*BI SHIP - Bloomberg Intelligence Marine Shipping Index
- Our model portfolio gained 3.2% from March 2017 to June 2017, clearly outperforming its sector-specific benchmark, Bloomberg’s BI SHIP (down 2.5%), while being lower than MSCI, the global benchmark index (up 4.6%). Download the June report
- This outperformance was a result of our larger allocation to container shipping companies and port operators. However, at average P/B valuations of 2x for liner companies, most of the positive developments are in the price, and hence we believe it is time to book profit in names such as Maersk and OOIL, which have led the rally in the liner space.
- We also trimmed our exposure to port operators in view of the surge in share prices especially ICTSI, which we downgraded to Neutral in May 2017.
- First year’s performance, Model Portfolio returns 38%. Download full report
- In 2Q16, we made a tactical shift to increase allocation to the dry bulk sector as we upgraded it to Neutral, backing our conviction of the bottom in the dry bulk market. We downgraded the tanker segment considering its large orderbook, significant dividend cuts ahead and were also discouraged by stagnant asset prices despite healthy freight rates. Our conviction call for 2016, “Long dry bulk, short tankers” generated the highest alpha.
- In 3Q16, our portfolio construct was geared for higher risk and we increased our allocation to the dry bulk sector to 42% as we expected the upward trend in stock prices to resume after a period of consolidation in 2Q16. The trade played out handsomely as our portfolio generated a return of 40% between October 2016 and February 2017.
- Our portfolio defied a terrible year for the industry to produce a 38% return in our first year out. The model portfolio markedly outperformed the benchmark indices, BISHIPGP Index (Bloomberg Intelligence Marine Shipping Index, 14%) and MSCI World Index(19%) by a big margin.
- For 2017, lowering allocation to dry bulk stocks; increasing weightage on container trade. We have reduced our allocation to the dry bulk segment to 31% from 42%. The value play is over in our view and we believe stocks could be at the risk of “too soon too fast” in the near term. Conversely, we believe that the worst is over for the container shipping and we see higher returns for the sector in 2017-18. We have increased the allocation to the sector from 8% to 27%. The port sector is another major constituent of our model portfolio for 2017 as world trade recovery gathers steam and earnings remain resilient for our portfolio constituents.
- We are Neutral on gas shipping as we believe the stocks are trading in a fair territory, while we maintain our Unattractive stance on tankers.
- Our model portfolio outperformed key benchmark indices from June to October, although it is still down 6% from February 2016. The portfolio generated annualized returns of 15.7% during the four-month period starting from 16 June 2016.
- We continue to stick to our thesis that dry bulk names will be the outperformers in 2017, and have added Star Bulk Carriers because of its high spot exposure and large Capesize fleet.
- We have increased allocation to the Port sector as the global throughput growth is stabilising and hence earnings will remain resilient in our view; we have included China-COSCO Ports and ICTSI.
- We made a tactical shift to increase allocation to the Dry Bulk sector in June 2016 as we believed the bottom had been reached early in the year. Meanwhile, we downgraded the Tanker segment to Neutral on increasing vessel supply.
- We reshuffled our portfolio to play the recovery in the Dry Bulk shipping sector albeit from a very low base, and believed that the beaten-down Dry Bulk names could provide superior risk-adjusted returns.
About our Model Portfolio
In 2016, Drewry Maritime Financial Research (DMFR) launched a model portfolio - selecting stocks within the global maritime space to ensure a balanced approach to managing risk in a low return environment.
Recommended stocks are hand-picked based on the fundamentals of each entity, coupled with near-term triggers. The objective of the model portfolio is to generate optimum returns in conjunction with moderate risk.
It is important to note that shipping is a high-beta sector; it is therefore not uncommon for shipping stocks to under-perform or out-perform the financial markets by a wide alpha.