Just before Christmas a Guernsey-based fund called Tufton Oceanic Assets (LSE: SHIP) launched on the London Stock Exchange, marking a real first for London – a chance for investors to make an income by renting out ships. Investors have long been able to invest in shipping giants such as Maersk or Hapag-Lloyd. But these are cyclical trading businesses, rather than ones focused on producing a steady dividend stream. In the UK, it has been possible to invest in a few small ship-owning companies under the Enterprise Investment Scheme (EIS), but there were no shipping investment trusts.
A huge liquid market
This is a pity, because there’s much to like about the market. Like aeroplanes, ships produce a steady stream of rental or lease payments, and the market in shipping rentals is huge and very liquid, with many reliable, creditworthy customers. On the downside, its cyclical nature means the market is prone to bouts of oversupply, with prices collapsing as a result – as they did for the Baltic Dry index (which charts the cost of transporting raw materials) after 2008.
But unlike many other asset-backed markets, grabbing hold of delinquent assets in a slump isn’t hard – repossessions have been going on for hundreds of years, and there is a very liquid market in new rentals for the ship owner. And as with any cyclical market, there’s always the potential for an upturn – indeed, we may be seeing one right now. The Baltic Dry has risen by around 60% over the past five years. The global economy is humming, helped by a strong US and China. Cargo rates have stabilised, and shipyards are relatively less busy – the global order book for new ships is at a 20-year low, and shipyard capacity has shrunk by 16% since 2012.
An established player
Tufton is an established player in the second-hand ship market, managing around $1.5bn across a variety of funds. It tends to target product tankers, bulk-cargo ships and smaller container ships. The vessels themselves might be anything from five- to 20-years old, trading at between 30% and 70% of their new value, while customers charter them for between two and ten years. As with aeroplanes, sale-and-leaseback deals are common – a big operator sells their new ship to a funding vehicle such as Tufton, then leases it from them. This leaves the finance outfit to deal with the hassle of the final residual value, or resale value. This is where the real profits are made – by buying second-hand ships cheaply, and making sure the residual value is as high as possible.
Tufton maintains that now is the right time to buy. Certain types of ship are still quite cheap to buy, but rental rates are rising alongside the economy. This upturn isn’t being swamped (yet) by a sudden spike in new ship construction. Tufton reckons it can pay out 7% per year (5% in the first year), with an overall internal rate of return (a measure of project profitability) – including capital gains – of 12%. Tufton’s existing institutional fund has made a total return of 12.5% since 2015.
The risks are clear (which is why the fund is floated on the specialist market, aimed at institutions and sophisticated investors). Shipping is cyclical and, in a downturn, residual values could plunge, and rental yields dry up. The fund is also dollar-denominated, which introduces currency risk. Yet as part of a diversified portfolio, this is an excellent source of alternative income, with real asset backing and steady income streams.
Activist watch
Hess has become “the incredible shrinking oil producer” as hedge-fund Elliott Management pressures it to streamline its operations, says Bloomberg. The New York-based group is to shed about 300 jobs this year in an effort to cut costs by $150m a year from 2019, even though it has already shrunk its workforce by 75% between 2013 and 2014. Last month, activist investor Elliott called for chief executive John Hess to “fix the oil producer his father founded or get out”, says Bloomberg, in a continuation of a feud that has gone on for four years. Elliott also wants Hess to sell assets in southeast Asia and focus on share buybacks instead of paying dividends. Hess shares fell 2% on news of the planned cuts.
Short positions… what are you being charged?
• It’s now easier for investors to see how much they’ve been paying in “hidden” fees for open-ended funds, says FT Adviser. Under new EU rules, firms are no longer able to “bundle” the cost of research with trading commissions, and must instead disclose the cost in investor charges. So investors in the JP Morgan Global Macro Opportunities fund can now see that they are paying 66 basis points (bps) more than previously declared, according to research from consultants Lang Cat. Investors in the £10bn Woodford Equity Income fund pay an extra 28 bps of transaction fees on top of the 0.75% ongoing charges, while the popular Vanguard Life Strategy 60% Equity fund actually costs investors 0.33% in total, compared with the 0.22% previously declared. “It is grimy that it has taken some EU regulation for asset managers to tell investors what the true cost of investing is,” says Mike Barrett of Lang Cat.
• The wildfires that hit California last month knocked more than 16% off the net asset value of CatCo Reinsurance Opportunities, making it the fund’s worst year ever, says Michelle McGagh on Citywire. Holders of CatCo’s new C-shares have “brighter prospects”, however, notes McGagh. This separate pool of money is “not liable to claims from 2017 and could benefit from an increase in insurance rates resulting from last year’s spate of natural catastrophes”.