Ian Cowie: this trust has sailed through stormy waters

Summer storms on the stock market wiped billions off the value of technology shares earlier this month. But one of my biggest investment trust holdings, yielding more than 7% of tax-free income because I hold them in my ISA, and still priced 14% below its net asset value (NAV), sailed serenely on to deliver an eye-stretching 48% total return over the past year.

Better still, next Wednesday, 28 August, this little-known ship leasing specialist is due to distribute $31.5 million (£24.2 million) to shareholders, as part of a buyback at NAV.

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City cynics who claim that investment trust discounts are illusory, because share prices rarely rise to match NAV, should feel a bit silly when they hear the uplifting tale of TUFTON OCEANIC ASSETS LTD (LSE:SHPP). Long-term investors like me, who paid 86p per share in August  2021, for stock that currently trades at 121p, may consider that this £345 million fund demonstrates the value of diversification to diminish risk and maximise returns.

Most individual investors a century ago would have had some exposure to British shipping but relatively few do so today. While Britannia no longer rules the waves, more than 80% of all international trade continues to be transported by sea and so it makes sense for global investors to have some exposure to this sector.

Strong long-term demand is only one reason to set sail into what might feel to some like uncharted waters. Short-term squeezes on supply have also helped to keep prices buoyant. As discussed here before, Houthi rebels in Yemen have attacked shipping outside the Suez Canal and lack of rain in Latin America has restricted the number and size of vessels that can transit the Panama Canal: both major choke points for global trade.

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These unfolding dramas have caused sharp spikes and slumps in the share prices of major shipping businesses, such as Hapag-Lloyd AG (XETRA:HLAG) and AP Moller-Maersk (MAERSKB). But, respectively, German and Danish withholding taxes are difficult to reclaim, as this small shareholder knows to his cost, and both those big businesses are primarily focussed on container ships, where a supply glut is widely anticipated.

By contrast, SHPP steered away from containers years ago in favour of a fleet of eight product tankers (six medium-range and two handysize), nine bulkers (eight handysize and one ultramax), two chemical tankers, and one gas carrier. The technical terms are less important than the fact that this fleet is diversified over a range of different cargoes, clients and scales or sizes.

What does Mr Market make of it all? SHPP was launched in December 2017, so lacks a 10-year log book, but ranks second among eight funds in the Association of Investment Companies (AIC) ‘Leasing’ sector over the past five and one-year periods with total returns of 89% and 48% respectively.

Meanwhile, as mentioned earlier, it yields dividend income a shade above 7%, without counting the buyback windfall, and this has grown by an annual average of 5.7% over the past five years. It is important to beware that dividends can be cancelled or cut without notice.

However, those of us hoping to pay for an enjoyable retirement with our investments might note that if the above rate of ascent can be maintained, it would double shareholders’ income in 12 years and seven months.

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To put all that in context, SHPP’s nearest rival in the leasing sector is Taylor Maritime Investments (TMIP) which offers a higher initial yield of 7.7% and is bigger with total assets of £383 million but delivered little more than half as much total return, with 26% over the past year. (Interactive investor offers the dollar share class: Taylor Maritime Investments Ord (LSE:TMI)). Independent statisticians Morningstar say TMIP lacks five and 10-year returns and failed to sustain dividend increases over all of the past five years.

Cost-conscious investors might also note that SHPP’s annual management fees are just over 1%, while TMIP’s are 1.6%. No wonder TMIP shares are trading at a 31% discount to NAV. For once, this feels like an either/or choice where your humble correspondent steered the right course.

Never mind what I think, what do the brokers say? Alex O’Hanlon at Panmure Liberum spies potential profits ahead: “We believe the market is not fully capturing the value in the shares, with significant gains realised by the manager moving in and out of various shipping segments.

“The opportunity now is on the supply-side. The global fleet of 25-year-old ships that will need to be replaced is vast, exceeding yard capacity. The other factor working in SHIP’s favour is that shipbuilding is only mildly profitable and increasingly struggles to staff yards, particularly in South Korea, Japan and China.

“Given SHPP’s performance track record, the measures it has taken to make the shares more attractive - such as the higher dividend, repurchases, and capital return - we think this is one of the better vehicles.”

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Similarly, Fiona Huang at Jefferies, anticipates helpful following winds: “The shipping sector is in the middle of a supply-driven upcycle with ageing fleets and tightening environmental restrictions.

“A good NAV and confirmation of the share redemption are two highlights for the second quarter. SHPP remains poised to benefit from stronger bulker charter rates as well as, potentially, containership investment opportunities. Buy.”

As recent news events remind us, the sea remains a dangerous environment where unexpected setbacks can prove disastrous. Even so, as a famous non-sailor observed: “There is a tide in the affairs of men which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and miseries.”

This sailor and shareholder is glad I jumped aboard SHPP three years ago and looks forward to next week’s cash payment.

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

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