Full steam ahead!

Civilisations were built on shipping and today it is still the most cost-effective way to transport goods around the globe. Sebastian Cheek discusses what investors need to know in order to navigate the asset class safely.

“Private equity firms in principle don’t know anything about shipping, so why would you want to invest in shipping through a private equity firm?”

Tony Foster

“Without shipping, the world as we know it would not exist,” says Marine Capital chief executive Tony Foster. “Without shipping, the lights go out, literally.”

It may come as no surprise that this bold statement comes from the head of an asset management firm dedicated to shipping, but the fact is there is still no better way to transport goods to every corner of the globe – and unlikely to be for the foreseeable future.

Investors have therefore begun to look to the high seas for returns as part of an increasing move into real assets. But shipping’s course has not always been smooth sailing as the highly volatile and cyclical nature of the sector and highprofile piracy cases off the coast of Somalia in recent years have deterred investors.

The pre-crisis period between 2003 and 2008 saw the expansion of a shipping bubble largely driven by China’s demand for raw materials following its 2001 induction in the World Trade Organisation. When the crisis took hold in 2008/9 the bubble burst, demand decreased, charter rates plummeted and valuations sunk.

But according to Mercer head of alternatives in Canada, Ryan Bisch, this dislocation enabled buying opportunities to float to the surface. “In 2010 there were a limited number of folks talking about shipping,” he adds. “Fast-forward four years and there are more managers; the pure distressed opportunity has become more of a subtle dislocation and an opportunity to enter the asset class on a more normalised basis.”

JP Morgan Asset Management Global Maritime Investment fund CIO Andrian Dacy believes the industry is set for further recovery.

He adds: “The industry order book as a percentage of the existing fleet was 60% back in 2008 and is now about 20%. We’re about 30% back up the curve toward achieving historic mean average in terms of charter rates and end valuations.”

One fund to enter the sector on the back of this was the £6bn Merseyside Pension Fund.

“Three years ago, there was no reason to invest,” explains head of pensions Peter Wallach. “The world economy was in the doldrums, shipping was over-supplied, freight rates were at multiyear lows and all the news flow was bleak. However, as other assets were looking fully valued, I started to look at shipping.”

Essentially there are four ways to access the sector: investing directly and owning and operating ships; investing in private equity funds; investing in quoted shipping shares; and investing in hedge fund strategies. Commonly, investors opt for one of the first two either as an opportunistic play or as part of a return-seeking bucket.