Pension Funds Look to Place Bets on Shipping Recovery

shipping boat on the water

Some pension funds are thinking of buying a boat.

More specifically, they are weighing investments in the shipping industry, which some observers say is due for a recovery. If the industry does rebound, pension funds want to be among the beneficiaries.

But they are treading these waters carefully.

Reported by Reuters:

Pension funds, squeezed by low interest rates, are exploring investments in shipping in their hunt for higher returns, hoping to benefit once this industry starts to recover from one of its worst ever downturns.

There are signs of a gradual pick-up in world trade and ship values for the first time since the financial crisis. Ship financier NordLB has said the market could see a broad recovery but not before 2016.

The industry’s revival could deliver double-digit returns for pension funds that decide to add shipping to their so-called alternative assets such as infrastructure, which can make up about 15 percent of a fund.

But they need to do their homework.

Some hedge funds and private equity firms have been burned by diving into shipping too early and have found the recovery they were betting on has taken longer to materialise.

So far only a few pension funds have taken the plunge, also partly because of the need for specialised knowledge on shipping, such as how to price vessels accurately.

One pension fund leading the way is Ilmarinen in Finland, which had 34 billion euros ($41.8 billion) in assets at end-September. Earlier this year, Ilmarinen acquired five oil tankers and three supply ships from Finland’s state owned refiner, Neste Oil.

Esko Torsti, head of non-listed investments at Ilmarinen, said the investment was for tens of millions of euros through a new joint-venture firm owned by the pension fund and Finland.

“Investing in ships is not the easiest area, it requires extreme carefulness and special expertise,” Torsti said.

Another potential driver for investment is the shipping industry’s growing funding gap that has opened up as banks scale back lending due to capital constraints.

The combined value of ships on the water is estimated at $1.25 trillion with a further $380 billion in ships on order.

Among the pension funds that have taken the dive: Canada’s OMERS, Britain’s Merseyside Pension Fund and Finland’s Ilmarinen.


Photo by  Louis Vest via Flickr CC License

What Would Adam Smith Say About CalPERS’ Hedge Fund Pullback?

Adam Smith

Tim Worstall has written an interesting piece for Forbes in the wake of CalPERS’ decision to remove $4 billion from 30 different hedge funds. The premise: What would Adam Smith think about the pension fund’s decision to end its investments with hedge funds?

Worstall writes:

We can look back all the way to 1776 and the foundation text of modern economics, Adam Smith’s “Wealth of Nations” and find a reasonable explanation of what’s happening here. Essentially, hedge funds were a great idea but the innate structure of free market capitalism means that no idea stays great over time.


When the capitalists (investors) spot someone making those above average profits then they’ll move their investments over into that sector so that they can get them some of those excess returns. All of which is entirely fine and is a reasonable enough description of what happened to hedge funds from their small start in the 60s and 70s up to recent times. They were making higher (risk-adjusted) profits and people were moving more of their capital into them in order to get those higher returns.

However, Smith goes on to point out what happens next. That increased capital in that sector introduces more competition into that sector. Such competition, umm, competes away those excess profits and it’s thus, in the end, the very movement of capital (or investment) in chase of higher returns that leads to the higher returns disappearing. This would be a reasonable description of the hedge fund industry in more recent times.

Certainly, some funds have done very well indeed, but others have tanked. The average return from the industry (after fees, a vital point to consider) is now lower than many if not most other investment strategies. At which point we should see capital flowing out of the industry and that’s just what Calpers is doing.

Worstall is a senior fellow at the Adam Smith Institute. Read the rest of his piece here.


Photo credit: “AdamSmith” by Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872). Licensed under Public domain via Wikimedia Commons