The search for new yield-oriented investment opportunities has been a notable characteristic of the post-global financial crisis landscape. However, in the sea of alternative investing, the island left largely unexplored remains the maritime industry.
Allocating to maritime assets is an area of increasing popularity, based on the premise that such investments offer a new avenue for obtaining scarce higher-yield-oriented returns. Ships — like buildings, pipelines and toll roads — can provide a visible, reliable and consistent stream of income. When risk can be effectively managed, maritime investments are also capable of generating an attractive relative return versus other financial and real assets.
A yield-oriented maritime portfolio, employing diversified and long-term charters to creditworthy counterparties, can provide income in excess of other yield-oriented alternative portfolios, such as infrastructure and real estate. This premium extends to more mainstream financial assets, such as equities, fixed income, REITs and master limited partnerships. It is worth noting that maritime investments have the added benefit of being nearly all U.S. dollar denominated, decreasing foreign exchange risk.
In addition, the maritime sector can offer distinct advantages over the fixed-
income market, especially in a rising interest rate environment. 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 vessel asset values should improve in an economic-growth-driven rising interest rate environment.
Just as no real estate investor would assume that 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 sectors and sizes, allowing for price transparency within size categories.
Like a real estate owner, a ship owner has to toggle the length of a “lease” — which in shipping is called a “charter” — and counterparty credit quality to generate desired risk-adjusted returns. Charters vary in length from short-term spot market employment, measured in weeks or months, to longer-term period charters, which can run up to 10 or more years. Spot market charters can drive maximum profits in a strong market but leave a vessel exposed to market volatility, given their short duration. Period charters (such as time charters and bareboat charters) bring a measure of stability to the table. Large end users, such as oil conglomerates, major mining companies and global commodity traders that have visibility into their future transportation needs can insulate themselves from the gyrations of the market through longer-term contracts. Ship owners, for their part, ensure a vessel’s employment, lock-in a predictable cash flow and earn steady income, assuming they purchased the vessel at a price that allows for sustained profitability (that is, the operating expenses of the vessel, plus financing costs, do not exceed the charter hire) and have chartered the ship to a creditworthy counterparty.
Justin Yagerman (justin.b.yagerman@jpmorgan.com) is global maritime specialist with J.P. Morgan Asset Management — Global Real Assets.