ETF.com Webinar: MLPs at a Turning Point

Transcription

1 ETF.com Webinar: MLPs at a Turning Point

2 Panelists Paul Britt, CFA Senior ETF Specialist ETF.com Scott Burley ETF Specialist ETF.com Peter Lazaroff, CFA, CFP Portfolio Manager Acropolis Investment Management

3 Recent Market Volatility

4 Data Source: Bloomberg Crude Oil Prices $105 NYMEX WTI Crude $100 $95 $90 $85 $80 $75 $70

5 Source: Bloomberg Macro Events Impacting Oil Prices Strengthening Dollar 10.0% Inverted DXY WTI Global Growth Forecast Revised Down Strong U.S. Shale Oil Production Growth 5.0% Weakening GDP in Europe and China 0.0% Refinery Maintenance Season Mixed Message from OPEC -5.0% -10.0% -15.0% 01/01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/2014

6 Data Source: Bloomberg. Impact of U.S. Dollar 10.0% Inverted DXY WTI 5.0% 0.0% -5.0% -10.0% -15.0%

7 Source: Bloomberg 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

8 IMF Real GDP Estimates and Projections for Year 2014 Oct-13 Apr-14 Oct Annual Change % World Source: IMF World Economic Outlook Advanced Economies U.S. Euro Area Japan Emerging Market and Developing Economies China

9 IMF Real GDP Estimates and Projections for Year 2015 Oct-13 Apr-14 Oct Annual Change % World Source: IMF World Economic Outlook Advanced Economies U.S. Euro Area Japan Emerging Market and Developing Economies China

10 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

11 U.S. Shale Oil Production MnBbl/Day MnBbl/Day Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 - Source: EIA Total Light Tight Oil Bakken Eagle Ford Haynesville Marcellus Niobrara Permian Utica

12 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

13 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

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

15 Data Source: Bloomberg (S&P 500 Oil & Gas Exploration & Production Index, Alerian MLP Index, NYMEX WTI Crude Oil) 5% Recent Performance: E&P, MLP, and Oil 0% -5% -10% -15% -20% -25% -30% -35% E&P MLP Oil

16 Source: Bloomberg (as of 11/18/14) Historical Correlation to Crude Oil 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) Alerian MLP S&P 500 S&P 500 Energy 1 Month Year Year Year Year

17 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

18 Kinder Morgan Transaction

19 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

20 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.

21 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

22 Considerations for MLP Exposure

23 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

24 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

25 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

26 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

27 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

28 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

29 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

30 Choosing a Fund Key Considerations Structure Active vs. Passive Index selection Cost Liquidity Asset Location Use of Leverage

31 Source: Bloomberg (as of 11/18/14) AMLP vs. AMJ vs. EMLP 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 $ Month Yield 6.0% 4.4% 3.0% 12-Month Total Return 10.7% 15.9% 22.1%

32 MLP Landscape 22 ETPs available, in three different structures: 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

33 MLP Landscape Broad selection of strategies Fund Strategy Fund Strategy AMJ Broad market MLPI Infrastructure only AMLP Infrastructure only MLPJ Small-caps only AMU Broad market MLPN Infrastructure only, equal-weighted AMZA Active, infrastructure only MLPW Broad market ATMP EMLP ENFR IMLP MLPA MLPC MLPG Includes GPs Active; includes C-corps, LLCs, royalty trusts, GPs Includes C-corps, GPs, Canadian dollar exposure Broad market Broad market Complex fundamental screen Natural gas only, equal-weighted MLPX MLPY OSMS YGRO YMLI YMLP ZMLP MLPs plus energy infrastructure C-corps High-yield only, equal-weighted Growing yields, low correlation to energy Growing yields Infrastructure only High yield, small- and midcaps only Quality screens, equal-weighted

34 MLP Landscape At varying levels of liquidity Average over 45 trading days to 11/13/14 Fund Average Daily Volume Average Spread 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% 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%

35 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

36 Recent Performance Cumulative total return, 12 months to 11/13/14 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 11/13 12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP SPY

37 Recent Performance Cumulative total return, October % 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% 9/30/14 10/2/14 10/4/14 10/6/14 10/8/14 10/10/14 10/12/14 10/14/14 10/16/14 10/18/14 10/20/14 10/22/14 10/24/14 10/26/14 10/28/14 10/30/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP SPY

38 Recent Performance Cumulative total return, October % 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% 9/30/14 10/2/14 10/4/14 10/6/14 10/8/14 10/10/14 10/12/14 10/14/14 10/16/14 10/18/14 10/20/14 10/22/14 10/24/14 10/26/14 10/28/14 10/30/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP USO

39 Correlation to Oil Daily correlation to United States Oil Fund (USO), 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP

40 Correlation to Equities Daily correlation to SPDR S&P 500 ETF (SPY), 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP

41 Correlation to Energy Sector Daily correlation to Energy Select SPDR ETF (XLE), 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP

42 Volatility Annualized standard deviation of daily returns, 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP USO 0% 5% 10% 15%

43 Volatility Annualized standard deviation of daily returns, 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP SPY 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

44 Volatility Annualized standard deviation of daily returns, 12 months to 11/13/14 AMJ AMLP AMU EMLP IMLP MLPI MLPN YMLP XLE 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

45 Yield vs. Total Return 12 months to 11/13/14 12% 10% YMLP Distribution Yield 8% 6% 4% 2% XLE AMLP AMJ AMU MLPI MLPN IMLP SPY EMLP 0% -10% -5% 0% 5% 10% 15% 20% 25% Total Return

46 Legal Structures Affect Performance 25% ETN (MLPI) C-corp (AMLP) 20% 15% 10% 5% 0% -5% (Source: Bloomberg. Market price with dividends reinvested 10/31/13-10/31/14)

47 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

48 Why Not Traditional ETFs? ETF MLPs (100%) 100% MLP holdings ETF not allowed in traditional ETF ( 40 Act open-ended fund) Hence, alternative Exchange-Traded Product (ETP) structures

49 MLP ETP Structures C-Corp MLPs (100%) ETN MLP Index (100%)* ETF MLPs (25%) Similar Energy Corps

50 C-corporation C-Corp ETF MLPs (100%) Holds 100% MLPs Tax-deferred ETF income Taxed at fund level! Low beta to index

51 C-corporation Fees Reflect Taxes ETF Average Expense Ratio (basis points) ETF - C-Corp ETN Trad. ETF (Source: ETF.com as of 11/19/2014. Among all 22 unlevered MLP ETPs)

52 Exchange Traded Note C-Cor ETN ETF MLP Index (100%)* Pure play exposure Income is fully taxed ETF Counterparty risk

53 Traditional ETF C-Cor ETN ETF ETF MLPs (25% Max) Diluted exposure Mixed portfolio ETF Lower yield recently Similar Energy Corps

54 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)

55 Kinder Tax Impact on AMLP (C-corp) No special distributions expected C-Corp Not required to distribute any cash proceeds unlike an ETF No additional taxes expected AMLP accrues taxes daily anyway (Source: Kinder Morgan s Tax Effects On MLP ETFs 10/3/2014, ETF.com)

56 It s Easy to Submit a Question Click on the Question Mark Icon (?) on the floating tool bar on your web session. This will open the Q&A window in the lower right hand corner of your screen. Type your question into the small dialogue box. Please make sure to send the question to ALL PANELISTS and NOT to the HOST. Click the Send button.

57 Panelists Paul Britt, CFA Senior ETF Specialist ETF.com Scott Burley ETF Specialist ETF.com Peter Lazaroff, CFA, CFP Portfolio Manager Acropolis Investment Management

58 Thank You!