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Investors looking for a safe berth in the stock market storm that erupted this week could do a lot worse than jump aboard Tufton Oceanic Assets as the shipping fund prepares to call time on its business and hand back cash.
The dollar-based Guernsey investment company owns a $451m (£355m) fleet of 22 second-hand tankers and bulkers, which it hires out to major shipping operators for around one to three years.
Income from charter rates supports well-covered quarterly dividends that, at the current share price of $1.28, offer an attractive yield of 7.8pc. Gains in the value of its vessels topped up with periodic sales of ships generate capital growth.
With income and growth combined the portfolio has provided a total underlying investment return of 103pc in the past five years. Unfortunately, the actual total return shareholders have received has been a less impressive 77.6pc.
That is because, like many “alternative” funds, Tufton Oceanic shares fell out of favour as income investors turned to government bonds yielding 4pc-5pc during rising interest rates. From a $1.41 peak in October 2021, the shares dropped to a low of $0.98 in January. Despite a 33pc rally since that nadir, at today’s price they stand nearly 17pc below analysts’ current estimate of their net asset value (NAV) of $1.53, which is slightly below the most recent company-issued NAV of $1.55 on 30 June.
However, here lies the investment opportunity. Like GCP Asset Backed Income, which we tipped last week, Tufton Oceanic has said it will start to wind down the portfolio in 2028, sell its ships and return capital to shareholders over what could be a two-year period.
That process will automatically erase the current share price discount and, even with liquidation costs of around 2pc, should give today’s shareholders a 15pc uplift on top of any investment return the fleet generates between now and then.
In theory, investors could see the discount disappear a lot quicker than that. Tufton Oceanic is holding a continuation vote at its annual general meeting in October. It is possible that shareholders will elect to wind up the company at that point, which would result in an almost immediate rise in the share price to align it with the asset value that the liquidation would release.
However, it’s unlikely the pension schemes and fund managers that hold most of the shares will push the fund into the breaker’s yard so soon. Investors have been impressed with the way the company’s board and fund manager Tufton Investment Management have run the fund and prioritised shareholder returns when the stock derated.