Ian Cowie: this trust is a rare winner from the war in Ukraine

Sanctions on Russia mean more raw materials need to be transported by sea, boosting the high-yielding ‘leasing’ investment sector.

Will the boat come in – or go out – for exports from the world’s bread basket before war in Ukraine causes famine in Africa? That question is worth asking after leaders of the Group of Seven (G7) rich democracies told Russia on Monday that it must allow grain shipments to leave Ukraine if a global food crisis is to be avoided.

The war-torn country grows a fifth of the world’s top-quality wheat and supplies half the grain bought by the World Food Programme (WFP), a charity set up to avoid starvation in Africa. But the Russians have mined the Black Sea, making insurance for shipping prohibitively expensive and exports effectively impossible. That led the G7 meeting in Germany to issue this joint statement: “We urgently call on Russia to cease its attacks on transport infrastructure and enable free passage of agricultural shipping from Ukrainian ports in the Black Sea.”

Whatever Vladimir Putin decides to do, the Ukraine war has disrupted global marine transport and should remind investors about its importance. Despite all the developments in road, rail and air cargo, about 90% of global exports go by sea.

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Despite those facts, most British investors have no direct exposure to this sector. However, I am glad investment trusts make it cost-effective and convenient to gain access to commercial shipping – even if I seem to have boarded the wrong boat at this early stage.

Last August, I invested in Tufton Oceanic Assets (LSE:SHIP) at $1.21 (86p) per share, largely for their 6.3% dividend yield. Last April, I popped them into my ISA for a handy tax-free income, which independent statisticians Morningstar say brings SHIP’s total return over the last year to nearly 19%. Better still for prospective buyers today, they remain priced 8.1% below their net asset value (NAV).

Sad to say, I would have done better to have got onboard a rival investment trust in the Association of Investment Companies (AIC) “leasing” sector. Taylor Maritime Investments (LSE:TMI) has delivered a total return of 26% over the same period and, by coincidence, is priced at a 26% discount to its NAV. TMI yields just under 5.6%, so this may be an example of accepting lower income today to obtain higher total returns tomorrow.

SHIP has total assets of $423 million (£345 million), while TMI has $563 million and neither has a five-year track record. The vessels they manage include tankers, designed to carry liquid cargoes such as oil or liquefied natural gas (LNG), and bulk carriers or “bulkers”, with commodities such as grain or coal. They also manage container ships, carrying standardised metal boxes, usually 20ft or 40ft in length.

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Despite some short-term relative disappointment, Paulo Almeida, co-manager of SHIP, effectively urged shareholders to hold our course and look over the horizon. He told me: “The most important market development for SHIP shareholders, which is driven by the increasing sanctions against Russian oil and fuel exports, is the recent strong improvement in tanker markets.

“SHIP has been selling containerships over the past 18 months and reinvesting in bulkers, which continue to perform strongly, and also tankers. Tankers are the only market segment where ships can be acquired at a large discount to depreciated replacement cost.”

Valuation – or the entry point at which assets are acquired – is important. So are the interaction of supply and demand, setting market prices in future. Almeida continued: “We believed, independently of the geopolitical situation, that tankers would improve because global inventories of fuel were low, needing ships to replenish them, while there is very little supply of new tankers being delivered.

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“With the increased sanctions leading to both Russia having to export over much longer distances to China and India, while Europe needs to import over much longer distances from America and the Persian Gulf and Middle East, demand for tankers, especially product tankers carrying fuels, has increased dramatically over recent months. Tanker yields and values are up, and values should increase further over the coming months if the market stays strong as Tufton expects it to.”

Bear in mind Germany blocked the opening of the new Nord Stream 2 gas pipeline from Russia immediately after the invasion of Ukraine. Now Russia has reduced the supply of gas through Nord Stream 1, claiming this is “routine maintenance”.

Either way, it looks likely less gas will be pumped through pipelines in future, when more will be shipped by sea.

Investors willing to consider alternative assets may benefit if squeezed supplies pump up prices. It’s an ill wind that blows no good.

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

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