We have commenced reporting our returns on a net of fee basis. Our maximum fee for MLP accounts is 1.65%. After backing this out from the gross return, we have the net return. Our largest accounts and institutional or sub-advised accounts are charged a smaller fee, so the net returns in these cases underreport those real net returns. Nevertheless, it is convention to report returns net of fees.
We still report returns on an asset class basis. This means we track all MLPs and aggregate those returns and subtract the fee. The Global Investment Performance Standards “GIPS” is the international standard for reporting. It is expensive and administratively cumbersome to implement, but we are moving to that standard too. We will begin reporting a GIPS format performance number this coming year. One difference is that the performance is on the whole account performance not just the MLPs. This also means that some accounts are not included, resulting in some MLP’s performance not being included. We think to have all MLPs included is a more objective measure, but this is a point of debate and standards. We have many accounts which are only partly invested in MLPs. Consequently, we have presented our performance using the asset class methodology.
The bottom line is that our very solid long term annualized performance is now being reported about 1.65% lower than before. However, due to compounding there are small differences from a simple 1.65% deduction. Our performance continues to show solid returns and high levels of outperformance.
Our performance for November is up 5.49% gross and 5.35% net.
Year to date our performance is up 35.27% gross and 33.30% net.
One year performance is up 25.30% gross and 23.29% net.
Three-year performance is up 0.39% gross and -0.01% net.
Five-year performance is up 10.21% gross and 9.40% net.
Ten-year performance is up 14.06% gross and 12.30% net.
Since inception, Dec 31, 2000 performance is up 16.51% gross and 15.03% net.
What is particularly impressive is our outperformance relative to the Alerian MLP Total Return index-AMZX.
Year to date we have outperformed the AMZX by 19.97%.
Our one year outperformance is 14.01%.
Our three-year outperformance is 5.53%.
Our five-year outperformance is 6.93%.
Our ten-year out performance is 4.56% and
since inception our outperformance is 2.54% net after management fees.
Relative to the AMLP MLP ETF, our MLP separately managed account performance still shows significant outperformance after including a management fee of 1.65%. The AMLP started trading in August of 2010 and since we measure our performance monthly, we compare our performance from August 31, 2010. The outperformance of IGA’s MLP SMA’s after management fee declined from 12.50% gross to 10.66% net annualized.
MLPs, the election and energy’s future:
November 2016 will go down in history for the stunning election of Donald Trump over Hillary Clinton. November will also be remembered in the energy world as the month when OPEC decided to cut production, proving its 2014 production increase gambit was a failure.
Regarding the Trump Presidency, I have attached a separate note on the implications of Trump’s surprising victory. In short, the nationalist business man and president elect, will likely roll back environmental regulations aggressively promoted by the Obama administration and the EPA. Additionally, the government will promote the development of the country’s vast natural resources such as its massive shale resources. This means that US natural gas and oil production should see a solid rebound as the energy sector comes out of one of its great down cycles.
The down cycle in oil which started in June 2014 was accelerated and exacerbated by OPEC’s critical and historic decision to not cut production in late November 2014. Instead, OPEC, led by Saudi Arabia chose to increase its production and punish non-OPEC producers like the United States which had emerged as a top global producer as a result of its massive shale revolution. The intent of the OPEC cartel was to reduce US oil production by increasing its own market share. It underestimated its members’ tolerance for economic pain and US producers’ ability to lower production cost. OPEC and Saudi Arabia have now appeared to have lost this trillion dollar gamble.
While the US oil market decline since 2014 caused wide spread misery in the energy sector, the US energy complex reduced costs, lowered production break evens and now is a stronger and more efficient global producer of oil and gas. With a Trump administration policy focused on energy independence and leveraging our exceptional natural resource reserves, US energy growth prospects improved with the two significant events in November. That was not the OPEC plan.
With US oil production near 10 million barrels a day, the law of large numbers will limit growth to high single digits or low double digit levels. However, the roll back of regulations and a pro-growth government will raise energy growth prospects a few percentage points worth trillions in the aggregate. This backdrop will help drillers in the country’s best shales and energy infrastructure (MLPs) overall.
The negative economic development of the Trump election is the rise in interest rates. We expect that a shift to fiscal stimulus and away from global monetary stimulus will lead to higher rates globally. The trendline of declining rates since 1982 has broken and higher interest rates will weigh against all income producing assets including Master Limited Partnerships. However, MLPs are a unique asset class in that they offer high tax advantaged yields with the prospect for meaningful distribution growth. We believe that the prospect for improved energy growth will outweigh the downside risk of higher rates which a Trump administration will likely facilitate.
Recent MLP performance illustrates that the prospect for higher growth in the energy sector will more than offset the negative impact of higher interest rates. In November, the AMZX rose 2.3% while interest rates on the 10-year Treasury Note rose from 1.83% to 2.37%. Normally, the MLP index would decline 5.4% based on the 54 basis point rise in rates in the 10-year Treasury note. 10-year US Treasury Note yields are up from a low 1.36% in July and MLPs are up too, showing that the improving energy sector prospects have outweighed the rise in 10-year US treasury notes yields.
We will continue to invest in those operators whose operating metrics are most attractive based on their business models and shale economics.
We continue to view MLPs as a conservative asset class that benefits from recurring revenues inherent to energy infrastructure projects. MLP yields continue to portend higher MLP prices relative to other yield investments. Due to the election of Donald Trump and the negotiated reduction in oil production by OPEC this November, US energy growth prospects are measurably stronger than a month ago. Consequently, we remain solidly optimistic on the total return prospects for MLPs which we estimate will be in the 25-50% total return range over the next two years.
For optimal investment performance, we recommend investing in MLPs through separately managed accounts and avoiding MLP mutual fund structures. MLP mutual funds are subject to taxation of approximately 30% defeating the benefit of the tax free corporate structure of the Master Limited Partnership. IGA’s MLP Separately Managed Account performance has outperformed the AMLP ETF by 10.66% annually (= 12.08% – 1.42%) since 8/31/2010. For the convenience of avoiding K-1s, this performance disparity is tremendous. Consequently, for investments over $100,000, we recommend our separately managed account strategy. We can implement this strategy through our prime brokers US Trust/Bank America/Merrill Lynch, Folio Institutional and Interactive Brokers. This is a particularly sensible time to evaluate your allocation to this attractive sector. We see a clear path to generate meaningful relative and absolute performance over the next two years.
Tyson Halsey, CFA
Income Growth Advisors, LLC
225 Seven Farms Drive, Suite 108
Charleston, SC 29492