector was just too small to make up a meaningful part of his fund.

"There is a large miner called Dominion in Canada, but the rest are just rats and mice really," Hambro told CNBC.

Hambro instead advised investors to add to their gold holdings after the sell-off.

"I manage my gold exposure in my fund on the basis of how is it doing relative to the rest of the assets that I have. So during the last few years, we have seen gold rising and everything else falling, so you take some profits in gold. Now you have seen the opposite happening, so you probably take a few profits in everything else that has gone up and add to your gold holdings," he said.

—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave