Ian Cowie: this niche investment trust keeps paying its way

Perhaps surprisingly, even very good news - like this week’s Gaza peace deal, when fighting ceased and hostages were freed - can be bad for some businesses. Everyone knows the old adage that it’s an ill wind that blows no good but fewer investors consider how benevolent events can have negative consequences.

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For example, hopes that a permanent end to hostilities in the Middle East might fully reopen the Suez Canal to international trade have caused shipping freight rates to sink. To be specific, the Drewry World Container Index has lost more than half its value during the past year, with the going rate for 40-foot containers falling from $3,489 to $1,651 this month.

That’s not as bad as the 66% reduction in shipping traffic using this short cut between Asia and Europe, according to Office for National Statistics (ONS) estimates. This matters to many businesses because about 15% of all commercial marine vessels and 30% of container ships used Suez before Houthi rebels and others began attacking them.

Of course, the global trade war between America and China has also hit demand, while tit-for-tat tariffs on exports between Britain and the European Union have made a bad situation worse. Leaving the world’s largest free trade zone shortly before taxes soared on international imports looks riskier by the day.

On a brighter note, specialist investment trusts can help shareholders navigate uncharted waters of stock market returns in future.

As well as gaining exposure to a sector that few individuals could access directly, these closed-end funds can help us share the cost of dedicated professional asset management.

That includes diversifying over different types of shipping, which still carries more than 80% of global trade by volume, according to the United Nations Conference on Trade and Development (UNCTAD).

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Coming down from the clouds of macroeconomics, one specific company in my portfolio shows how these potential risks and rewards can work in practice. Let me pipe aboard Tufton Assets Ord (LSE:SHIP) (stock market ticker: SHPP for sterling shares and SHIP for dollar-denominated stock) where I paid 86p in August, 2021, for shares that cost only 85p on Thursday.

Put another way, SHPP shrank shareholders’ capital with a loss of 8.2% over the past year, following a total return or gain of 88% over five years, with no decade-long record after being launched in December 2017. At first blush that looks to be pretty poor performance but I intend to hang on to celebrate SHPP’s 10th birthday for several reasons.

First, quarterly dividends paid by this $352 million (£265 million) fund currently equal an eye-stretching 8.3% of the share price in total, according to Morningstar. Better still, payouts to shareholders have risen by an annual average of 7.4% over the past five years. Income-seekers should note that these shares go ex-dividend on Thursday 23 October.

It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. However, if the current rate of ascent could be sustained, SHPP would double investors’ income in less than a decade.

Second, the -18% discount or difference by which the share price trades below SHPP’s net asset value (NAV) looks excessive. To be specific, consider the rising income described above and the extent to which this fund has diminished capital losses despite sinking freight rates and stormy weather on global stock markets.

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Third, there is growing anxiety about when the boom in technology shares might end with an almighty bust. This worries me because the iPhone-maker Apple Inc (NASDAQ:AAPL) is the most valuable holding among 50 others in my forever fund, and the software giant Microsoft Corp (NASDAQ:MSFT) ranks 10th.

But fretting about an unknowable future won’t achieve much, while investing in old technology dividend-yielding businesses should diminish risk by diversification. Ongoing yearly charges of 1.05% don’t seem excessive for exposure to this specialist sector. All things considered, SHPP seems set fair to remain my biggest source of tax-free income, because I hold them in my ISA.

It’s also encouraging to see the fund managers Andrew Hampson and Nicolas Tirogalas, who have been at the helm since 2017 and 2023 respectively, report a NAV total return on Wednesday of 5% during the third quarter (Q3) of this year. That’s pretty impressive, especially when achieved despite the headwinds described above.

Avoiding container ships and focusing, instead, on product tankers - which can transport liquefied natural gas (LNG) or oil - and bulkers - designed to transport unpackaged cargo such as grain, coal, steel coils, or cement - seems to have helped.

Hampson added: “Compared to total gross capital raised since inception of $316.5 million, the company has returned $214 million of capital, including the Q3 dividend payable on 7 November, through dividends, share buybacks and capital redemption.”

So, short-term stormy weather for shipping might present profit opportunities for long-term investors willing to brave the waves. Or, as Shakespeare put it more poetically:

“There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat;
And we must take the current when it serves,
Or lose our ventures.”

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

Ian Cowie is a shareholder in Apple, Microsoft and Tufton Assets as part of a globally diversified portfolio of investment trusts and other shares.