I’ve not really focused very much on one of the newest bits of the alternatives funds market here in the UK, shipping. We’ve only really had a choice of funds this year and the first listed shipping fund didn’t list until 2018. I have talked a bit about listed shipping funds recently in Citywire HERE and in Moneyweek a few years ago, but in truth, it’s not really been a focus for me.
Before 2018 shipping was largely the preserve of Greek magnates and German dentists and if we are honest, it didn’t boast a great stellar alternative asset class track record. Throughout the last decade, the huge German private shipping fund market lurched from challenges to crises and caused the big German banks all sorts of problems. Just google German shipping funds and problems and you’ll find plenty of amusing early evening reading matters.
Back in 2009 for instance, Citywire reported here that the German shipping fund segment was “sailing into a storm… A survey conducted by German data firm Scope reveals that 17 ship funds are close to bankruptcy while another 70 are seriously struggling to survive”. As the tremors from the GFC quietened down, the sector improved but in Germany at least it’s never really properly recovered and plenty of German dentists and accountants have lost a great deal of money.
But the times they are a-changing and now we are back in an upswing and shipping looks more interesting. And there’s also another key change – the two listed London funds look to be a more robust structure. They are focused on a more opportunistic acquisition strategy and aren’t loading up – from what I can see anyway – on debt. This is a classic asset leasing story – buy a quality asset that can be leased out to reliable payers, collect the charter repayments and then hope that the underlying asset also provides a decent Nav uplift.
Now those words may sound spookily familiar to anyone who invested in another alternative asset leasing sector – planes. Last decade we also witnessed an explosion of aircraft leasing funds, some of which I quite liked. These were on paper fairly similar. Buy good quality assets and lease it to well-regarded clients such as Emirates, and produce a generous income.
But there were some crucial differences: first, the assets were mostly a particularly large Airbus plane that had a very niche audience. In addition, the structures used were fairly complex and did involve lots of debt – within the SPVs – which had to be repaid back. Another key problem was that the slow but remorseless demise of the A380 plane made working out the real NAV of these airplane funds bloody difficult. There’s no easily accessible second-hand market and thus we are forced to rely on consultants estimates. And then of course Covid came along and the rest is history.
Hopefully, these shipping funds should avoid these problems. Most of the ships owned by the two funds in this segment are not amazing, massive state-of-the-art vessels that are difficult to value. They tend to be “bog-standard” container ships, dry bulk freighters, and the odd oil tanker (though more focused on chemicals). There’s also a multitude of businesses leasing their ships, so you’re not stuck wondering what might happen to say Emirates or Thai Airlines. And the leasing contracts are shorter. Looking down the Tufton list of assets I see that the majority of ships look like they’ll come off charter at some point in 2023 or 2024. Those short-term leases are both an advantage – we have visibility – and a disadvantage – you’ve got to find someone else to charter them. Crucially though these funds are also already releasing numbers that show the second-hand value of their ships on the very liquid global shipping resale market. Tufton for instance has recently announced that it sold its Containership Kale for $21.5m, “reflecting a realised IRR of 31% and a 70% premium to depreciated replacement cost”.
Now of course there are some obvious risks lurking around here. As we’ll see the shipping market is in rude health at the moment but it hasn’t always been. Global trade can and has crashed at various times. It’s also the case that whole classes of ships have gone in and out of fashion. There’s a long list of things that can go wrong in ships and shipping – fill in your own worry list. My list would have political and crime risks near the top followed by labor issues. I’d also observe that the maritime regs on ships and their burning of sulfur-rich fuel are changing and many of the old ships going back and forth on our oceans might find themselves regulated out of existence within a decade.
So, there are some big risks – I would put that worry about fuel top of the list over a 15-year timescale.
On balance, though I think these shipping funds are more interesting than aircraft funds – which are beaten up and difficult to trade-in. For income investors, they offer a genuinely strong, cash-backed, stream of regular dividends in excess of 5% per annum. And both eh funds on the market at the moment look well run and sensibly diversified. The basic details on the two funds are in the box below.
|Taylor Maritime Investments
The first shipping fund to list was Tufton Oceanic in 2018. It is targeting a recently revised dividend yield of 6.9% which the fund expects to be covered e c1.7 over the next 18 months.
More importantly, recent trading looks to be on the up (NAV rose 10.0% over the quarter to 30 June to $1.158 per share) with the shipping market booming post-pandemic. Here’s Numis’ report on current trading : “The containership and bulker markets continued to strengthen over the quarter reflecting the global economic recovery from the pandemic; however, due to the agreed charters in place the fleet’s valuation does not capture this, with the portfolio negative charter value increasing from -$44.6m to -$71.7m (22% of net assets) over the quarter. The manager notes that over the medium term the charter value will tend to zero, which will increase the NAV. Although the tanker market is starting to strengthen it remains relatively weak; however, the company’s strong contractual coverage means it is insulated from this weakness an initial target dividend yield of 7% pa on the issue price”. Crucially the quarterly reports also give us some sense of the charter market and how numbers are changing fast. During the quarter, the manager extended the charter for a bulker ship called the Lavender for 14-17 months through to early 2023, which will produce an annual net yield of 17%. The company’s two recent bulker investments have forecast annual net yields of 16-20%.”
Taylor Maritime is the new kid on the block raising $253.7m at IPO in May 2021. Its focus is on second-hand geared ships (Handysize and Supramax) and the initial portfolio boasted 23 seed assets with an average age of 11 years and an estimated remaining life of 17 years – the company has also acquired a further two assets which weren’t in the seed portrfolio.
All ships are fully operational and income generating from acquisition dates. The company is internally managed and like Tufton, its most recent quarterly numbers look impressive: its first quarterly NAV is $1.1263 a 15% increase since the fund’s launch on 27 May. This was driven by a 10.5% ($33.3m) increase in the value of the portfolio. The manager notes that charterers are “seeking longer term contracts in anticipation of a sustained upward trend in charter rates”.
In terms of recent trading Numis reports that “Net time charter rates at 30 June were up over 30% since 7 May, and the manager notes that this strengthening in market rates is currently happening faster than shipping prices are rising, which is “giving rise to attractive investment opportunities”. The current charter rates are delivering annualised unlevered gross cash yields of 20%. The implied dividend cover from the delivered fleet is c.2.7 times and this is expected to rise materially once the remaining committed vessels are delivered. The six targeted acquisition vessels are all Japanese built with an average age in line with the current fleet’s 10.5 years. The vessels have near-term delivery dates and are expected to be fixed on new charters in the run up to their delivery. These six targeted vessels form part of the manager’s wider near-term pipeline of 14 vessels”.
Taylor Maritime recently raised another $75m at $1.15 to fund the acquisition of six Handysize vessels.
I’m obviously no expert on shipping but when it comes to the funds, my sense is that Tufton is possibly the slightly better bet at this stage. It boasts a higher dividend yield, a longer track record, and a lower premium to NAV. Taylor looks impressive but I’m a tiny bit more cautious and would like to see a year or two of solid numbers before committing money to the fund. I’d also guess that we have a good year or two of strong numbers from the global shipping markets as the world economy picks up speed but I’d be curious to see what happens to charter rates if we have another global slowdown or even a trade crisis (China vs Taiwan for instance).