Updated: Apr 3, 2020
"There have been days that the trading volume of BDRY surpassed that of most dry bulk equities with much longer trading history and greater market capitalization." - John Kartsonas
Since the beginning of this year, the notoriously volatile shipping industry has already faced a series of challenging circumstances that saw implementation of IMO2020 with new fueling practices for ships, the coronavirus (COVID-19) epidemic that coincided with the all-commodity important celebrations of the Chinese New Year, lifting of sanctions on tankers having traded with Iran as abruptly as expediently were put in place last year, that led to the halving of tanker freight rates. Although based mostly on technicalities, it is indicative that the Baltic Capesize Index (BCI), and a weighty component of the Baltic Dry Index (BDI), has turned negative for the first time of the history of the Baltic Exchange producing freight indices.
In these tumultuous times, we have the pleasure hosting an interview with Mr John Kartsonas, Founder and CEO of Breakwave Advisors; John has extensive experience with shipping and capital markets; Breakwave Advisors is behind the establishment of and acts as Commodity Technical Advisor (CTA) to the Exchange Traded Fund (ETF) BDRY (ticker: $BDRY), intended to replicate the dry bulk shipping freight market through investments in shipping equities and freight forward contracts. Ever since the shipping IPO stampede from the last decade, it has become clear that shipping equities – for many reasons – have not been able to offer the investors a reliable way to take positions to reflect the performance of the BDI and the broad dry bulk freight market, both long and short.
ETFs are dozen a dime, and typically perform well in bull markets; however, in bear markets and when the underlying commodities start getting priced at extremes, most of such funds fail to perform as per their mandate. Since its inception in March 2018, the share price of the BDRY has reflected the BDY reasonably well; however, the extreme moves of the BDI (and the BCI) indices in 2020, have acted as a “stress test” for BDI that has seen its performance to reflect the BDI, and at heightened volumes – a clear sign that confidence of the investors in BDRY and the shipping industry, remains strong.
An edited version of our discussion with John has as follows:
Q: What is your view on the present state of the shipping market, broadly? Containerships seem to be doing barely adequately, tankers were having a great time till recently, and the dry bulk market seems to be in a multi-month trough again. Are these sub-markets affected by same catalysts at present?
John Kartsonas (JK): The shipping markets are clearly in distress. China is by far the most important country in terms of demand, and the coronavirus (COVID-19) epidemic has brought the Chinese economy to a virtual halt. Import and export activity has declined, logistical supply chains are in disarray and major ports are operating at very low rates. There is no doubt that this is a major concern for shipping and the outlook highly depends on the recovery timing, if any, of the epidemic.
Q: Specifically for the dry bulk market, which is the market of choice for BDRY, there have been headline news with negative freight index readings. Is the market fundamentally bad, or there is a confluence of factors for the stated index turning negative? And, based on market reports, scrubber-fitted capesize vessels getting chartered at materially higher rates than the indices would imply.
JK: Dry bulk rates for the larger vessels are very close to zero. The various indices that exist today aiming at providing a broader picture for the dry bulk market were designed for periods that the market is operating under normal conditions. The extreme levels of today will have an effect on the calculations and could potentially come up with outputs that look extreme. Overall, the market is below operating expense levels but not negative. Ships that are equipped with scrubbers have the ability to burn cheaper fuel, thus they are earning a bit more. But even those ships are very close to breakeven levels and only the comparison to non scrubber ships make them look favorable.
Q: Any silver linings from the current slump? Possible scenarios for a swift recovery or increased volatility as shipper may rush to replenish stocks and keep the supply chain intact? For instance, it’s too early to have an assessment on coronavirus, but its timing around the Chinese New Year celebrations, it seems to already have been affected production and keeping the supply chain intact.
JK: There is a very significant silver lining in the current situation: the Chinese government has already indicated that they are willing to support the economy and take any necessary measures to do so. We believe a meaningful stimulus is on the way, although the timing is uncertain. Following the financial crisis, China’s economic stimulus totaled about USD600 billion and had a significant positive impact on shipping. The Chinese economy has more than doubled since then and we would expect a larger stimulus this time around. Combine that with healthy export capacity for commodities around the world and a very low orderbook and the ingredients for a strong second half are in place.
Q: Please tell us about BDRY ETF and its intended purpose in the market place? What is the investment need that aids to fulfill? Harvest the proverbial high volatility in shipping when rates can increase or decrease multifold in a matter of days? Hedging?
JK: BDRY is the only shipping Exchange Traded Fund (ETF) in the world. The purpose of BDRY is to provide a simple, easy to use product to gain exposure to dry bulk shipping. BDRY is as pure an exposure to dry bulk as one can get. BDRY invests in freight futures that closely follow freight rates. As a result, an investor gains shipping exposure directly to dry bulk freight rates. Freight rates are by far the most important aspect when it comes to shipping, and that is the reason why BDRY is the most efficient and direct way to gain shipping exposure.
Q: And, why someone just don't buy shipping stocks, to go long or short the market? Why BDRY? Also, are there any savings in terms of expense ratio vs trading shipping stocks?
JK: Although shipping stocks also provide sector exposure, equities come with a lot of non-shipping risks including company specific risks, broader market correlation , dilution, questionable management tactics as examples. In terms of expenses, BDRY has an annual expense ratio similar to all other ETFs. Although it is impossible to compare that to a shipping stock, we believe the implied cost of holding a shipping dry bulk stock is more than double that of BDRYs expense ratio, although I would like to stress out that these are not directly comparable figures. But it is the direct relationship that BDRY has to freight rates which makes it a better investable product compared to shipping equities.
Q: How the ETF is structured and can reflect the underlying dry bulk market? Is it supposed to mirror any specific index or sector? And, is it planned to have 100% correlation with such index/market?
JK: BDRY is structured as a fund that buys and holds freight futures. The composition of the fund in terms of asset class is ~50% Capesize, ~40% Panamax and ~10% Supramax. In terms of duration, the average tenure of the futures the fund holds is 3 months. The ETF was structured that way to closely follow the well-known Baltic Dry Index and to also have relatively strong correlation to the spot market. However, BDRY invests in futures. Spot indices like the BDI are un-investable and are designed to provide an indication of the spot market. Although BDRY is positively correlated to BDI the historical correlation is less than 100%.
Q: Like other commodity-driven ETFs, is there a possibility for the “intrinsic” value of BDRY to collapse, if underlying shipping equities or FFAs collapse? Or there is no sufficient underlying liquidity for “fair” pricing?
JK: The intrinsic value of BDRY reflects the value of the underlying futures the fund holds. Any change on the price of such assets directly affects the intrinsic or net asset value of BDRY.
Q: Most commodity-driven ETFs seem to work just fine in a bull market, and while the commodity is trading around historical numbers. Most ETFs seem to not behave as planned in bear markets and when the underlying commodity pricing tends to extreme. BDRY has been around for almost two years, and it performed as expected in an up market. How do you assess the performance in the last couple of months, in an extremely bearish market and with the BCI turning negative for the first time ever? Recent performance is vindication that the ETF behaves as intended?
JK: In the two years that BDRY has been around it has traded and behaved exactly as planned. Whether a bull or bear market, BDRY provides investors with exposure to dry bulk though the use of freight futures. Shipping is a cyclical industry and BDRY will follow the cycles of the market.
Q: Increasing trading volumes in a bear market are considered signs of “bearishness”. The volumes for BDRY have improved in the last month. Could you please put this into perspective (volumes when the ETF started)? Also, how these volumes compare to volumes of dry bulk shipping companies with highest capitalization / flow? Any clue for the reason behind higher volumes? And, who are the new investors / traders? Going long / short the market? Retail or institutional? And, another vindication that BDRY behaves as planned, and increased awareness in the investment community?
JK: The recent decline in freight rates have led to a significant decline in BDRY but a major increase in trading volumes. In fact, there have been days that the trading volume of BDRY surpassed that of most dry bulk equities with much longer trading history and greater market capitalization. There is no way to know who the investors are but it is evident by the volumes that interest has increased. Shipping is cyclical and current freight rate levels are once again at trough levels. Investors see the current price level as an attractive risk/reward. Last year’s impressive performance of BDRY, with more than 100% return from trough to peak, is potentially looked at in hindsight as a good opportunity back then.
Q: Possibly a tanker ETF soon given the volatility in the tanker market as well? Or any future plans you may wish to share with the audience?
JK: We are working on several projects that aim at opening those opaque and difficult to access markets to all investors. Shipping is an under-invested sector as the instruments to do so are inefficient and not investor friendly, in my view. We aim at slowly changing that and opening this exciting industry to everyone.
- Thank you very much, John, for the insights! Wishing you and $BDRY every success, as the maritime industry can always benefit from high caliber professionals like yourself, and innovative financial products that truly deliver to the investors the core attributes of the maritime transport industry, including its notorious volatility.
John Kartsonas is the Founder and Managing Partner Breakwave Advisors LLC, an asset management and advisory services firm to the shipping and commodities industries. Breakwave Advisors LLC is the Commodity Trading Advisor (CTA) for the Breakwave Dry Bulk Shipping ETF (NYSE: BDRY).
John was a Senior Portfolio Manager at Carlyle Commodity Management, a commodity-focused investment firm based in New York and part of the Carlyle Group. Prior to his role, John was a Co-Founder and Portfolio Manager of the Sea Advisors Fund, an investment fund focused in shipping. From 2004 to 2009, John was the leading Transportation Analyst at Citi Investment Research covering the broader transportation space including shipping. Prior to that, John was an Equity Analyst focusing on shipping and energy for Standard & Poor’s Investment Research.