Shipping as an Alternative Investment 8 comments
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As the Economist pointed out a couple of weeks ago, the shipping industry has seen better days:
Since the recession bit hard last autumn a lot of attention has been paid to the plunge in the Baltic Dry Index, a composite measure of the cost of shipping bulk cargoes such as iron ore and coal. It fell by over 90% between June and October last year, although it has since recovered slightly and is hovering at just above a quarter of its peak.
But although an investment in the shipping industry clearly comes with a boat-load of global growth beta, are there any aspects of this sector that might qualify as an “alternative” investment?
Turns out there may be. A new article in the Journal of Alternative Investments (available free for a limited time here at the Chartered Alternative Investment Analyst Association’s Website) reveals that shipping actually has some quintessential alternative investment properties.
In “Diversification Properties of Investments in Shipping”, Michael Grelck, Stefan Prigge, Lars Tegtmeier and Mihail Topalov take a more nuanced approach to examining this sector – focusing on shipping companies, not the shipping sector in general. What they find may be somewhat counter intuitive to most. Shipping stocks do not have a huge equity beta component. And as a result, they possess the diversification properties craved by alternative investors.
Report the authors:
Explanatory power of the general stock market for shipping stocks returns is quite weak. Therefore, high volatility of shipping stocks—which we find in our empirical analysis—should not refrain investors from holding shipping stocks because a large part of their risk is unsystematic and can thus be diversified.
But the extent of these diversification properties depends on the index used. Grelck et al examine a few possibilities. One, the Clark Sea Index, is an index of revenues, not profits or actual stock prices (sort of like a fundamental index of shipping companies). Alternatively, the MSCI World Marine Index is an index of stock prices, but it includes only 10 stocks.
The correlation between the ClarkSea index and the MSCI World is actually pretty low (0.07). But as you might guess by the common moniker, the MSCI Marine Index has a markedly higher correlation with its cousin, the MSCI World (0.56). The chart below from the paper shows the higher efficient frontier of the ClarkSea Index.
Unfortunately, you can’t invest in the ClarkSea Index. So the MSCI Marine is your only option. If you started with 75% allocated to the Lehman Bond Index and 25% to the MSCI World, then shifted from the MSCI World to the MSCI Marine Index, your Sharpe Ratio would move from 0.12 (’99-’07) to 0.16. Good, but not great.
So the authors christened their own index based on flotsam and jetsam collected from a variety of esoteric shipping databases and information sources. Their “Research Index” contains 41 stocks, has a monthly return that is 2.5x higher than the MSCI Marine. This is partly why, when the Research Index is used as a replacement for the MSCI World in the case above, the Sharpe Ratio moves from 0.12 all the way to 0.39.
Much of this is due to the higher returns of the 41 stocks in the Research Index (vs. the 10 stock MSCI Marine). But with a respectably-low 0.12 Lehman Bond correlation, the Research Index brings some serious diversification.
Upon further examination, the authors find that their new shipping index has a much higher correlation with Bonds during bull markets than it does in bear markets – an asymmetry that is often cited as a hallmark of a good alternative investment.
Ergo, concludes the quartet:
It seems that it is worth the effort to assemble a portfolio of shipping stocks from more than ten different issuing corporations and to avoid attributing dominant weights to the largest constituents. The result underlines the findings from the main section that investments in shipping stocks promise to offer substantial diversification benefits and gives some guidance as to the construction of the shipping position.
So it looks like you can add shipping to hurricanes (see this post “Hurricanes as alternative investments“) in your high-seas alternative investment portfolio.
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On the other hand if you can invest in pirates - that is a boomin international business.
That aside, shipping stocks may be a great place to be 5 years from now but are probably dead money for at least another year until the global economy improves enough for countries to use up their large stockpiles of raw materials and need more imported goods in order to grow.
pps down under 9.00. agree with bob that it will continue to be a dead stock until end of year.
www.torm.com/wps/wcm/c.../
but long term, oil shipments will continue to increase to India and China for many years to come.