ETF.com Webinar: MLPs at a Turning Point · Incentive structure at KMP (and most MLPs) sends...
Transcript of ETF.com Webinar: MLPs at a Turning Point · Incentive structure at KMP (and most MLPs) sends...
ETF.com Webinar:
MLPs at a Turning Point
Paul Britt, CFA Senior ETF Specialist ETF.com
Panelists
Scott Burley ETF Specialist ETF.com
Peter Lazaroff, CFA, CFP® Portfolio Manager Acropolis Investment Management
Recent Market Volatility
Data Source: Bloomberg
$70
$75
$80
$85
$90
$95
$100
$105
NYMEX WTI Crude
Crude Oil Prices
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
Source: Bloomberg
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
01/0
1/20
10
01/0
4/20
10
01/0
7/20
10
01/1
0/20
10
01/0
1/20
11
01/0
4/20
11
01/0
7/20
11
01/1
0/20
11
01/0
1/20
12
01/0
4/20
12
01/0
7/20
12
01/1
0/20
12
01/0
1/20
13
01/0
4/20
13
01/0
7/20
13
01/1
0/20
13
01/0
1/20
14
01/0
4/20
14
01/0
7/20
14
01/1
0/20
14
Inverted DXY WTI
Data Source: Bloomberg.
Impact of U.S. Dollar
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Inverted DXY WTI
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
Source: Bloomberg
Source: IMF World Economic Outlook
3.6
2.0
2.6
1.0 1.2
5.1
7.3
3.6
2.2
2.8
1.2 1.4
4.9
7.5
3.3
1.8 2.2
0.8 0.9
4.4
7.4
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
World AdvancedEconomies
U.S. Euro Area Japan EmergingMarket andDevelopingEconomies
China
Annu
al C
hang
e %
IMF Real GDP Estimates and Projections for Year 2014 Oct-13 Apr-14 Oct-14
Source: IMF World Economic Outlook
4.0
2.5
3.4
1.4 1.1
5.3
7.0
3.9
2.3
3.0
1.5
1.0
5.3
7.3
3.8
2.3
3.1
1.3
0.8
5.0
7.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
World AdvancedEconomies
U.S. Euro Area Japan EmergingMarket andDevelopingEconomies
China
Annu
al C
hang
e %
IMF Real GDP Estimates and Projections for Year 2015 Oct-13 Apr-14 Oct-14
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
-
1
2
3
4
5
6
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Jan-
07
Apr-
07
Jul-0
7
Oct
-07
Jan-
08
Apr-
08
Jul-0
8
Oct
-08
Jan-
09
Apr-
09
Jul-0
9
Oct
-09
Jan-
10
Apr-
10
Jul-1
0
Oct
-10
Jan-
11
Apr-
11
Jul-1
1
Oct
-11
Jan-
12
Apr-
12
Jul-1
2
Oct
-12
Jan-
13
Apr-
13
Jul-1
3
Oct
-13
Jan-
14
Apr-
14
Jul-1
4
Oct
-14
MnB
bl/D
ay
MnB
bl/D
ay
U.S. Shale Oil Production
Total Light Tight Oil Bakken Eagle Ford Haynesville
Marcellus Niobrara Permian UticaSource: EIA
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
Macro Events Impacting Oil Prices
Strengthening Dollar
Global Growth Forecast Revised Down
Strong U.S. Shale Oil Production Growth
Weakening GDP in Europe and China
Refinery Maintenance Season
Mixed Message from OPEC
Data Source: Bloomberg (S&P 500 Oil & Gas Exploration & Production Index, Alerian MLP Index, NYMEX WTI Crude Oil)
Recent Performance: E&P, MLP, and Oil
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
E&P MLP Oil
Historical Correlation to Crude Oil
Source: Bloomberg (as of 11/18/14)
Alerian MLP S&P 500 S&P 500 Energy
1 Month 0.66 0.35 0.65
1 Year 0.29 0.14 0.42
3 Year 0.29 0.25 0.45
5 Year 0.47 0.50 0.65
10 Year 0.39 0.32 0.59
MLP correlations to crude oil tend to spike in the short-run, but remain low over the long run.
Historical Correlations to Crude Oil (WTI)
Benefits of MLP Exposure
Growth of U.S. Energy Infrastructure
Need over $135 billion in energy infrastructure projects in U.S. by 2016
Stable and Growing Cash Flows
Fee-based toll road business models
Average distribution growth of ~ 7% over the past 10 years
No Entity-Level Taxation
No double taxation leads to more competitive cost of capital
Tax-Efficient Yield
70%-100% of income is treaded as tax-deferred “return of capital”
If held until death: MLPs step up in basis and income on distribution avoid most
taxation
Portfolio Diversification
Low correlation to broader markets
Less dependent on overall economic growth
Kinder Morgan Transaction
Kinder Morgan Transaction
Solving the Growth Problem Incentive structure at KMP (and most MLPs) sends increasing share of total cash
distributions to the general partner, creating a significant headwind to distribution growth.
The more successful an MLP is at growing distributions, the more difficult it will become to
sustain that growth.
Old solution: MLPs buy out their GPs’ incentive distribution rights (IDRs)
New solution: GP buys out their MLPs
Kinder Morgan Transaction
Industry Implications MLP structure remains a highly attractive operating and financing structure
Considerable running room for asset class due to infrastructure build out needs
MLPs with higher distribution splits more likely candidates for “simplications”
Mature MLPs with significant asset footprints are well-positioned to become consolidators
Continued MLP consolidation, supporting robust industry valuations and prompting smaller
MLPs to get bigger or get bought.
Kinder Morgan Transaction
MLP Fund Implications Index Changes
KMP = 9.34% of Alerian MLP Index (as of 9/30/14)
EPB = 2.72% of Alerian MLP Index (as of 9/30/14)
Taxes
Tax effect on funds that are “closed-end” or organized as C-corporations should be
minimal
Mutual funds that are “registered investment companies” will realize taxable income if
they hold the affected MLP units
Exchange traded notes (ETNs) experience no tax consequences
Active management may have short-term advantage over passive funds
No material change in yield and distribution growth for passive funds
Considerations for MLP Exposure
Ways to Invest
Product Type Direct Investment Closed-End Funds Open-End Mutual Funds
Exchange-Traded Notes
Exchange-Traded Funds
Tax Characteristic Flow-Through Yes Yes Yes No Yes
Tax Treatment Ordinary Income Qualified Dividend Qualified Dividend Ordinary Income Qualified Dividend
Tax Form Form K-1 Form 1099 Form 1099 Form 1099 Form 1099
IRA/401(k) Eligible Taxable Beyond $1,000 in UBTI Yes Yes Yes Yes
Leverage No Varies Varies Yes No
Annual Fee None Varies Varies Varies Varies
First Fund Launched N/A February 2004 March 2010 July 2007 August 2010
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
Choosing a Fund
Key Considerations Structure
Active vs. Passive
Index selection
Cost
Liquidity
Asset Location
Use of Leverage
AMLP vs. AMJ vs. EMLP
Source: Bloomberg (as of 11/18/14)
AMLP AMJ EMLP
Structure C Corporation ETN Registered Investment Company
Active / Passive Passive Passive Active
Index Alerian MLP Alerian MLP n/a
Gross Expense Ratio 8.56% 0.85% 0.95%
Average Daily Liquidity (millions) $71.30 $83.30 $10.30
Asset Location Taxable Account Tax Deferred Tax Deferred
Distribution Taxed As Mixed (some Return of Capital) Ordinary Income Dividend Income
Net Assets (millions) 9,600 6,600 $935
12-Month Yield 6.0% 4.4% 3.0%
12-Month Total Return 10.7% 15.9% 22.1%
22 ETPs available, in three different structures:
MLP Landscape
Structure No. of Funds
Combined Assets Under Management
C-corporation 7 $9.9 billion Exchange-traded note (ETN) 12 $11.5 billion Open-ended fund (1940 Act) 3 $1.1 billion
• Broad selection of strategies…
MLP Landscape
Fund Strategy
AMJ Broad market
AMLP Infrastructure only
AMU Broad market
AMZA Active, infrastructure only
ATMP Includes GPs
EMLP Active; includes C-corps, LLCs, royalty trusts, GPs…
ENFR Includes C-corps, GPs, Canadian dollar exposure
IMLP Broad market
MLPA Broad market
MLPC Complex fundamental screen
MLPG Natural gas only, equal-weighted
Fund Strategy
MLPI Infrastructure only
MLPJ Small-caps only
MLPN Infrastructure only, equal-weighted
MLPW Broad market
MLPX MLPs plus energy infrastructure C-corps
MLPY High-yield only, equal-weighted
OSMS Growing yields, low correlation to energy
YGRO Growing yields
YMLI Infrastructure only
YMLP High yield, small- and midcaps only
ZMLP Quality screens, equal-weighted
• At varying levels of liquidity…
MLP Landscape
Fund Average Daily Volume
Average Spread
AMJ $84.1 million 0.09%
AMLP $89.6 million 0.06%
AMU $3.1 million 0.17%
AMZA $389.3 thousand 0.33%
ATMP $1.2 million 0.13%
EMLP $8.9 million 0.11%
ENFR $187.0 thousand 0.20%
IMLP $4.0 million 0.17%
MLPA $1.1 million 0.16%
MLPC $873.9 thousand 0.16%
MLPG $78.8 thousand 0.16%
Fund Average Daily Volume
Average Spread
MLPI $11.0 million 0.12%
MLPJ $101.8 thousand 0.32%
MLPN $5.5 million 0.18%
MLPW $53.7 thousand 0.14%
MLPX $1.2 million 0.12%
MLPY $533.2 thousand 0.35%
OSMS $2.8 thousand 0.46%
YGRO $240.3 thousand 0.30%
YMLI $210.3 thousand 0.25%
YMLP $2.8 million 0.24%
ZMLP $892.0 thousand 0.13%
Average over 45 trading days to 11/13/14
Narrowing the Field
Structure Assets Under Management
Alerian MLP (AMLP) C-Corp $9.3B
JPMorgan Alerian MLP (AMJ) ETN $6.3B
ETRACS Alerian MLP Infrastructure (MLPI) ETN $2.3B
Credit Suisse Cushing 30 MLP (MLPN) ETN $927M First Trust North American Energy Infrastructure (EMLP) 40 Act $927M
iPath S&P MLP (IMLP) ETN $866M
ETRACS Alerian MLP (AMU) ETN $381M
Yorkville High Income (YMLP) C-Corp $300M
Recent Performance
-15%-10%
-5%0%5%
10%15%20%25%30%
11/1
3
12/1
3
1/14
2/14
3/14
4/14
5/14
6/14
7/14
8/14
9/14
10/1
4
11/1
4
AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP SPY
Cumulative total return, 12 months to 11/13/14
Recent Performance Cumulative total return, October 2014
-16%-14%-12%-10%
-8%-6%-4%-2%0%2%4%
9/30
/14
10/2
/14
10/4
/14
10/6
/14
10/8
/14
10/1
0/14
10/1
2/14
10/1
4/14
10/1
6/14
10/1
8/14
10/2
0/14
10/2
2/14
10/2
4/14
10/2
6/14
10/2
8/14
10/3
0/14
AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP SPY
Recent Performance Cumulative total return, October 2014
-16%-14%-12%-10%
-8%-6%-4%-2%0%2%4%
9/30
/14
10/2
/14
10/4
/14
10/6
/14
10/8
/14
10/1
0/14
10/1
2/14
10/1
4/14
10/1
6/14
10/1
8/14
10/2
0/14
10/2
2/14
10/2
4/14
10/2
6/14
10/2
8/14
10/3
0/14
AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP USO
Daily correlation to United States Oil Fund (USO), 12 months to 11/13/14
Correlation to Oil
-1 -0.5 0 0.5 1
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
Daily correlation to SPDR S&P 500 ETF (SPY), 12 months to 11/13/14
Correlation to Equities
-1 -0.5 0 0.5 1
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
Daily correlation to Energy Select SPDR ETF (XLE), 12 months to 11/13/14
Correlation to Energy Sector
-1 -0.5 0 0.5 1
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
Annualized standard deviation of daily returns, 12 months to 11/13/14
Volatility
0% 5% 10% 15%
USO
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
Annualized standard deviation of daily returns, 12 months to 11/13/14
Volatility
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
SPY
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
Annualized standard deviation of daily returns, 12 months to 11/13/14
Volatility
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
XLE
YMLP
MLPN
MLPI
IMLP
EMLP
AMU
AMLP
AMJ
12 months to 11/13/14
Yield vs. Total Return
AMLP AMJ
MLPI
MLPN EMLP IMLP
AMU
YMLP
SPY XLE
0%
2%
4%
6%
8%
10%
12%
-10% -5% 0% 5% 10% 15% 20% 25%
Dist
ribut
ion
Yiel
d
Total Return
Legal Structures Affect Performance
-5%
0%
5%
10%
15%
20%
25%
ETN (MLPI) C-corp (AMLP)
(Source: Bloomberg. Market price with dividends reinvested 10/31/13-10/31/14)
MLPs – Direct Investment
C-Corp
MLPs
• Pass-through structure
• Most income is Return of Capital
• ROC income is tax deferred; Lowers cost basis
• K-1 tax filing
Why Not Traditional ETFs?
ETF ETF MLPs (100%)
• 100% MLP holdings not allowed in traditional ETF (‘40 Act open-ended fund)
• Hence, alternative Exchange-Traded Product (ETP) structures
MLP ETP Structures
C-Corp ETF MLPs (25%)
Similar Energy Corps
ETN MLP Index
(100%)*
C-Corp MLPs (100%)
C-corporation
ETF ETF
• Holds 100% MLPs • Tax-deferred
income • Taxed at fund level! • Low “beta” to index
C-Corp MLPs (100%)
C-corporation Fees Reflect Taxes
ETF ETF
-
100
200
300
400
500
600
C-Corp ETN Trad. ETF
Average Expense Ratio (basis points)
(Source: ETF.com as of 11/19/2014. Among all 22 unlevered MLP ETPs)
Exchange–Traded Note
ETF ETF
• Pure play exposure • Income is fully taxed • Counterparty risk
C-Cor ETN MLP Index
(100%)*
Traditional ETF
ETF ETF
• Diluted exposure • Mixed portfolio • Lower yield recently
C-Cor ETN ETF MLPs
(25% Max)
Similar Energy Corps
MLP ETP Structures - Summary
C-Corp Direct MLP Investment
MLPs in Exchange-Traded Products
C-Corp ETN ETF
Tax-deferred income Yes Yes No Some
Pure exposure to MLPs Yes No Yes No
Issues K-1 Yes No No No
(Source: ETF.com)
Kinder Tax Impact on AMLP (C-corp)
C-Corp
(Source: “Kinder Morgan’s Tax Effects On MLP ETFs” 10/3/2014, ETF.com)
• No special distributions expected • Not required to distribute any cash
proceeds unlike an ETF • No additional taxes expected
• AMLP accrues taxes daily anyway
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Paul Britt, CFA Senior ETF Specialist ETF.com
Panelists
Scott Burley ETF Specialist ETF.com
Peter Lazaroff, CFA, CFP® Portfolio Manager Acropolis Investment Management
Thank You!