Ian Cowie: ship happens, but this trust still floats my boat

While there is nothing most investors can do about the Ukraine war or its terrible toll in human lives, we are all affected by its impact on the global economy. For example, hostilities have hit food and fuel exports especially hard since the expiry of the Black Sea Grain Initiative last month and both sides are now attacking the other’s shipping.

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. Combined with China’s economic slowdown, and other worries closer to home, this has made a bad situation worse for businesses engaged in maritime transport.

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No wonder the Drewry World Container Index, the best-known benchmark for global freight rates, has lost three-quarters of its value during the last year. Against that bleak backdrop, an 18% slump in the share price of the self-descriptive investment trust Tufton Oceanic Assets Ord (LSE:SHIP), does not seem too bad to this small shareholder.

It’s been a difficult year for the ship-leasing specialist, but it continues to pay out 8.8% income. By coincidence, I note that its next quarterly dividend, which produces a four-figure annual income, is due to berth in my bank account tomorrow, 11 August.

Despite all the highly publicised headwinds, SHIP remains afloat with a total return of 28% over the last five years, according to Morningstar. Meanwhile, Mr Market has jumped SHIP in a panic and is frantically paddling towards calmer waters, leaving the shares priced 29% below their net asset value (NAV).

However, as mentioned earlier, it could have been worse. For example, SHIP’s nearest rival, Taylor Maritime Investments Ord (LSE:TMI), has suffered an eye-watering 33% loss over the last year, yields just over 8.7% income and trades 47% below NAV. Neither fund has a 10-year track record because TMI was launched in May 2021, and SHIP set sail in December 2017.

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Readers might very well ask why anyone who was not already onboard, like me, should consider steering a course towards the sound of gunfire - or, less dramatically, a sector that is so horribly out of favour. Why invest in shipping shares after they have sunk and might fall further?

First, and most fundamentally, there is the fact that about nine-tenths of international trade by volume is transported by sea. Lorries, planes and even trains are less efficient ways of moving bulky and heavy stuff - such as hard and soft commodities - long distances. It’s difficult to imagine when that might cease to be true.

Second, while it is easy to buy shares after their price has risen, it is always more difficult, but often more profitable, to do so after they have fallen. Of course, that only works if the price subsequently recovers but I think there are specific reasons to hope that might be the case at SHIP.

For example, I asked this $407 million (£320 million) fund’s managers - Andrew Hampson and Paulo Almeida - how they managed to avoid sinking by as much as the global shipping indices during the last year. Here’s what they told me: “Because we deliberately sold all the container ships in SHIP, mostly during 2022, and shifted our portfolio towards product and chemical tankers, we have significantly outperformed.

“The sanctions against Russia due to the Ukraine war have led to high, but somewhat volatile, tanker markets, as cargoes move over longer distances due to the new trading patterns. This has indirectly led to a stronger chemical tanker market where approximately 10% of our NAV is exposed and has greatly benefited.”

Even something as terrible as a war will produce winners, as well as losers. But the past is not necessarily a guide to the future, and it is the latter that matters to investors today.

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So I also asked Almeida and Hampson what reasons there are to hope for better times ahead. Here’s what they said: “The supply-side fundamentals in our market segments continue to be strong.

“Very few new product, chemical tankers or handysize bulkers (that is: medium-sized ships of between 24,000 and 35,000 deadweight tonnage, between 130 and 150 metres length, with a draft of less than 10 metres) are delivering over the next few years, because of high new-build prices and uncertainties about future fuels.

“This results in a strong tanker market today and we expect a strong bulker market once we have relatively small demand increases.”

Cynics might say that sounds like fund managers who are all at sea and whistling to keep their spirits up while they wait for the tide to turn. But a glance at other funds in the Association of Investment Companies (AIC) ‘Leasing’ sector shows how it can pay to go against the flow.

Not so long ago, during the Covid crisis when very few planes were flying anywhere, investment trusts that specialised in aircraft leasing were about as popular as pangolin stew or the virus itself. But anyone bold enough to buy shares in DP Aircraft I Ltd (LSE:DPA) or Amedeo Air Four Plus (LSE:AA4) has enjoyed total returns of 80% or 70% respectively over the last year. Sometimes, but not always, fortune really can favour the brave.

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.