Interactive Investor

Ian Cowie: this trust shows how active management can pay

11th November 2021 09:51

Ian Cowie from interactive investor

A recent addition to our columnist’s ‘forever fund’ has weathered the wider storm in its sector.

It’s early days, but the initial success of one ‘alternative assets’ investment company, despite the collapse of its relevant index, shows how active management can pay. Better still, commitments to cut pollution and improve working conditions suggest shareholders may do well by doing good.

Storm clouds were gathering when I set sail with Tufton Oceanic Assets (LSE:SHIP), paying $1.21 on 2 August for shares yielding dividend income of 5.9%. I forecast rising demand and prices for the “second-hand commercial sea-going vessels” in which this $380 million company invests but did not expect economic tailwinds to become headwinds so quickly.

Global recovery from the worst of the coronavirus crisis boosted demand for goods transported by sea, while the supply of tankers and other forms of transport remained restricted. When I wrote about SHIP here in early September, that had pushed the Baltic Exchange Dry Index (BDI) above 4,000 and this benchmark of global shipping rates peaked at 5,664 on 7 October.

Little more than a month later, the BDI has halved to 2,718 this week. Now that’s what I call volatility!

Meanwhile, SHIP sails serenely on, with the shares trading ex-dividend at $1.42 and still yielding 5.7% this week. That performance is all the more impressive against a backdrop of bad news about logistical bottlenecks disrupting global supply chains.

For example, Richard Ballantyne, chief executive of the British Ports Association, said: “Container ports around the world are dealing with Covid backlogs. Getting empty containers back to Asia and other locations has been challenging.

“UK ports are also experiencing the much-publicised lack of haulage. Also this is a peak period in the freight calendar as the pre-Christmas order books create an additional surge in demand for the import-hungry British economy.”

This is a global problem, as demonstrated by record queues of ships outside America’s biggest container ports; Los Angeles and Long Beach. But Paulo Almeida, chief investment officer at Tufton Investment Management, told me active asset allocation can beat these headwinds.

He said: “The BDI tells you very little about a diversified shipping portfolio. In the nearly four years since inception, the net asset value (NAV) of SHIP is uncorrelated to the BDI.”

To be specific, take one type of vessel owned by SHIP, such as “bulkers” or bulk carriers, designed to transport unpackaged bulk cargo such as cereal grains, coal or cement. SHIP’s chief executive Andrew Hampson said: “We can earn attractive returns on our bulkers at rates significantly below the current market, especially after de-risking through high-yielding one or two-year charters.”

That has delivered total returns of 69% over the last year to SHIP shareholders, according to Morningstar via the Association of Investment Companies (AIC). Doing so involved buying and selling assets at the right price. Hampson explained: “Containerships are at all-time highs, so we have made selective divestments.

Tankers will recover now that energy inventories are low, so we have made selective investments there.”

Some caution is reflected in SHIP and its nearest rival, Taylor Maritime Investments (LSE:TMI), which was launched last May, both having zero gearing or borrowing. By contrast, elsewhere in the AIC’s ‘Leasing’ sector, Doric Nimrod Air Two (LSE:DNA2) and Doric Nimrod Air Three (LSE:DNA3) show gearing of 110% and 157% respectively. 

Borrowing to invest can boost returns but also increases risk - not least if, as widely expected, interest rates rise in future. If the cost of credit exceeds the investment return achieved, gearing will prove a costly mistake - as it did for DNA2 and DNA3 over the last five years when they shrank shareholders’ money by -34% and -29% respectively.

SHIP was launched in December 2017, so lacks comparable data. But Almeida argues it should weather the storms ahead and may even thrive in adversity. He said: “The two biggest macro risks – inflation and decarbonisation – are positives for SHIP.

“We know that ship values historically increase by more than inflation in periods of higher inflation - and this has happened in 2021.

“Decarbonisation is a threat for much of the industry. By contrast, we have public commitments to reduce emissions in SHIP by 10% or more by installing energy-saving devices on most of the fleet over the next two years.”

What about the workers? Shipping has a shoddy reputation for failing to allow staff adequate shore leave but Almeida claims SHIP aims higher: “At the end of September we had only 3% of our crew overdue for relief versus a benchmark of 8% for the top 10 ship managers.

“We’ve also arranged for many of our crews to get vaccinated when our ships call into the US or Europe. Vaccines are still limited in many of their home countries.”

As the son of a former merchant seaman, this shareholder hopes SHIP will continue to do well by doing good - even if the macro-economic headwinds turn into a gale. As my father used to say, worse things happen at sea.

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 diversified global portfolio of investment companies and other shares.

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