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 is 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 is an area that has been increasing popular, based on the premise that such investments offer a new avenue for obtaining scarce risk-adjusted returns. In addition to appreciation potential, ships, like buildings, pipelines and toll roads, can provide a visible stream of income. When risk can be effectively managed, a maritime strategy is capable of generating sizable returns relative to other financial and real assets.
Global seaborne trade amounted to approximately 50 trillion ton-miles in 2013 and has averaged more than 6.5 percent annual growth since 2001. Roughly $1.8 trillion has been invested in new vessels over the past 20 years, a figure that London-headquartered Clarksons, one of the world’s leading ship brokers, anticipates will double within the next decade because of replacement of current vessels as well as expansion of the global fleet.
Shipping, although not as visible as real estate, perhaps plays a greater role in modern life. The global maritime industry moves 90 percent of world trade. A commuter’s everyday automobile, for instance, is typically a product of 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, apparently domestic-make 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 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, one that employs 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. Such comparisons also extend to more mainstream financial asset classes, such as equities, fixed income and real estate investment trusts. Maritime investments also have the added benefit of being primarily U.S. dollar–denominated, which lessens 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 integral position in the global economy, underlying asset values could potentially improve in a growth-driven, rising interest rate environment.
Just as no real estate investor would assume that all buildings are created equal, different vessels have divergent qualitative and quantitative variables, which can impact risk and return profiles. Nevertheless, whereas 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 that category.
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. Plus, low historical asset values afford the prospect of relative asset value appreciation during future economic recoveries.
Andrian Dacy is global head of maritime and the CIO of J.P. Morgan Asset Management’s Global Maritime Investment Fund in New York.
