Ian Cowie: specialist trust is my third-most valuable ISA holding

Houthi rebels sank two cargo ships in the Red Sea earlier this month, demonstrating the extreme dangers of this sector for sailors and shareholders. At least four mariners died and it remains to be seen what the vessels’ owners will receive from any insurance policies.

But more than 80% of global trade continues to be transported by sea and one specialist ship-leasing investment trust aims to diminish risks by diversification and shrewd asset allocation. It is also paying investors to be patient with high and rising income.

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Tufton Assets Ord (LSE:SHIP), formerly Tufton Oceanic Assets (LSE: SHPP for sterling shares listed in London), currently yields 8.2% dividend income, which has risen by an annual average of 5.7% over the past five years. This is now the third-most valuable holding in my ISA, generating a welcome four-figure tax-free annual income, paid quarterly.

However, it’s important to beware that dividends are not guaranteed and can be cut or cancelled without notice. Similarly, independent statisticians at Morningstar report that SHPP has shrunk investors’ capital by nearly 7% this year, after delivering a total return of 86% over the past five years.

At least it remains an investment trust, unlike its former rival in the Association of Investment Companies (AIC) “Leasing” sector. Taylor Maritime Investments (TMI) left the AIC after it bought the American shipping line Grindrod, and shed closed-fund status last January to become a shipping operator.

More importantly than corporate status, what is now Taylor Maritime Ltd (LSE:TMIP) has delivered negative returns of -18% over the past year and -10% over the past five years. Meanwhile, SHPP shares I bought for 86p in August 2021 were trading at 85p this week and remain priced -20% below their net asset value (NAV).

That double-digit discount is another indication of the risks in this sector, even before renewed violent conflict in the Middle East. These include doubts about valuations, or what prices these second-hand vessels might achieve when sold.

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Fortunately, Andrew Hampson, the manager since SHPP’s flotation in 2017, and his colleague, Nicolas Tirogalas, who joined him at the helm of this £376 million fund in 2023, have a track record of trading profitably. Between them, they have more than 70 years’ experience in maritime finance.

That includes avoiding recent high-profile risks of this sector. Hampson told me: “The ongoing impact of the conflict in the Middle East on shipping is the disruption of vessel transits via the Suez Canal due to attacks by the Houthi rebels.

“None of the SHIP vessels are directly affected by the conflicts in the Middle East. Since January 2024, we have instructed our vessels not to call in or transit the Red Sea, Gulf of Aden, or the Suez Canal to eliminate the risk of Houthi attacks.”

Even so, an ill wind can still blow some good, as Tirogalas pointed out: “Global vessel transits through the Suez Canal remain between 60% and 70% below 2023 levels as ships are re-routed via a safer passage around the Cape of Good Hope.

“The re-routing of vessels to avoid the Suez Canal adds about 2.5% to global shipping demand. The recent bombing of Iran and subsequent vessel attacks by the Houthis suggest this is likely to continue in the medium term.”

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Other worries include tariff tantrums or almost daily changes to American taxes levied on imports. SHPP managers argue that their fleet of 20 vessels should not be adversely affected because it’s comprised of handysize bulkers, two chemical tankers and one liquefied petroleum gas (LPG) tanker but no container ships.

Hampson explained: “Since early 2025, there have been several proposed changes to global trade. The currently proposed tariff regime applies to about 4% of global seaborne trade and is concentrated on segments such as automobiles and containership trades.

“Of the two segments accounting for most of SHPP’s exposure - oil products and dry bulk - tariffs are not applicable to the former and are applicable to about 3% of global seaborne trade in the latter.”

Tirogalas was also cautiously optimistic: “Shipping is a flexible and efficient industry which tends to benefit from disruptions. As a final safeguard, all SHPP vessels remain fully insured.”

Whatever happens next, shareholders can draw some comfort from the fact that the fund management team are in the same boat as us financially, with more than £10.6 million invested in these shares.

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

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