One of my pet peeves is that the UK funds market is increasingly mispricing quality assets because it fears volatility and uncertainty. It also doesn’t help that too many funds have over indulged income investors who want a steady income and want to avoid difficult reporting to clients.

Compounding this challenge is the reality that many alternative funds are really operating companies (opcos) masquerading as income funds. Mispricing thus becomes rife, which is great news for the opportunistic new investor, less so for existing shareholders and fund managers.

The small shipping funds segment is a great example. Both Tufton Oceanic (SHPP ) and Taylor Maritime (TMI ) are trading on roughly 25% discounts and yield 8.9% and 8.2% respectively. Those numbers suggest investors have doubts about the funds’ asset backing and the sustainability of their dividend yields – any yield above 8% in my book tells you the market is pricing in a lot of downside risk.

To be fair, caution is warranted. Owning ships and then chartering them out on relatively short leases is a tough business model – Tufton, for instance, has an average charter length of 1.7 years which means that if the global economy slows down then its income will receive a quick, sharp shock.

While we are looking at the risks, there is the reality that since China’s post-Covid recovery weakened, shipping rates and valuations have been in a down cycle. All of this is made worse by the fact that investors and analysts can always pop along to ship broker Clarkson’s and look up the ship valuation – and going rates for hire – on bulk tankers or handysize ships.

Next up on the list of worries is that TMI for instance has recently bought back in its US-listed Grindrod business which initially plumped up the debt ratios. If we include the Grindrod business, the debt-to-gross asset ratio is probably around 35%.

So, let’s quickly run through the checklist for the bears: volatile asset class, macroeconomic uncertainty, debt and big dividend payouts to finance. That said, at Tufton the forecast dividend cover is probably at around 1.6 times over the next 18 months, according to Jefferies analyst Matt Hose, who produces the excellent, quarterly Shipping Forecast report.

But, and here comes my peeve, all this is not exactly hidden. With very little effort, you can work out the cost of a handysize ship owned by the funds – I think I saw roughly around $20m a ship, although the modern, Japanese ships both funds operate might fetch a premium.

On a side note, TMI is now completely based around Japanese handysize ships whereas Tufton owns eight handysize vessels, plus one ultramax. TMI’s combined fleet (with Grindrod) now comprises 40 vessels, with an average age of 10.5 years.

While looking at those market reports you can see that although bulk charter rates were depressed in 2023, there is strong evidence of a recent recovery. According to Taylor Maritime’s last quarterly report, charter income for the fleet increased by around 15% in the most recent period with dry bulk charter rates reaching 13-month highs in mid-December.

One last thing you’ll see is that there are not enough modern handysize ships being built and all those impending regulations about pollution mean that if you have a young fleet with less polluting ships, you’re in a decent position when it comes to reselling.

Both funds have reported decent financials. SHPP for instance announced a net asset value (NAV) per share of $1.496 as of 31 March, reflecting a total return for the quarter of 4.5%. Over at TMI, NAV per share was $1.36 on 31 December, up 3.8% from $1.31 as of 30 September. Crucially you can also see very clearly that these assets have real mark-to-market prices – there are no mysterious black box valuations built around lots of variables.

Here’s one incredibly important point – you can also see very clearly what the ships are worth when they sell them. TMI for instance has disposed of 16 vessels since completing its acquisition of Grindrod, at an average discount of 3.7% below the carrying value.

So, all those worries about ‘Gosh, how do I value these alternative assets using my discounted cash-flow model?’ fade away.

As for debt, TMI is doing a decent job of paying off its borrowings and Tufton is running a net cash position.

So, maybe a different way of looking at these funds is to regard them as operating shipping businesses? Ironically, TMI bought an operating business, Grindrod, but merged it back into the fund on a share price to cash earnings (paid as dividends) multiple of just under 12 with low leverage and potential upside.

On a tangible-to-book value basis, both are trading at 0.75 and both look like they are sailing into a more clement shipping market with rising charter rates. And there’s always that 8.5% dividend yield plus tangible book value upside to cushion you against the volatile market.

To me, if you’re looking for an alternative asset class where you can believe what the profit and loss and valuation models tell you, that seems like a slightly ripe price compared to the legion of alternative funds with complex valuation models.

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances.