Ian Cowie: the niche trust with a high and rising income

The Royal Navy will intercept Russia’s “shadow fleet” to prevent oil exports funding the invasion of Ukraine, Prime Minister Keir Starmer has told a Joint Expeditionary Force summit in Helsinki, Finland.

British armed forces and the French navy seized a Russian tanker in the Strait of Gibraltar last Friday.

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Meanwhile, more than 20,000 seafarers and 2,000 ships from many nations are trapped in the Arabian Gulf and the Gulf of Oman by the Iran war. This has blocked a fifth of the global supplies of fertiliser, liquefied natural gas (LNG) and oil that used to transit the Strait of Hormuz before fighting began.

In addition to the human costs of conflict, fears are rising that more than 1,000 aged vessels in the Russian shadow fleet, often shipping with their transponders turned off, represent a hazard to navigation and the environment.

But it’s an ill wind that blows no good and demand is increasing for legitimate vessels, with fuel-efficient and lower-pollution propulsion systems, pushing up freight rates.

Few investors can participate directly in the marine transport sector, which carries 90% of all international trade by volume, but investment trusts make it convenient and cost-effective to do so.

Step forward Tufton Assets Ord (LSE:SHIP) (stock market ticker: SHPP for sterling shares and SHIP for dollar-denominated stock), a second-hand marine leasing specialist that has delivered a high and rising income, earning its place as the most valuable asset in my ISA.

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Expressing dividends as a percentage of the share price, the trust’s shares currently yield 8.5% after increasing distributions by an annual average of 7.4% over the last five years. It is important to be aware that dividends are not guaranteed and can be cut or cancelled without notice.

However, it is also worth considering that if this rate of ascent could be sustained, it would double shareholders’ income in less than a decade.

That’s why this old boy, with one eye on retirement, is happy to hold it for tax-free income, despite tepid capital performance; shares I bought for 86p in August, 2021, traded at 91p this week.

So, this investment trust, with total assets of £371 million, has behaved more like an unsecured bond than conventional equities but continues to offer scope for growth; not least because its shares are priced 15% below their net asset value (NAV).

More positively, the fund managers - Andrew Hampson and Nicolas Tirogalas - are navigating troubled waters skillfully.

The fund disposed of the last of its container ships recently, where oversupply fears had depressed bigger rivals such as A P Moller Maersk AS Class B (XETRA:DP4B) before recent conflicts, and focused on bulkers - for dry goods, such as iron ore, fertiliser and timber - and tankers - for liquid commodities, such as oil, chemicals and LNG.

They have also moved down the size spectrum to gain access to smaller ports, especially in the Pacific.

This strategy recently included the $33 million (£25 million) purchase of two “handysize” bulkers - that is, ships of between 10,000 and 44,999 deadweight tonnes (DWT), with a shallow draft and onboard cranes.

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Hampson said: “Handysize vessels can navigate a diverse range of routes and cargoes, by being able to access smaller ports with limited infrastructure in fast-growing, smaller markets where port infrastructure is still developing.

“Their wide range of cargoes includes minor bulk commodities such as forest products, cement, sugar, and mineral ores, as well as major bulks like grain, coal, and ore.”

Tirogalas added: “Although these ships operate using conventional ultra-low sulphur fuel, their exceptional fuel efficiency sets them apart.

“Considering that fuel costs often account for more than half the overall costs for an operator, fuel-efficient vessels like these are in high demand.”

Geopolitical conflict is likely to sustain those trends, according to Hampson: “The clampdown on the Russian shadow fleet is already having a very positive effect on the broader tanker market.

“First, demand for compliant vessels like ours rises. Second, the recently expanded America–India trade framework, which restricts the flow of Russian barrels into India, opens a new pathway for Atlantic-to-India movements.

“This shift paves the way for Venezuelan crude to embark on longer journeys to India, essentially requiring more vessels for the same volumes of cargoes due to the increased distance.”

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Annual charges are 1.05%, which does not seem unreasonable for access to such a specialist sector, and it is encouraging to see that the fund management team owns shares in this trust worth £10.6 million.

Dividends are paid quarterly, with the shares due to trade ex-dividend - or without rights to the next income distribution - from 23 April.

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

Ian Cowie is a shareholder in AP Moller-Maersk (MAERSKB) and Tufton Assets (SHPP) as part of a globally diversified portfolio of investment trusts and other shares.