Ian Cowie: why I’ve halved this trust, and bought its rival

The higher returns from this specialist trust versus its peer has caught the eye of our columnist, leading to changes to his ‘forever fund’.  

You might think a tax-free 6.5% income plus 17% capital growth over the last difficult year is nothing to complain about, but the truth is that I have just sold half these shares to pursue higher total returns elsewhere. Brave, greedy or foolish? Only time will tell.

Here and now, the explanation is that my commercial shipping specialist investment trust, Tufton Oceanic Assets (LSE:SHIP), has done well - but not nearly as well as its nautical rival in the Association of Investment Companies (AIC) ‘Leasing’ sector; Taylor Maritime Investments (LSE:TMI).

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The latter is 28% up over the last year, albeit with a lower dividend yield of 4.8%, according to Morningstar. By contrast, the same source shows SHIP as having delivered total returns of less than 7% over the same period.

To be candid, this baffles me because I can see the contract notes showing I paid 86p per share to invest in SHIP in August last year and took profits by selling some of these shares at 101p earlier this month. That’s an uplift of 15p per share or 17% with income and gains tax-free because I hold these shares in my ISA.

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Exchange rate fluctuations may explain the difference - because SHIP’s primary listing is in dollars, but the platform I use prefers to deal in sterling. The pound has lost more than 12% of its value against the greenback over the last year, falling from $1.38 last August to trade at $1.21 this week.

Setting aside this statistical or currency conundrum, SHIP and TMI both give exposure to second-hand commercial shipping. This is an industry that is rarely represented in many individual or institutional investors’ portfolios but delivers more than 90% of international trade by volume.

Despite all the media focus on digital commerce and E-vehicles, shipping remains a cost-effective way to transport bulky goods, such as hard and soft commodities, including foods and fuels. So this is the kind of business where demand is likely to support sales and profits for long after I have ceased caring and is an attractive asset for my ‘forever fund’.

But the cost of global maritime transport, as measured by the Baltic Dry Index (BDI), has fluctuated wildly in recent years. Economic storms prompted by the coronavirus blew the BDI below 500 points in May 2020, before vaccine-inspired hopes of recovery sent this benchmark soaring above 5,500 last October. Since then, the war in Ukraine and fears of economic recession have knocked the BDI back to 1,400 this week.

Such gyrations amply demonstrate this sector’s risks - and, by implication, the value of professional fund management. Unfortunately, this also raises another worry about SHIP, where ongoing annual charges are 1.1% compared to 0.93% at TMI.

That’s not a massive difference but paying higher charges for lower total returns added to my feeling it was time for a change.

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To be fair to SHIP, it operates a highly diversified portfolio of second-hand commercial vessels - including bulkers, product and chemical tankers, gas tankers and containerships. By contrast, TMI focuses primarily on second-hand examples of what are called ‘Handysize’ ships. 

Lest the terminology confuse, Ed Buttery, chief executive of TMI, explained: “As the workhorses of dry bulk shipping, the Handysize segment is intrinsically defensive, with constantly growing demand due to transporting basic necessity goods such as food, fertiliser and building materials.

“Handysize vessels are relatively small in dimension and carrying capacity among dry bulk vessels. They are ‘geared’ meaning that they have on-board cranes to self-load and discharge, which is particularly attractive where shoreside infrastructure is not as developed. Due to these features and their shallow draughts, Handysize vessels are able to access a far greater number of ports around the world than larger ships.”

The geographical spread of TMI’s business can be seen in the fact that 27% of the ports its ships visit are in Asia, followed by 18% in South America, with the same percentage in Europe, and 16% in North America, with the remainder spread across Australia, the Middle East and Africa.

Similarly, substantial diversification can be seen in the cargoes carried by TMI’s ships. Food and agriculture is the biggest segment, accounting for 43% of the total, followed by construction materials at 35% and energy at 10%. Non-ferrous metals and minerals comprise most of the remainder.

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Bargain-seekers will note that SHIP and TMI shares are priced at discounts of about 14% below their net asset value (NAV). Two of SHIP’s four directors have invested more of their own money in these shares than they are paid in annual fees to sit on its board, according to the stockbroker Investec’s 2021 ‘Skin in the game’ survey.

Only one of TMI’s six directors can say as much - but TMI chairman, Nicholas Lykiardopulo, holds shares worth more than £372,000; much more than any other director of either trust.

To return to where we began, I don’t know whether I am being greedy in wanting more than SHIP delivered in my first year as a shareholder, but decades of investing have taught me to listen carefully when Mr Market speaks. He might even be shouting in this instance because TMI has delivered substantial outperformance in little over a year since it launched in May 2021.

While it remains uncertain whether this can be maintained, I decided to diversify my exposure to maritime transport by halving my holding in SHIP and reinvesting the cash in TMI at just under 122p per share earlier this month. They are competing trusts that might prove complementary.

Because of a coincidence in these businesses’ fiscal calendars, it was possible to offset dealing costs by double-dipping dividend income. I sold the SHIP shares before they went ex-dividend on July 28, thus retaining income received last week on 12 August, and also bought the TMI shares before they went ex-dividend, on 4 August, thus retaining my right to receive income due next week on 24 August.

I really should try to get out more. This synchronicity wouldn’t have justified the deal, but it did help to pay for it, prompting me to stop dithering and act. While I still have no idea what is beyond the horizon, I am also mindful that time and tide wait for no man.

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

Ian Cowie owns shares in Tufton Oceanic Assets (SHIP) and Taylor Maritime Investments (TMI) as part of a globally diversified portfolio of investment trusts and other shares.