Managers at London-listed shipping fund Tufton Oceanic Assets have admitted boxship charter coverage is holding back its net asset value (NAV) in booming markets.
But the company argued that a stable rise in value as vessels are re-fixed at higher rates will pay off for investors over the long term.
In a first-quarter update, the shipowner said its NAV stood at $284.44m on 31 March, with a total return for the quarter of 9.1%.
But growth could have hit 25% with less charter coverage.
Paulo Almeida, chief investment officer at affiliated investment manager Tufton Investment Management, told TradeWinds that the company's charter coverage means its NAV will "lag the market".
"In targeting cash flow stability from a diverse portfolio to pay consistent strong dividends, this will mean our NAV will be much more stable too than the shipping markets overall," he said.
Long-term bet
The company believes this is the best way to participate in shipping for institutional investors.
"With the continued supply side correction, our NAV should keep increasing over time as some of our charters from 2020 end and those ships are re-fixed at current rates," Almeida added.
He described the results as Tufton Oceanic's best quarterly figures to date.
"I wish to note that this performance is many quarters to several years in the making," he added.
"We built a portfolio that performed very well through the first half of 2020 due to our higher tanker exposure at the time, and we shifted the portfolio towards containerships and bulkers later last year."
Almeida said: "And shipping of course is benefiting now from several years of underinvestment. This has served us very well."
Yield up 13%
The yield on the portfolio of 21 boxships, product tankers, bulkers and an LPG carrier increased to 13.3%, mainly due to new containership charters.
The company is paying a dividend of $0.01875 for the quarter and continues to target a total annual dividend of $0.075 per share.
Containership values rose strongly, Tufton Oceanic said.
But because market charter rates have increased greatly, the portfolio has a negative charter value of $44.6m.
This will move towards zero and increase NAV in the medium term as legacy charters end.
If market rates stay flat, there will be a gain of about $8m in NAV.
If rates go up, some charters will have more negative value, but the ship values will rise by more than this.
Boxship market surprises
The portfolio has an average charter cover of two and a half years.
"The containership market surprised even seasoned market participants as the effects of strong demand were accentuated by regional port congestion," Tufton Oceanic said.
Asset values rose strongly, with the benchmark for a 10-year-old, 2,500-teu vessel up 54%, or $7m, during the first quarter.
Shipbroker Harper Petersen has said there is negligible containership vessel capacity becoming available in the coming 12 months.
The tanker market remains weak, but the company’s six product tankers are on long-term charters fixed before current market conditions slumped.
