“Consistency of involvement is a big deal in shipping. It is very hard to dip in and dip out.”
The Grid: Which sectors do you invest in and what is your methodology?
Marcus Machin: Our business is solely focused on shipping and oil services. We have approximately US$1.6bn in AUM, of which 40% is in a hedge fund while the rest is deployed in direct investments (59 vessels). From our Dubai office we cover a footprint roughly from Istanbul to Singapore.
The sectors we cover are perceived to be highly volatile in terms of earnings and asset values. Our job as investment manager is to ensure we understand the shipping and oil services markets and the factors that affect them. We then match opportunities to the risk-return parameters of our institutional counter parties. In the last five years we have seen more people drawn into alternative assets as a result of low yields in habitual investments.
The Grid: Can they safely invest in such areas with little past experience?
Marcus Machin: Shipping is an attractive sector in part because for many it is a new asset class with an uncorrelated risk-return profile. Traditionally shipping has been funded by bilateral bank debt (70%). With pressure on balance sheets, banks have pulled back (overexposure and other calamities since 2008). That has meant demand for new sources of capital.
The sector is primarily US$ denominated, investments are typically tax neutral and there is a long established legal context governing contractual relationships in the shipping industry. Even here in the DIFC we now have the Emirates Maritime Arbitration Centre.
The Grid: What about the sector’s inherent volatility and its vulnerability to factors such as oil?
Marcus Machin: It’s a question of market knowledge and expertise. Like any other sector, if you are the market stooge you will find that you will have difficulty (same in property or aircraft investing). Despite being a global industry, shipping still operates on quite a self-contained basis (i.e. less corporatized than many international industries).
What that means is that industry intelligence and knowledge is not necessarily easy to come by, but long-term involvement is a considerable advantage because you gain access to direct market insight and have direct access to market participants. Consistency of involvement is a big deal in shipping. It is very hard successfully to dip in and dip out of the market.
The fall in oil prices in 2014 was extraordinarily helpful to sub-sectors like tankers, container and dry bulk shipping. The oil services sector, on the other hand, unsurprisingly has been impacted negatively. Participants are having to work through a protracted downturn as severe as any over the past thirty years.
The Grid: What does that mean for Tufton Oceanic?
Marcus Machin: It’s an opportunity. We should, if we do our job correctly, anticipate market movements, and we should, because of the focus on the key drivers in the industry both from the supply side (# of ships built) and demand side (for the movement of their cargoes), have a a clear opinion of which sub-sector should have a favourable outlook. That guides our investment decision-making
The Grid: Which sub sector is more favourable going forward?
Marcus Machin: If you take a speculative approach and wish to look for strong capital gains its almost impossible to ignore the container shipping sector. In the medium term, the supply side is highly constrained. You can argue the same for the dry bulk market, but there possibly the barriers to entry are lower and the market has partially bounced back in the last six months. The container sector has yet to do so.
We have certainly followed our own advice and bought in the container sector for our investment vehicles which are governed by the requisite risk – return parameters. Those mandates that take an aggressive stance are from UK and US pension funds that are not constrained by a specific hold period and which have the ability to sell on market improvement when it occurs..
The Grid: How are regional investors different from a risk-return perspective, if at all?
Marcus Machin: Our regional investors are conservative. They focus on credit, clear payment obligations and payment flows, not just market risk. In other words, pre-determined revenue flows that are focused on yield instead of capital gain. And the yield is favourable in comparison to that with similar risk in the property or aircraft sector. Over the last fifteen years we have delivered 8%-12% net annual returns in our managed vehicles.
The Grid: What’s in store for Tufton Oceanic in the region going forward?
Marcus Machin: The focus continues to be on our managed investment vehicle activity. We are looking at edging into the debt market as opposed to the equity investment market as a direct result of the retreat of the international banks. That creates an opportunity and we think that could be quite attractive. That is a key differential. Where we traditionally looked at mezzanine or junior funding perhaps now there is an opportunity for senior funding. We are well placed to make sense of the overall shipping and oil services sectors in comparison with other investment opportunities , and this therefore is an interesting proposition for us and perhaps also for regional participants.
This is an extract from an interview with Marcus Machin, CEO, Tufton Oceanic (Middle East) Limited
Tufton Oceanic (Middle East) Limited is committed to being the pre-eminent fund manager for investors in the maritime, energy, transportation and infrastructure sectors. It is part of the London based Tufton Oceanic Finance Group which was established in 1985 and has been active in the Middle East since 2000 and regulated in the Dubai International Financial Centre since 2006.
Interview by Tasneem Mayet, Research Director, The Grid Media Ltd
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