Ian Cowie: a hat-trick of misfortunes, but I’m holding my nerve

Please don’t laugh but a perfect storm of setbacks has hit one of my “Steady Eddie” income-yielding investment trusts. Stock market shocks - including violent conflict and unexpected effects of extreme climate change - have been topped with the fund manager’s sudden departure this week to complete a hat-trick of misfortunes.

From the macro to the micro, overseas and close to home, it all seems to be going wrong for the marine-leasing specialist Tufton Oceanic Assets (LSE:SHIP). Now here’s the funny thing: I recently bought more shares in SHIP and, even though these are already “underwater”, I remain more inclined to buy than sell.

Never mind my relentless optimism, for now, let’s start by getting into the reasons to be fearful. First, Russia’s invasion of Ukraine has hit international exports of hard and soft commodities, more than 90% of which travel by sea. Specifically, the collapse of the Black Sea Grain Treaty, discussed here in August, means both sides are now attacking each other’s shipping.

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Bear in mind that more than a fifth of the world’s internationally traded wheat and a tenth of its oil used to be exported from Ukraine and Russia before the fighting began. China’s slowdown and worries about global recession have further depressed demand for shipping.

No wonder the Drewry World Container Index, the best-known benchmark for global freight rates, has lost 40% of its value during the last year. Against that bleak backdrop, 6% shrinkage - or a negative “total return” - from SHIP does not seem too bad to this small shareholder. The explanation is that, while the share price is sitting substantially lower in the water, the 8.6% dividend yield continues to provide some comfort to income-seeking investors.

Second, believe it or not, a drought in Central America means the Panama Canal is running short of water and this is reducing the number of ships that can use this short cut to avoid Cape Horn. Gatun Lake is the rainfall-fed principal reservoir that floats ships through the canal's lock system where water levels have “continued to decline to unprecedented levels for this time of year”, according to the Panama Canal Authority.

Its spokesperson added: “Precipitation for October has been the lowest on record since 1950 - by a 41% margin - and, so far, 2023 ranks as the second-driest year for the same period.”

Last month, the authority reduced the number of ships allowed through the canal to 31 per day. This month, it cut the total to 25 per day.

Worse still, the authority has said it intends to reduce this over the next three months to 18 daily slots. Amrit Singh, lead shipping analyst at the London Stock Exchange Group (LSEG), said: “A diversion, via the Strait of Magellan or Cape Horn, adds about an extra 9,500 miles or 25 days more to a voyage compared to canal transit.

“Transit slots continue to be auctioned to the highest bidder with typical $300,000 to $400,000 (£242,000 to £322,000) prices ballooning to a record $4 million (£3.2 million). These diversions and additional expenses will inevitably drive up shipping costs.”

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In quieter times, I suspect we would have read more about this. Even so, Andrew Hampson, chief executive of Tufton Investment Management, emphasised the positive amid extreme adversity.

He told me: “The reported loss of life and injuries due to the missile strike on the Port of Odessa are upsetting and our sympathies go out to the families of all involved. However, SHIP vessels are not directly involved in the transport of goods to or from Ukrainian Black Sea ports.

“Delays in transit of the Panama Canal have been ongoing since mid-summer. While this is a headache for vessel operators, on a macro level the congestion and delays tie up vessels which would otherwise be vying for cargoes and therefore reduce the supply of tonnage on the open market.

“As with issues of the Ever Given, which blocked the Suez Canal in 2021, longer canal transit times and additional voyage lengths can only be beneficial to tonnage providers such as SHIP which closely monitor vessel supply dynamics.”

Closer to home, the fund’s chief investment officer, Paulo Almeida, announced on Tuesday that he is leaving SHIP and will be replaced by the highly experienced Nicolas Tirogalas. Far from rocking the boat, corporate platitudes from all concerned succeeded in, er, pouring oil on potentially troubled waters.

SHIP’s share price, perhaps surprisingly, was unchanged by the news. This remains a difficult time in a cyclical industry but SHIP continues to outperform its rival Taylor Maritime Investments (LSE:TMI), where the “total return” is minus 18% this year.

There is also some comfort to be had from the stockbroker Investec’s “skin in the game” analysis, which shows that two out of four SHIP directors own shares worth more than the annual fees they are paid by this trust. By contrast, only one out of seven TMI directors holds shares worth more than the annual fees they receive from that trust.

This means ordinary shareholders at SHIP can at least reflect that half the directors are in the same boat as us. So, all things considered, this small shareholder does not intend to alter course and, instead, aims to steam straight ahead.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Tufton Oceanic Assets (SHIP) as part of a globally diversified portfolio of investment trusts and other shares.