By Tony Foster
Everyone wants a high-yielding, diversified investment, particularly if the risk/reward balance is favourable. But how hard are you willing to look? You may not have to cross the oceans to find these opportunities, but to consider the ships that sail on them.
As is almost always the case with something that is ‘new’, shipping is often treated with circumspection at first, and there’s certainly no shortage of people who think it might be a ‘bad thing’ because grandpa lost his shirt in a shipping venture, or because ‘Somali pirates rule the waves’. Sink a little deeper, however, and you will find many attractive features.
At an estimated value of $2-3trn, the shipping market is enormous, highly regulated, and multi-dimensional. There are a number of different sectors in the shipping market, each of which has its own fundamental demand and supply drivers and therefore individual cycle. You wouldn’t say banking was a ‘good’ or ‘bad’ business, and the same mistake should be avoided with shipping. The three main generic sectors, bulkcarriers, tankers and containerships offer best risk/return trade-offs as they are the most liquid and transparent. Given the different characteristics of each sector, investment strategies can be structured to meet a variety of risk/return profiles and investment horizons.
There are a number of ways to invest in shipping, such as buying shares in quoted shipping companies, but by the best way by far is to invest directly by owning, physically operating and chartering individual vessels. So, what is it about direct shipping investment that should float your boat?
Portfolio diversification
Shipping returns are not closely correlated with those of equities and commodities, have no correlation with bonds and operate on a different cycle to other real assets such as real estate.
Income generation
Ships generate income. The level of yield depends on the sector of the market in which one chooses to invest and the type of investment strategy followed, but historical average annual cash yields (in the bulkcarrier sector) have typically been in the teens.
Inflation hedge
Historical returns on direct shipping investments have far exceeded inflation as input costs for shipbuilding (such as labour, steel and other materials) have inbuilt inflationary pressures.
Liquidity
The generic sectors of the shipping market have a high volume of transactions, providing transparent and reliable valuation data. The sales volume of dry cargo ships is twice that of UK residential real estate, for example. People are often surprised to find that ships can be bought and sold in a day, a characteristic not shared by many other real assets.
Of course, no discussion of shipping is complete without reference to the cyclicality of the market. It is true that the shipping market is cyclical but it is not ‘boom and bust’ and as mentioned above, each sector has its own cycle and these do not all move in tandem. Unlike many other asset classes, the shipping market is driven by fundamental demand and supply factors as opposed to external influences such as government monetary policy.
It is also important to distinguish between the volatility that is often reported in the spot freight market (usually through the much-misunderstood Baltic Dry Index) and the volatility of shipping investment returns which are dependent on the strategy pursued. In a strategy where the largest contribution to return is expected to come from capital appreciation, volatility is a necessary component for this to be achieved. In other strategies that are based on long term deals which generate a fixed annual coupon, the volatility of returns is expected to be relatively low. As is the case in many other asset classes, good active management can mitigate many of the risks associated with the market cyclicality. Right now, markets are weak and ship prices are cheap. It may be time to jump onboard!
Tony Foster is chief executive at Marine Capital
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