Diversification Properties of Investments in Shipping

In contrast to the more established alternative asset classes like real estate or hedge funds, there is not much research available for investments in shipping. This article contributes to closing this gap in the literature and investigates the diversification properties of investments in shipping. During our sample period from January 1999 to December 2007, an investment in shipping stocks earned an attractive risk-return combination. From an overall perspective, we find almost no indications within our analytical framework that the addition of an investment in shipping stocks to a base portfolio of stocks and bonds worsened diversification. In most cases, the Sharpe ratios increased considerably but were, with some noticeable exceptions, statistically insignificant. Some details should be noticed: Firstly, the composition of the shipping stocks portfolio mattered much. Compared with the MSCI World Marine Index, which is a capitalization-weighted aggregate of 10 stocks, the diversification benefit of the broader and equally-weighted shipping stocks portfolio of our Research Index with 41 stocks was much more pronounced and partially even statistically significant which is a rare event for the test developed by Gibbons et al. [1989]. Secondly, diversification properties were not stable through the course of time with larger diversification benefits during the bear market from March 2000 to March 2003 compared to the bull market from April 2003 to October 2007. However, the latter are statistically more reliable. Our positive overall view of the diversification properties of shipping stocks is based on a single full stock market cycle. The generalizability of our results is an open question and requires further research.