If I had to find an adjective to describe the global shipping industry, I would go for “volatile”. Measures of shipping rates such as the Baltic Dry Index show that revenues from owning ships can fluctuate wildly.
In the past, investors worldwide have lost a lot of money in this sector. In 2009, a survey by data firm Scope found 17 funds in the German shipping fund sector were close to bankruptcy. Another 70 were struggling to survive. The sector has improved since then, but it hasn’t fully recovered.
London’s first shipping funds
So it’s probably not surprising that we had to wait until 2018 for the first shipping fund, Tufton Oceanic (LSE: SHIP), to list on the London stockmarket. This fund now has a competitor, Taylor Maritime Investments (LSE: TMI), and both are now trading at a large premium to their net asset value (NAV). Does that tell us that these funds have succeeded in making a volatile sector boring?
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Certainly, both funds have worked hard to reduce risk. They don’t use lots of complex debt. They tend to own straightforward ships such as bulk carriers and container ships. Crucially, they have both focused on a more active ship model: they’ll buy cheap ships, work them hard and then if necessary trade them out.
Additionally, most of the leases seem to be of shorter durations, which means they aren’t tied to one big client. For example, Tufton’s list of assets show the majority of its ships will come off charter in 2023 or 2024. Short-term leases are both an advantage (they show us when the shipping cycle waxes and wanes) and a disadvantage (they’ve got to find someone else to charter them).
Tufton is targeting a recently revised dividend yield of 6.7% which it expects to be covered 1.7 times over the next 18 months. The net yield on the ships in its portfolio is running at around 14%. Recent trading looks to be on the up, as the shipping market booms after the pandemic: NAV rose 10% over the quarter to 30 June to $1.158 per share. The fund also released numbers suggesting its assets are holding their value on the resale market: it sold the containership Kale for $21.5m, an internal rate of return of 31% and a 70% premium to depreciated replacement cost.
Taylor Maritime is the new kid on the block. It raised $253.7m when it floated in May 2021, and subsequently raised another $75m. It focuses on smaller second-hand bulk carriers and its seed portfolio held 23 ships with an average age of 11 years and an estimated remaining life of 17 years. It has since acquired nine more. The first quarterly NAV was $1.1263, a 15% increase since the fund’s launch. This was driven by a 10.5% ($33.3m) increase its portfolio’s value. The manager reports that charterers are seeking longer-term contracts in expectation of rising charter rates. Given this backdrop, it’s not surprising that its ships are producing gross cash yields of around 20%.
A convincing case
The appeal of both funds is clear. They offer a strong, asset-backed stream of regular cash dividends in excess of 5% a year. Operating yields are well in excess of those single-digit numbers, which could imply increased payouts in time. The underlying assets are traded on a global market, so investors can take comfort from their second-hand values.
Times are good at the moment, but rates usually go into freefall for a while when the economy turns. The test will be whether the funds have managed potential volatility by picking the right ships, and whether they can keep paying out the dividends if those assets can’t be leased out against a backdrop of plunging capital values. Longer-term, climate change policies are also a concern. If owners must update their fleets due to new emissions regulations, that could cut into the resale values for the wrong sort of ships.
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