Finding Income with MLPs

Transcription

1 Finding Income with MLPs Webinar November 1, 2016

2 Disclosures (1/2) Investing involves risk, including the possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). MLP funds may invest in the energy industry, which entails significant risk and volatility. In addition, the funds may be non-diversified, which represents a heightened risk to investors. Furthermore, the funds may invest in small and mid-capitalization companies, which pose greater risks than large companies. Due to the nature of some MLP funds investments, the fund will be subject to taxation on its taxable income. The NAV of shares will also be reduced by the accrual of any deferred tax liabilities. The Underlying Index however is calculated without any deductions for taxes. As a result, the fund s after tax performance could differ significantly from the Underlying Index even if the pretax performance of the fund and the performance of the Underlying Index are closely correlated. MLP funds may be taxed as a regular corporation for federal income tax purposes. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor s return from an investment in the fund. The potential tax benefits from the fund's investment in MLPs depends largely on the MLPs being treated as partnerships for federal income tax purposes. As a partnership, an MLP has no federal income tax liability at the entity level. Therefore, treatment of one or more MLPs as a corporation for federal income tax purposes could affect the fund's ability to meet its investment objective and would reduce the amount of cash available to pay or distribute to you. There is no guarantee distributions will be made and dividends may be reduced or eliminated at any time. Furthermore, certain distributions are expected to be treated as a return of capital for tax purposes rather than from net profits and shareholders should not assume that the source of distributions is from the net profits of the fund. The fund is required to distribute income and capital gains, which may be taxable. Buying and selling shares will result in brokerage commissions and tax consequences. This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation. Securities mentioned, comments made, or charts included also are not recommendations to buy or sell any security. All expressions of opinion reflect judgement as of the date set forth above and are subject to change. Sources utilized for this information are believed to be accurate but no warranties are made to their accuracy or timeliness of reporting. Global X Management accepts no responsibility for the conclusions and decisions clients make utilizing this information. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 2

3 Disclosures (2/2) Carefully consider MLPA and MLPX s investment objectives, risks, and charges and expenses. This and other information can be found in the fund's summary and full prospectuses. This and additional information can be found in the Funds' summary and full prospectuses, which may be obtained by calling GX-FUND-1 ( ), or by visiting Please read the prospectus carefully before investing. Global X Management Company LLC serves as an advisor to the Global X Funds. MLPX and MLPA are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company or any of its affiliates. Solactive Indexes have been licensed by Solactive AG for use by Global X Management Company LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds. Concentration Risk: Because MLPX and MLPA s investments are concentrated in the energy sector, the Funds will be susceptible to loss due to adverse occurrences affecting this sector or industry. To the extent that the Underlying Indexes concentrate in the securities of issuers in a particular sector or industry, the Funds will also concentrate its investments to approximately the same extent. By concentrating its investments in a sector or industry, the Funds face more risks than if it were diversified broadly over numerous sectors or industries. Such sector-based risks, any of which may adversely affect the companies in which the Funds invest, may include, but are not limited to, the following: general economic conditions or cyclical market patterns that could negatively affect supply and demand in a particular sector or industry; competition for resources, adverse labor relations, political or world events; obsolescence of technologies; and increased competition or new product introductions that may affect the profitability or viability of companies in a sector or industry. In addition, at times, such sector or industry may be out of favor and underperform other sectors or industries or the market as a whole. Non-Diversification Risk: MLPX and MLPA are classified as a non-diversified investment companies under the 1940 Act. As a result, the Funds are subject to the risk that they will be more volatile than a diversified fund because the Funds may invest their assets in a smaller number of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains and losses on a single investment may have a greater impact on the Funds NAVs and may make the Funds more volatile than more diversified funds. Management Fees Other Expenses (Deferred Income Tax Expense and Franchise Tax Expense) Total Expenses Global X MLP ETF (MLPA) 0.45% % Global X MLP & Energy Infrastructure ETF (MLPX) 0.45% % GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 3

4 Webinar details Finding Income with MLPs 1 2 Income Environment State of MLPs MLP Insights 11 4 Q&A 22 Speaker: Jay Jacobs, CFA Director of Research Global X Leads the Global X research team, which provides insights & education on ETFs, income, multi-factor strategies, commodities, and thematic investing Author of the Global X research site: Former ETF & Index Business Analyst at NYSE BA, International Studies, Emory University GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 4

5 Income environment: The last 50 years of treasury yields Since 1960, 10 year US treasuries have averaged a yield of 6.3% 10 year treasuries have failed to deliver >4% yield for almost 8 years 18% 10 Year US Treasury Yield vs. 4% Income Target 16% 14% 12% 10% 8% 6% 4% 2% 0% 10 Year US Treasury Yield (below 4% target) 10 Year US Treasury Yield (above 4% target) 4% Income Target Source: Bloomberg, US Department of the Treasury (January 1960-June 2016) For illustrative purposes only. Past performance does not guarantee future results. Current 10 year treasury yield is ~1.8%; versus an average of 6.3% since GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 5

6 1 Income environment: Treasury yield impact on incomeproducing assets Low 10 year treasury yields are driving down the yields across various income-producing asset classes. 8% Current vs. 5 Year Avg. Yield of Various Asset Classes 7% 6% 5% 4% 3% 2% 1% 0% TIPS Investment Grade Bonds Utilities Real Estate Current Yield EM Bonds Preferreds High Yield Bonds 5 Year Avg Yield Source: Bloomberg, Citi. Data as of 10/25/2016. For illustrative purposes only. Past performance does not guarantee future results. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 6 MLPs MLPs are the highest yielding asset class among this list of incomeproducing investments. MLP yields are 14% higher than their 5 year average.

7 1 Income environment: The assets classes and value opportunities When looking at these asset classes based on their yield spreads to 10 year treasuries, the asset classes are looking more fairly priced compared to their 5-year averages, but few value opportunities are present. 6% 5% 4% 3% 2% 1% 0% -1% -2% Current vs. 5 Year Avg. Yield Spread to 10 Year US Treasuries -3% TIPS Investment Grade Bonds Utilities Real Estate EM Bonds Preferreds High Yield Bonds Current Spread 5 Year Avg Spread MLPs Source: Bloomberg, Citi, US Treasury. Data as of 10/25/2016. For illustrative purposes only. Past performance does not guarantee future results. MLPs spreads are 34% higher than their 5 year average. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 7

8 2 State of MLPs: The effects of movements in oil Over the last 5 years, MLPs have generated positive returns despite significant selloffs in oil. 100% 5 Year Returns Legend MLPs Oil 50% 0% -50% Despite oil being down -45%, MLPs are up nearly 20% over the last five years. -100% % 0% -20% -40% -60% Returns Since Beginning of Oil Selloff (June 2014) -80% Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Since June 2014, MLPs are down around -30%, versus oil which is down over -50%. Source: Bloomberg. Data from 6/30/2014 to 10/25/2016 For illustrative purposes only. Past performance does not guarantee future results. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 8

9 2 State of MLPs: Midstream vs. Upstream (1/2) Midstream MLPs have demonstrated significantly more robustness than the upstream segment. 20% 0% -20% -40% -60% -80% -100% Midstream vs. Upstream MLP Performance Since Oil Selloff Midstream MLPs Upstream MLPs MLP Composite Since June 2014, midstream MLPs are down approx. -30%, whereas upstream MLPs are down over -85% 45% of distribution-paying upstream MLPs have negative distribution growth over the last 12 months, compared to 11% of midstream MLPs Investors with high exposure to the upstream MLP segment likely have underperformed broader MLP benchmarks, which tend to be dominated by midstream MLPs Source: Bloomberg and MLP Data. Data from 6/30/2014 to 10/25/2016. Midstream MLPs represented by the Wells Fargo Midstream MLP Index. Upstream MLPs represented by the Yorkville MLP Exploration & Production Index. MLP Composite represented by the Solactive MLP Composite Index. For illustrative purposes only. Past performance does not guarantee future results. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 9

10 2 State of MLPs: Midstream vs. Upstream (2/2) Investors with upstream MLP exposure tend to hold composite MLP funds or High Income MLP funds. Typical Index/Fund Inclusions Description MLP Composite MLP Infrastructure High Income MLP Upstream Exploration & Production Horizontal drilling and fracking Potentially higher risk/higher reward business Benefits from high oil prices Included Overweight Midstream Storage & Transportation Natural gas and petroleum pipelines Toll road business model Less sensitivity to oil prices Included Included Underweight Downstream Refining, Marketing, and Distribution Interacts with end-consumer More impacted by fluctuations in demand Included Overweight GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 10

11 3 MLP Insights: 4 questions on MLPs 1. How robust is the midstream MLP business model in this low oil price environment? 2. What are the correlations between MLPs and oil? 3. Why should I consider including MLPs in my portfolio? 4. What are my options for investing in MLPs? GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 11

12 3 MLP Insights: Robustness of the midstream MLP business model in a low oil price environment The midstream MLP business model has proven resilient despite the low oil and natural gas price environment. 6.0% Avg. Change since Q3 2015* Among midstream MLPs 5.0% + 5.0% 4.0% 3.0% 2.0% + 2.6% Over the last year, key metrics for midstream MLPs have improved, including earnings (as measured by adjusted EBITDA), distributions, and coverage ratios. 1.0% 0.0% + 0.1% Adjusted EBITDA Distributions Coverage Ratio Source: MLPData, Bloomberg. For illustrative purposes only. Past performance does not guarantee future results. Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, less non-cash charges and unusual items. It is used as a proxy for MLP earnings. *measured from 9/30/2015 to 9/20/2016. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 12

13 3 MLP Insights: The correlations between MLPs and oil In early 2016, MLPs became highly correlated to oil as low commodity prices brought severe volatility to the space. We found that correlations between MLPs and oil tended to increase the lower oil prices fell. As oil prices recovered in early Q2 2016, correlations began to revert towards more normal levels. Source: Bloomberg, Data from 8/1/2014 to 7/31/2016. For illustrative purposes only. Past performance does not guarantee future results. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 13

14 3 MLP Insights: Consider including MLPs in a portfolio MLPs are demonstrating high nominal yields and low correlations to other asset classes The high nominal yields of MLPs can not only potentially increase the yield of a portfolio, but can also allow PMs to include lower yielding portfolio stabilizers. MLPs have low correlations to traditional bonds and equities and therefore can play the role of a diversifier in an alternatives sleeve. For illustrative purposes only. Past performance does not guarantee future results. Charts as of September 30, GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 14

15 3 MLP Insights: Options for investing in MLPs (1/3) The method chosen for investing in MLPs can significantly impact returns, risks, distributions, and taxation. Potential Advantages Potential Disadvantages Buy MLPs Directly Choose your exposures Avoid fund management fees Must file Form K-1 in every state that an MLP operates Usually generates UBTI for tax advantaged accounts Use an Investment Vehicle Exchange Traded Fund (ETF) Exchange Traded Note (ETN) Closed End Fund (CEF) Mutual Fund Outsource investment decisions to fund advisor Avoid K-1s Management Fees Potential fund level taxes or credit risk UBTI: Unrelated business taxable income. Tax advantaged accounts are typically limited to less than $1000 in UBTI, or risks losing its tax advantaged status. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 15

16 3 MLP Insights: Options for investing in MLPs (2/3) The method chosen for investing in MLP funds can significantly impact returns, risks, distributions, and taxation. Mutual Fund Closed End Fund ETF ETN Exposure Up to 100% MLPs Up to 100% MLPs Up to 100% MLPs Up to 100% MLPs (via note from a bank) Taxed at Fund Level Yes Yes Yes No Credit Risk No No No Yes Tax Reporting 1099 only 1099 only 1099 only 1099 only Active Management Yes Yes Some No UBTI No No No Under review by IRS Based on current MLP fund landscape. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 16

17 Total Return 3 MLP Insights: Options for investing in MLPs (3/3) Actively managed MLP mutual funds have largely failed to outperform plain vanilla MLP index funds over the last year. 0% -20% -40% -60% 20% 15% 10% Risk vs. Total Return One Year (9/30/2015 to 9/30/2016) Median MLPA Average 5% 15% 20% 25% 30% 35% 40% MLPA Standard Deviation (Risk) Max Drawdown 9/30/2015 to 9/30/2016 Median Average Only one of the 16 mutual funds outperformed MLPA. On average, this group of funds returned 9.1% over the last year, with 26.6% volatility. By comparison, MLPA returned 16.5%, over 700 basis points better, with slightly lower than average volatility of 24.8%. MLPA s maximum drawdown of % ranked it fourth best out of the group, with median mutual fund drawdowns amounting to %, and average drawdowns coming to -32.7%. -80% Sources: Morningstar, Bloomberg. Average and median figures refer to the average and median risk/returns of all mutual funds considered in the analysis. Mutual funds included are from the Morningstar Category: US OE Energy Limited Partnerships. Only mutual funds structured and taxed as a C-Corp are considered for the analysis. Data from 9/30/2015 to 9/30/2016. Performance and volatility data sourced from Morningstar. Volatility is the annualized standard deviation of daily NAV changes. For illustrative purposes only. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 17

18 3 MLP Insights: Options for investing in MLPs (3/3) Actively managed MLP mutual funds have largely failed to outperform plain vanilla MLP index funds over the last year. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 18

19 3 MLP Insights: Impact of accrued taxes (1/2) For MLP ETFs, CEFs, and mutual funds, fund-level taxation can be a drag on returns in bull markets, but may help soften losses in bear markets Fund lags its index because it must accrue a tax liability on realized & unrealized gains Fund can use its accrued tax liability to offset future losses, supporting returns in a bear market Returns pictured above are hypothetical and for educational purposes only. Indexes are unmanaged and it is not possible to invest directly in an index. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 19

20 3 MLP Insights: Impact of accrued taxes (2/2) For MLP ETFs, CEFs, and mutual funds, fund-level taxation can be a drag on returns in bull markets, but may help soften losses in bear markets 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Liability Asset If a fund continues to fall and exhausts its tax liability, it will begin accruing a tax asset, and track the index one for one MLP Index MLP Index Fund 10% 8% 6% 4% 2% 0% -2% -4% -6% Liability Asset The fund can use this tax asset to offset future gains, until the asset is exhausted and the fund must accrue a liability again -8% -10% MLP Index MLP Index Fund Returns pictured above are hypothetical and for educational purposes only. Indexes are unmanaged and it is not possible to invest directly in an index. GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 20

21 3 MLP Insights: Tax efficient MLP funds RIC-structured MLP Funds seek to avoid fund-level taxation, while retaining high exposure to the MLP space Potential Exposure of RIC MLP Fund Characteristics MLPs <25% Limited to <25% exposure to MLPs Remaining >75% consists of General Partners of MLPs or other energy/infrastructure related corporations General Partners of MLPs >75% More total return focus than income GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 21

22 3 MLP Insights: Global X MLP ETFs Global X offers two MLP ETFs with management fees that are nearly half of the industry average. 1 Global X MLP ETF (MLPA) 0.45% Management Fee 100% midstream exposure 0.99 correlation between its underlying index and the Alerian MLP Infrastructure Index 2 No K-1s, 1099 only Appropriate for investors seeking income Global X MLP & Energy Infrastructure ETF (MLPX) 0.45% Management Fee Tax-efficient MLP exposure (RIC-structure) Approx. 25% MLPs, 75% general partners of MLPs and energy infrastructure corporations 100% midstream exposure Appropriate for investors seeking total returns 1. Versus average mgmt. fee of comparable Equity US MLP ETFs according to ETF.com as of 9/30/2016. As with other MLP ETFs, MLPA is subject to other expenses. 2. Source: Bloomberg, correlation between Solactive MLP Infrastructure Index from inception (March 24, 2015 to 9/30/2016) GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 22

23 4 Q&A: Thank you Thank you for attending! Please use the Questions box on the right hand side of your screen to submit a question. Additional MLP insights can be found at globalxfunds.com/research MLP Monthly Report MLP Quarterly Insights GLOBAL X MANAGEMENT COMPANY LLC. All numbers are approximate. 23