Ian Cowie: the ‘hidden gem’ investment trust I have bought

Our columnist has snapped up shares in an overlooked sector that could be a post-pandemic winner.

How do you fancy a floating 5.9% dividend income, even after 66% total returns over the last year, currently trading at a third of the premium paid for its untried and untested newbie rival? Better still, both investment trusts navigate an unloved and overlooked sector which may return to favour as the global economy recovers from the coronavirus crisis.

Tufton Oceanic Assets (LSE:SHIP) owns 21 ships of various sizes and applications, with total assets of £323 million, and is listed on the London Stock Exchange. I recently bought some shares for my ISA at $1.21 each, hoping for tax-efficient income and long-term growth.

Inflation-busting yields command a premium and so I was not deterred by SHIP being priced 10% above its net asset value. Still less so when I considered that this fund has a near three-year track record but its new rival, Taylor Maritime Investments (LSE:TMI), which was launched last May, is priced 30% above NAV.

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To be candid, I prefer to avoid paying premiums - or, for the more pedantic, premia - but believe it may be worth doing so here for several reasons. First, and most fundamentally, the NAV may be wrong.

For example, last year SHIP sold a crude oil tanker, called ‘Bear’, for a return that its annual report claims “greatly exceeded the company’s target”. It also agreed to sell two of its vessels for more than expected during the second quarter of this year and intends to marginally increase its dividend during the current quarter.

Second, global demand for shipping is rising rapidly. That is reflected by the Baltic Exchange Dry Index (BDI), a benchmark of international shipping rates, having soared from below 1,600 points at the start of this year to trade above 4,200 points now. However, its current level remains less than half the peak it hit before the global financial crisis began in 2008.

Third, shipping offers an element of diversification for my portfolio. However, this is not a sector that anyone other than the very biggest investors can access directly. Closed-end funds offer a cost-effective way to gain exposure to what I cannot resist calling an illiquid asset.

The Association of Investment Companies (AIC) reckons that SHIP’s ongoing charges, including performance fees, amount to 1.1% per annum, which does not seem too steep for such a specialist fund. No figures are available from the AIC for fees or yields yet at TMI.

Perhaps perversely, the news that brought Tufton to mind was negative. When the world’s biggest containership blocked the Suez Canal for six days in March, it reminded me that 80% of goods bought and sold internationally are transported by sea. The death of one man during attempts to refloat the Ever Given - which is not one of SHIP’s assets - demonstrates that this can still be a dangerous business.​​​​​​​

More positively, as the son of a former member of the Merchant Navy, I was impressed by this investment trust’s attention to what we must learn to call environmental, social and governance (ESG) issues.

For example, the annual report refers to an under-reported human impact of the coronavirus crisis - hundreds of thousands of merchant seamen being stranded on ships moored outside ports many miles from home. It states: “The investment manager took active measures to expedite crew relief on the company’s vessels.

“As a result, only 6% of the crew on board the company’s vessels were overdue for rotation at the end of December 2020 compared to 40% in July 2020. The International Maritime Organisation (IMO) estimates that globally 400,000 seafarers - or about 40% of the total - were overdue for rotation.”

Elsewhere, there’s good news on the pollution front for those of us worried about horrible ‘bunker fuel’, used by most commercial shipping, where this company reports a marginal improvement in the official energy efficiency indicator.

It’s also encouraging to see the fund manager and board of directors have substantial ‘skin in the game’. All four of SHIP’s directors hold shares in this business, with two of their equity stakes exceeding the value of their annual fees.

By contrast, three suits on the board of TMI hold none of its stock and only one has shares worth more than his annual fees, according to Investec’s annual analysis, which was published in June. For small shareholders like me, it is comforting to think we are all in this together and irritating to see directors who do not deign to put any of their own money at risk.

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Returning to the macro-economics, I note several news reports about supply shortages and commodities’ prices hitting seven-year highs. Sachin Saggar, a director at broker Stifel, tells me: “When inflation and logistic concerns are growing we think the shipping sector offers protection and the potential to generate strong returns.”

Me too, matey. Full steam ahead!

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