Sailing the High Seas

With interest rates at or near all-time lows across the developed world, and an increasingly uncertain equity market, investors are finding new opportunities in old, yet often unexplored, sectors of the global economy. It’s a quest leading to unique and mature markets that have been less visible in recent times.

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With interest rates at or near all-time lows across the developed world, and an increasingly uncertain equity market, investors are finding new opportunities in old, yet often unexplored, sectors of the global economy. It’s a quest leading to unique and mature markets that have been less visible in recent times.

By Andrian Dacy

With interest rates at or near all-time lows across the developed world, and an increasingly uncertain equity market, investors are finding new opportunities in old, yet often unexplored, sectors of the global economy. It’s a quest leading to unique and mature markets that have been less visible in recent times.

In this sea of alternative investing, an island left largely unexplored remains the maritime industry. Investing in maritime assets (ships) is an area where there has been increasing popularity, based on the premise that such investments offer a new avenue for obtaining scarce risk-adjusted returns. Ships—like buildings, pipelines and toll roads—in addition to appreciation potential, can provide a visible stream of income. When risk can be effectively managed, a maritime strategy is capable of generating notable relative returns vs. other financial and real assets.

This sector is the workhorse of the global economy. Seaborne trade amounted to approximately 50 trillion ton-miles in 2013 and has averaged over 6.5% growth per annum since 2001, exceeding average global GDP growth of 4.0% over the same period. Roughly $1.8trn has been invested in new vessels over the past 20 years, a figure Clarksons, one of the world’s leading ship brokers, anticipates will double within the next decade due to replacement of current vessels as well as expansion of the global fleet.

Shipping, while not as visible as real estate, arguably plays a greater role in modern life. The global maritime industry moves 90% of world trade. For example, trainers from facto­ries in Vietnam to joggers in the US; mobile phones from assem­bly plants in China to consumers in Europe; soybeans and wheat from the US to noodle makers in China. Even these basic examples fail to reflect the full depth and complexity of maritime networks. A commuter’s everyday automobile, for instance, is typically an import from many different geogra­phies—steel smelted in Japan with coking coal mined in Canada and iron ore sourced in Australia or Brazil. So even a new “domestic” car may have traveled tens of thousands of miles before it leaves the showroom.

Like real estate and infrastructure, maritime assets—most often ships—are typically long-lived, with an average useful life of 25 to 30 years. They are employed in numerous global industries by a wide variety of end users of diverse credit quality. There are also multiple employment opportunities and structures that offer a variety of options regarding duration of employment and consistency of revenue. Vessels also come in a wide range of sizes and ages, and there can be differences in construction quality based on a vessel’s yard of build as well as ongoing maintenance.

Furthermore, a maritime strategy, employing long-term charters of varied duration to creditworthy counterparties, can provide a diversification strategy with distinct correlations to other asset classes, such as infrastructure and real estate. This comparison extends to more mainstream financial assets, such as equities, fixed income and REITs. Mari­time investments also have the added benefit of being primarily US dollar denominated, decreasing foreign exchange risk.

Unlike bonds, which typically underper­form in rising interest rate and inflationary environments, the maritime sector is positively correlated to inflation. In fact, given shipping’s vital role in the global economy, underlying asset values could potentially improve in an eco­nomic-growth-driven rising interest rate environment.

Just as no real estate investor would assume all buildings are created equal, different vessels combine divergent qualita­tive and quantitative variables, which can impact risk and return profiles. Nevertheless, while ships vary by sector, carry­ing capacity, demand fundamentals, yard of build and mainte­nance record, they do enjoy a degree of homogeneity among specific vessel sizes, allowing for price transparency within size categories.

Despite being a very old industry, maritime is a new and exciting asset class for institutional investors. As the search for income in a low interest rate environment continues, maritime investments are increasingly being considered as a potential option within a portfolio of both financial and other real assets. They offer inflation protection not available in conventional fixed income investments, and low correlations further insulate maritime within a broader investment strategy. Finally, low historical asset values afford the prospect of relative asset value appreciation in a future recovery.

Andrian Dacy is global head of maritime, global real assets group, JP Morgan Asset Management

 

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