November 2014 monthly MLP commentary

We had a small write up in The Wall Street Journal, this past weekend, in Jason Zweig’s Intelligent Investor column “An Energy Boost for Portfolios”. If you would like a copy, please let us know.

Our MLP SMA asset class performance declined 5.58% in October along with our benchmark. Our year to date our performance is up 21.41% — handily outpacing both the Alerian and S&P 500 capitalization weighted indexes. Since inception 12.31.2000, our MLP performance has annualized 21.77% before management fees. Since inception, we have outpaced the Alerian Cap Weighted Index (AMZX) and the S&P 500 (SPY) by 3.66% per and 16.11%.


Market and Analysis
October was a volatile month for equities. Intraday, on October 16th, the Dow Jones Industrial Average was down 460 following an Ebola rumor. The next morning, on Bloomberg TV, St. Louis Federal Reserve Bank President, James Bullard laid out the rational for the QE program to continue through the end of the year; the market has not looked back since. Following the much anticipated announcement of the end QE this month, this past Wednesday, the Bank of Japan announced a huge quantitative easing program and the US equity markets reached new highs by month’s end.

Our MLP stock selection focus has been on the faster growing MLP, which typically have much lower yields than upstream exploration and production oriented MLPs. With the recent sharp decline in oil prices, upstream MLPs declined 30-40% by mid-month and have had a relatively modest rebound. Our higher growth midstream MLPs dropped sharply and rebounded, but are still off their highs by 5-10%. We continue to favor buying the midstream growth MLPs which will provide better tax efficient total returns over time, even if their distribution yields seem relatively low. Over the next decade, we expect there will be consolidation in the MLP sector as telegraphed by Kinder Morgan’s recent decision to buy in all of its limited partners. We believe some of these midcap growth MLPs will be acquired by the largest MLPs in future years and provide a nice boost to performance.

The recent unusually sharp decline in oil prices is believed to be politically driven by Saudi Arabia and the United States to pressure Russia and Iran. Consequently, predicting where oil will go is far more complex than a simple supply and demand calculation. As such, we are not inclined to buy upstream MLPs, even though their yields are terribly high.

Our investment methodology is a two part process. We evaluate all MLPs based upon fundamental metrics like distributable cash flow, distribution yield and distribution growth. Once this quantitative sort is done, we look for high quality franchises just like Warren Buffett does. Alternatively stated, we buy good franchises at reasonable prices and are patient.

We recommend investing directly in MLPs through separately managed accounts and not through mutual funds or ETFs whose C-Corp. tax structure hurt fund holders’ returns. Jason Zweig’s column underscores this structural inequity.