A COMPLETE STUDY OF THE HISTORICAL RELATIONSHIP BETWEEN INTEREST RATE CYCLES AND MLP RETURNS

Transcription

1 A COMPLETE STUDY OF THE HISTORICAL RELATIONSHIP BETWEEN INTEREST RATE CYCLES AND MLP RETURNS 405 Park Avenue, 9 th Floor New York, NY Phone Fax Toll Free Web.

2 TABLE OF CONTENTS APPENDIX GUIDE... 2 ABSTRACT... 4 EXECUTIVE SUMMARY... 5 INTEREST RATE CYCLES... 6 RISING RATE ENVIRONMENTS... 7 TIGHTENING CYCLES... 8 MLP RETURNS: AVERAGE RISING RATE ENVIRONMENTS... 9 TIGHTENING CYCLES MLP RETURNS: MONTHLY RISING RATE ENVIRONMENTS TIGHTENING CYCLES RETURN COMPARISON: REITS AND UTILITIES RISING RATE ENVIRONMENTS TIGHTENING CYCLES MLP CORRELATIONS: LONG TERM 10-YEAR UST MONTH UST MLP CORRELATIONS: DURING RISING RATE CYCLES RISING RATE ENVIRONMENTS FEDERAL RESERVE TIGHTENING CYCLES MLP CORRELATION COMPARISON REITS AND UTILITIES CONCLUSION

3 APPENDIX GUIDE I. INTEREST RATE CYCLES A. RISING INTEREST RATE ENVIRONMENTS OVERVIEW B. TIGHTENING CYCLES OVERVIEW C. RISING INTEREST RATE ENVIRONMENTS: YIELD CHANGE D. TIGHTENING CYCLES: YIELD CHANGE II. MLP RETURNS DURING PERIODS OF RISING INTEREST RATES A. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: B. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: C. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: D. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: E. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: F. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: G. MLP RETURNS - TIGHTENING CYCLE: H. MLP RETURNS - TIGHTENING CYCLE: I. MLP RETURNS - TIGHTENING CYCLE: III. MLP RETURNS 6 MONTHS BEFORE AND AFTER INTEREST RATE BOTTOMS A. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENTS: AVERAGES B. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: C. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: D. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: E. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: F. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: G. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: H. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLES: AVERAGES I. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: J. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: K. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: IV. MLP MAXIMUM DRAWDOWNS - DURING RISING INTEREST RATES A. MLP MAXIMUM DRAWDOWNS - IN RISING INTEREST RATE ENVIRONMENTS B. MLP MAXIMUM DRAWDOWNS - IN TIGHTENING CYCLES V. MLP RETURNS 6 MONTHS AFTER INTEREST RATES BEGIN TO RISE A. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE:

4 B. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: C. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: D. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: E. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: F. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: G. TIGHTENING CYCLE MLP PERFORMANCE: H. TIGHTENING CYCLE MLP PERFORMANCE: I. TIGHTENING CYCLE MLP PERFORMANCE: VI. MLP MONTHLY RETURN ANALYSIS DURING PERIODS OF RISING RATES A. AVG. CUMULATIVE MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS B. AVG. CUMULATIVE MLP RETURNS: TIGHTENING CYCLES C. MONTHLY MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS D. MONTHLY MLP RETURNS: TIGHTENING CYCLES E. AVG. MONTHLY MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS F. AVG. MONTHLY MLP RETURNS: TIGHTENING CYCLES VII. REITS AND UTILITIES A. REIT PERFORMANCE: YTD B. UTILITIES PERFORMANCE: YTD C. LONG TERM CORRELATION: REITS VS. 10-YEAR TREASURY YIELDS D. LONG TERM CORRELATION: REITS VS. 3-MONTH TREASURY YIELDS E. LONG TERM CORRELATION: UTILITIES VS. 10-YEAR TREASURY YIELDS F. LONG TERM CORRELATION: UTILITIES VS. 3-MONTH TREASURY YIELDS G. RISING INTEREST RATE ENVIRONMENT: CORRELATION COMPARISON H. TIGHTENING CYCLE: CORRELATION COMPARISON

5 ABSTRACT There is a widely held belief that MLPs are negatively impacted by increases in interest rates. In order to provide investors with an objective perspective on the relationship between MLPs and interest rates, Yorkville has analyzed MLPs sensitivity to interest rates during every rising interest rate environment and Federal Reserve tightening cycle since This study provides a comprehensive and in-depth look at yield movements, MLP returns, and correlations during interest rate shocks. 4

6 EXECUTIVE SUMMARY The key observations of Yorkville s comprehensive study on the relationship between rising interest rate cycles and MLP performance are outlined below: There were six rising interest rate environments since 1992, which lasted for an average period of thirteen months. 10-year treasury yields increased by an average of 2. (70. off the low) peaking at 5.1%. There were three Federal Reserve tightening cycles since 1992, which lasted for an average period of nineteen months. 3-month yields increased by an average of 3.1% (214.7% off the low) peaking at 5.9%. MLPs had positive returns in 5 out of 6 rising rate environments. MLPs posted an average return of 17.7% during rising rate environments. MLPs had positive returns in 2 out of 3 Federal Reserve tightening cycles. MLPs posted average returns of 8.6% during tightening cycles. In rising rate environments, MLP returns experienced an average pull-back of 8.9% between the first and second month. This pullback was observed in 5 out of 6 periods. On average, MLPs declined by 1 during the first 4.5 months of a tightening cycle. This pullback was experienced in 2 out of 3 cycles. REITs and Utilities were more negatively impacted by rising rate environments than MLPs. REITs had negative returns in 3 out of 6 and Utilities in 4 out of 6 periods when 10-year UST yields were rising. Correlations between MLPs and 10-year treasuries and 3-month treasuries remain low in rising interest rate environments. Interest rates have little predictive power for MLP returns over the long term, during rising interest rate environments or during tightening cycles. Rising rate environments and Federal Reserve tightening cycles appear to have had little negative impact on MLP performance. 5

7 INTEREST RATE CYCLES To examine the effects of rising interest rates on MLPs, this analysis will focus on trough (low) to peak (high) interest rate periods as measured by the 10-year and 3-month US treasury yields, which represent rising rate environments and Federal Reserve tightening cycles, respectively. Since 1992, Yorkville identified six periods of rising rate environments and three Federal Reserve tightening cycles. These nine rising interest rate cycles form the core of our analysis of the impact of rising interest rates have on MLP performance. MLPs and Rising Rate Cycles Tightening Cycles Rising Rate Environments Yorkville MLP Universe Index * Brown shaded areas represent overlap between rising rate environments and tightening cycles 6

8 RISING RATE ENVIRONMENTS When examining interest rates from 1992, we find 6 clearly identifiable rising rate environments 93-94, 98-99, 02-04, 08-09, 10-11, and These environments are shaded in on the graph below. Generally, post-2008 environments tend to be shorter than environments pre-crisis; the longest rising rate environment was 36 months, beginning in 2003, and the shortest occurred in 2010, lasting 4 months. Overall, rising interest rate environments had an average duration of 13-months. The average absolute increase in interest rates during a rising rate environment was 2.. Interest rates rose the most, 3.8% on an absolute basis, in 1993, when 10-year treasuries peaked at 8. from 5.2%. The smallest absolute increase, of 1., occurred in both 2010 and 2013, when yields rose to 3.7% and 3. respectively. As Appendix I (A) illustrates, yields increase by 70. on a relative basis on average during a rising rate environment, with a maximum increase of 92.2% in 2008, and a minimum of 55. in During each rising rate environment, yields began at a lower trough and ended at a lower peak than they do in the previous environment. This is not surprising, given that interest rates have experienced a declining trend over the past 23 years, refer to graph below. 8% 7% 6% 3% 2% 1% Rising Rate Environments 10-Year US Treasury Yield: Tightening Cycles 10-Year Treasury Yield 7

9 TIGHTENING CYCLES Since 1992, there have been three primary tightening cycles, which can be identified on the graph below 94-95, 99-00, and Tightening cycles lasted for an average of 19 months. The longest cycle lasted 30 months, from December 2003 to November There have been no tightening cycles since, as the Federal Reserve has remained on the sidelines since the financial crisis of During tightening cycles, yields increase by an average of 214.7% on a relative basis. 3-month treasury yields, much like 10-year treasuries, have generally fallen since 1992, and remain near today. Appendix I (B) shows that the average absolute increase in 3-month treasury yields was 3.1%, which is greater than the average 2. increase in yield of 10-year US treasuries during rising rate environments. The largest relative percentage change in yields was 498.9%, from 0.9% to 5.1% during the 2004 cycle. The highest yield at the end of a cycle was 6. in Tightening cycles are more extreme than rising rate environments in terms of average duration and absolute and percentage yield changes. 9% 8% 7% 6% 3% 2% 1% Federal Funds Tightening Cycles Federal Funds Target Rate and 3-Month US Treasury Yield: Tightening Cycles 3-Month Treasury Yield Federal Funds Target Rate 8

10 10-Year Treasury Yields YMLPUX Returns MLP RETURNS: AVERAGE RISING RATE ENVIRONMENTS In 5 out of 6 rising rate environments, MLPs experienced positive total returns. As the table below illustrates, MLPs gained 17.7% on average. MLPs achieved returns of 54. and 42.1% during 2003 and 2008 respectively. During three other rising rate environments, MLPs produced mid-single to low double digit returns. The only period in which MLPs experienced a negative total return was during 1993, when the composition of the MLP asset class was vastly different than it is today. In the early 1990s, 8 of the asset class s market capitalization was comprised of exploration and production partnerships. Currently more than 9 of the asset class is comprised of US energy infrastructure. This dramatic shift within the asset class makes applying conclusions based on correlation from 1993 to today of limited use. In conclusion, rising rate environments appear to have had little negative impact on MLP performance. 9% 8% 7% 6% 3% 2% 1% 5.2% % 4.2% Rising Rate Environments MLP Returns and 10-Year US Treasury Yields 6.8% % 5.2% % 42.2% 3.9% 3.7% % % Oct '93 - Nov '94 Oct '98 - Jan '00 Jun '03 - Jun '06 Dec '08 - Jun '09 Oct '10 - Feb '11 May '13 - Dec '13 1.6% 10-Year Treasury Yield - Beginning 10-Year Treasury Yield - End MLPs Return Rising Interest Rate Environments Period Duration Yield Change MLPs Trough Peak Months Beginning End Absolute Percentage Percentage Change 10/15/ /7/ % % % 10/5/1998 1/20/ % 6.8% 2.6% 63.1% 7. 6/13/2003 6/28/ % 5.2% 2.1% /30/2008 6/10/ % 3.9% 1.9% 92.2% 42.2% 10/7/2010 2/8/ % % 10.7% 5/2/ /31/ % % 7.9% Average % 5.1% % Minimum 4 1.6% % Maximum % % 92.2% 54. 9

11 3-Month Treasury Yields YMLPUX Returns TIGHTENING CYCLES In 2 of 3 tightening cycles, MLPs produced positive total returns. This outcome is similar to the movements of MLP total returns during rising rate environments, which were positive in 5 out of 6 cycles. Average MLP total returns during tightening cycles was 8.6%. However, as the graph below indicates, this number is possibly misleading, as it is skewed by a 35. gain in In the 1994 Federal Reserve tightening cycle, MLPs were down 15.3%, and in 2000, MLP total returns were slightly up, at 5.6%. As previously discussed, the composition of the MLP asset class in was very different than it is today. If the 1994 cycle is removed with this point in mind, MLPs were up sharply and up slightly in the remaining two cycles, which suggests that MLPs are not negatively affected by tightening cycles. Currently, there are not enough data points to draw any meaningful conclusions on MLP performance during Federal Reserve tightening cycles. 7% 6% 3% 2% 1% 3. Tightening Cycles MLP Returns and 3-Month US Treasury Yields 6.1% -15.3% 4.6% % 0.9% % Jan '94- Feb' 95 July '99 - Nov '00 Dec '03 - July '06 3-Month Treasury Yield - Beginning 3-Month Treasury Yield - End MLP's Return Tightening Cycles Period Duration Yield Change MLPs Trough Peak Months Beginning End Absolute Percentage Percentage Change 1/26/1994 2/1/ % 3.1% 104.1% -15.3% 7/21/ /6/ % % 41.1% 5.6% 12/26/2003 7/18/ % 5.1% 4.3% 498.9% 35. Average % 5.9% 3.1% 214.7% 8.6% Minimum % 5.1% 1.9% 41.1% -15.3% Maximum % % 498.9%

12 MLP RETURNS: MONTHLY The next portion of our analysis will examine the 9 months following the yield trough (low) of each rising rate environment and tightening cycle. For the purposes of this analysis, a month is defined as a thirty trading day period. The six months after interest rate troughs are divided into 30 trading day increments to see if the relationships between interest rates and MLP performance change over the course of the cycles. RISING RATE ENVIRONMENTS MLPs produced an average return of approximately 1 over the first 9 months of a rising rate environment. As the bar graph below illustrates, MLPs generally delivered positive returns in each of the six 30 trading day intervals directly following yield troughs, which suggests that the positive movement of MLPs remains relatively stable throughout the beginning stages of a rising interest rate environment. 6 5 Cumulative MLP Returns Post Interest Rate Trough Rising Rate Enviroments 5 53% % % 6% 21% 2% 3% -2% - 19% 7% 6% 1% 11% -1% 3% 1 1 3% % 1 11% 11% 9% 6% 6% Trading Days Post Trough % Oct '93 - Nov '94 Oct '98 - Jan '00 Jun '03 - Jun '06 Dec '08 - Jun '09 Oct '10 - Feb '11 May '13 - Dec '13 11

13 Yield (% Change) MLPs (% Change) Interestingly, daily analysis of returns over the 9 month period following an interest rate trough reveals there is an initial pullback in MLP unit prices (refer to the graph below). On average, the pullback occurred roughly 21 trading days into the cycle and ended approximately 47 trading days into the cycle. This retrenchment occurred in 5 out of 6 of the rising rate environments, except for 2008, where MLPs began to retrench approximately 30 trading days later. Pullbacks lasted for roughly trading days in each instance, with an average decline of 8.9% (refer to Appendix IV A) Performance of MLPs vs 10-Year UST Rising Rate Environment Averages Trading Days Post Trough % Yield Change % MLP Change 18% 16% 1 12% 1 8% 6% 2% 12

14 TIGHTENING CYCLES On average, MLP returns dropped by 15. during the first 4.5 months and 6. during the first 9 months of a tightening cycle. MLPs were down in all three tightening cycles at the 4.5 month mark. In comparison, MLPs were up in 5 out or 6 cycles at the 4.5 month mark during rising rate environments. While the number of observations is too small, Federal Reserve tightening cycles appear to negatively impact MLP performance during the early stages of the cycle. Interestingly, the effects of a tightening cycle on MLP performance do not seem to assert themselves immediately. Rather, as the graph below illustrates, cumulative MLP returns only begin to drop significantly after the first 30 trading days post trough, which suggests that tightening cycles have a lagged effect on MLP performance % % Cumulative MLP Returns Post Interest Rate Trough Tightening Cycles -6.9% % -7.6% % -5.2% % % -13.2% Days Post Trough -9.2% 5. Jan '94- Feb' 95 July '99 - Nov '00 Dec '03 - July '06 13

15 Yield (% Change) MLPs (% Change) Examining returns over the 9 month period, reveals that there is a 90 trading day pullback in MLPs during tightening cycles (refer to the graph below). On average, pullbacks begin 14 trading days into the cycle and end 105 trading days into the cycle. This retrenchment occurred in 2 out 3 tightening cycles, save for 2003, where MLPs began to retrench 69 trading days into the cycle. MLPs had an average pullback of 1 during a tightening cycle (refer to Appendix IV B) MLPs vs 3-Month UST Tightening Cycle Averages Trading Days Post Trough % Yield Change % MLP Change 2% -2% - -6% -8% -1-12% -1 14

16 RETURN COMPARISON: REITS AND UTILITIES RISING RATE ENVIRONMENTS During rising rate environments, MLPs outperform REITs and utilities, with a 17.7% average total return compared with 14. for REITs and 5.6% for utilities. Average returns are misleading, as MLPs produced positive returns in 5 out of 6 cycles, REITs produced positive returns in 3 out of 6 cycles, and Utilities only produced positive returns in 2 out of 6 cycles. Average returns for REITs and utilities were skewed due to returns of 96.3% and 60. in REITs and utilities, during the 2003 to 2006 environment. Excluding this period, REITs and Utilities had negative performance in rising rate environments. Rising Interest Rate Environments Period MLPs REITs Utilities Trough Peak Returns Returns Returns 10/15/ /7/ % /5/1998 1/20/ % -7.2% 6/13/2003 6/28/ % /30/2008 6/10/ % -2.8% -2.6% 10/7/2010 2/8/ % 9.7% 3.8% 5/2/ /31/ % % Average 17.7% % Minimum -15.8% Maximum %

17 TIGHTENING CYCLES With average total returns of 8.6%, MLPs underperformed REITs (+25.7%) and utilities (+27.1%) during tightening cycles. The table below illustrates that MLPs produced lower total returns than both REITs and utilities in each tightening cycle, though all three asset classes saw positive returns in the 1999 and 2003 cycle and negative returns in cycle. Tightening cycles appear to directionally impact all three asset classes in a similar fashion both positively and negatively. The magnitude of the positive changes were greater for Utilities and REITs and negative changes for MLPs. Tightening Cycles Period MLPs REITs Utilities Trough Peak Returns Returns Returns 1/26/1994 2/1/ % % 7/21/ /6/ % 8.8% /26/2003 7/18/ % Average 8.6% 25.7% 27.1% Minimum -15.3% % Maximum % 16

18 YMLPUX Return (%) US 10-Year Treasury Yields MLP CORRELATIONS: LONG TERM For the purposes of correlation analysis, we use correlations between daily percentage changes in prices. Such a method allows for enough data points to obtain significant values during long and short term periods, and also allows the analysis to better account for fluctuations within rising rate environments and interest rate cycles. Correlation values range from -1.0 to 1.0. A correlation of 1.0 means that the assets moved directionally together 10 of the time, and a correlation of -1.0 means that the assets moved in completely opposite directions. A correlation of 0 represents no relationship between two assets. 10-YEAR TREASURY YIELDS Over the past 23 years, MLPs show a small positive correlation with 10-year treasury yield. The long term daily correlation between MLPs and 10-year treasury yields was While 10-year treasury yields have declined during the entirety of this period, as opposed to MLPs, rising rate environments tend to coincide with gains in MLPs. MLPs and 10-year treasury yields also declined in tandem during the recession. Therefore, 10- year treasury movements may have a limited relationship to MLP returns in the long term. 250 Long Term Correlation MLPs vs 10-Year Treasury Yield 1 Correlation (10-Year) = % 200 8% 7% 150 6% 100 3% 50 2% 1% Yorkville MLP Universe Index US 10-Year Treasury Index 17

19 YMLPUX Return (%) US 3-Month Treasury Yield 3-MONTH TREASURY YIELDS The long term correlation between 3-month treasury yields and MLP returns is almost nonexistent, with a value of Although there are points during the past 23 years when 3-month treasury yields and MLPs have moved in tandem, such as the period from 2004 to 2009, there are other timeframes (the 1990 s, 2010 to 2014) in which both move in opposite directions. Therefore, it appears that 3-month treasury yields have little, if any, relationship with MLP returns over the long term. Long Term Correlation MLPs vs 3-Month Treasury Yield Correlation (3 Month) = % 8% 7% 6% 3% 2% 1% Yorkville MLP Universe Index US 3-Month Treasury Index 18

20 MLP CORRELATIONS: DURING RISING RATE CYCLES RISING RATE ENVIRONMENTS The table below shows that correlations between MLPs and 10-year treasury yields average at in rising rate environments, implying the lack of a meaningful relationship between MLPs and 10-year treasury yields during these periods. However, two periods, 1993 (-0.28), and 2008 (0.33) exhibit larger and slightly more significant correlations. Regardless, these correlations have opposite signs, which ultimately says very little about correlations between MLPs and 10-year treasury yields. Results are inconclusive in showing a relationship between interest yields and MLPs in rising rate environments. Rising Interest Rate Environments Period Duration Yield MLPs Trough Peak Months Percentage Change Percentage Change Correlation 10-Yr UST 10/15/ /7/ % /5/1998 1/20/ % /13/2003 6/28/ /30/2008 6/10/ % 42.2% /7/2010 2/8/ % 10.7% /2/ /31/ % 7.9% Average % Minimum % Maximum %

21 FEDERAL RESERVE TIGHTENING CYCLES Within tightening cycles, correlations are very low and insignificant, averaging As the table below illustrates, there is very little deviation from this average correlation within specific cycles, with a maximum correlation of in 1999, and a minimum correlation of in Therefore, it seems clear that treasuries have little to no relationship with MLPs during tightening cycles. Tightening Cycles Period Duration Yield MLPs Trough Peak Months Percentage Change Percentage Change Correlation 3-Month UST 1/26/1994 2/1/ % -15.3% /21/ /6/ % 5.6% /26/2003 7/18/ % Average % 8.6% Minimum % -15.3% Maximum %

22 MLP CORRELATION COMPARISON REITS AND UTILITIES Within rising rate environments and tightening cycles, MLPs have lower correlations with treasury yields, on average, than either REITs or utilities. However, as the graphs below illustrate, REITs and utilities are still modestly correlated with treasury yields during any rising rate cycle, with correlations below the 0.2 threshold. In addition, Appendix VII illustrates that long term correlations between treasury yields, REITs, and utilities have been 0.21 and 0.14, respectively. Long term correlation with 3-month treasury yields is 0.01 for REITs, and for utilities. In conclusion, treasury yields have little to no relationship with MLPs, REITs, and utilities during both short term rate increases and over the long term. Rising Rate Environments Correlations w/ 10-Year UST MLPs REITs Utilities Tightening Cycles Correlations w/ 3-Month UST MLPs REITs Utilities

23 CONCLUSION 1. Federal Reserve tightening cycles lasted for 19 months and rising rate environments lasted for 13 months on average. Yield increases were significantly greater during tightening cycles, increasing by 214.7% from the low, compared with an average increase of 55. from the low during rising rate environments. 3 month treasury yields peaked at on average 5.9% during tightening cycles and ten year treasury yields peaked at 5.1% on average during rising interest rate cycles. 2. Rising rate environments appear to have little negative impact on MLPs. MLPs produced positive returns in 5 out of 6 rising rate environments with an average gain of 17.7%. 3. While results are slightly inconclusive due to limited observations, tightening cycles appear to have little negative impact on MLPs. MLPs produced an average positive return of 8.6% during tightening cycles. In 2 out of 3 cycles, MLPs posted positive returns, gaining 5.6% and 35. during 1999 and 2004, respectively. 4. MLPs generally pull back early in rising interest rate environments. MLPs experienced an average pullback of 8.9% between the second and third month of a cycle. This pullback was observed in 5 out of 6 periods. 5. MLPs outperform REITs and utilities in rising interest rate environments. REITs had negative returns in 3 out of 6 and Utilities in 4 out of 6 periods, compared with 1 out of 6 periods for MLPs. MLPs returned an average of 17.7%, compared with 14. and 5.6% from REITS and utilities, respectively, in rising rate environments. 6. Interest rates have little to no predictive power for MLP returns over any period. The long-term correlation between MLPs and 10-year treasuries was 0.20 and between MLPS and 3 month treasuries During rising interest rate environments or tightening cycles, average correlations were and -0.04, respectively. The United States has experienced six rising interest rate environments and three tightening cycles since MLPs produced positive returns on average across the entirety of both rising interest rate environments and tightening cycles. Early in each, MLPs averaged a pullback between -8% and -1. In conclusion, MLPs appear to be unaffected by rising interest rates over the long term, while displaying a short lived negative correlation during the early stages of rising interest rate cycles. 22

24 APPENDIX I. INTEREST RATE CYCLES A. RISING INTEREST RATE ENVIRONMENTS OVERVIEW Rising Interest Rate Environments Period Duration Yield Change Trough Peak Months Beginning End Absolute Percentage 10/15/ /7/ % % /5/1998 1/20/ % 6.8% 2.6% 63.1% 6/13/2003 6/28/ % 5.2% 2.1% /30/2008 6/10/ % 3.9% 1.9% 92.2% 10/7/2010 2/8/ % % 5/2/ /31/ % % Average % 5.1% Minimum 4 1.6% Maximum % % 92.2% B. TIGHTENING CYCLES OVERVIEW Tightening Cycles Period Duration Yield Change Trough Peak Months Beginning End Absolute Percentage 1/26/1994 2/1/ % 3.1% 104.1% 7/21/ /6/ % % 41.1% 12/26/2003 7/18/ % 5.1% 4.3% 498.9% Average % 5.9% 3.1% 214.7% Minimum % 5.1% 1.9% 41.1% Maximum % % 498.9% 23

25 Change in Yield % Change in Yield Change in Yield % Change in Yield C. RISING INTEREST RATE ENVIRONMENTS: YIELD CHANGE Rising Interest Rate Environments 92% 86% 2.9% 2.6% 68% 63% 2.1% 5 1.9% 57% Oct '93 - Nov '94 Oct '98 - Jan '00 Jun '03 - Jun '06 Dec '08 - Jun '09 Oct '10 - Feb '11 May '13 - Dec ' Change in Yield % Change In Yield D. TIGHTENING CYCLES: YIELD CHANGE 4. Federal Reserve Tightening Cycles 4.3% % 499% % % Jan '94- Feb' 95 July '99 - Nov '00 Dec '03 - July '06 Change in Yield % Change in Yield 24

26 II. MLP RETURNS DURING PERIODS OF RISING INTEREST RATES A. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: Rising Rate Environment: / / /1993 1/1994 2/1994 3/1994 4/1994 5/1994 6/1994 7/1994 8/1994 9/ /1994 US 10-Year Treasury Yield MLP Returns B. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: Rising Rate Environment: / /1998 2/1999 4/1999 6/1999 8/ / /1999 US 10-Year Treasury Yield MLP Returns 25

27 C. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: Rising Rate Environment: /2003 9/ /2003 3/2004 6/2004 9/ /2004 3/2005 6/2005 9/ /2005 3/2006 6/2006 US 10-Year Treasury Yield MLP Returns D. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: Rising Rate Environment: /2008 1/2009 1/2009 2/2009 2/2009 3/2009 3/2009 4/2009 4/2009 5/2009 5/2009 6/2009 US 10-Year Treasury Yield MLP Returns 26

28 E. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: Rising Rate Environment: / / /2010 1/2011 2/2011 US 10-Year Treasury Yield MLP Returns F. MLP RETURNS - RISING INTEREST RATE ENVIRONMENT: 2013 Rising Rate Environment: /2013 6/2013 7/2013 8/2013 9/ / / /2013 US 10-Year Treasury Yield MLP Returns 27

29 G. MLP RETURNS - TIGHTENING CYCLE: Tightening Cycle: / / / / / / / Month Treasury Yield MLP Returns H. MLP RETURNS - TIGHTENING CYCLE: Tightening Cycle: /1999 8/1999 9/ / / /1999 1/2000 2/2000 3/2000 4/2000 5/2000 6/2000 7/2000 8/2000 9/ / Month Treasury Yield MLP Returns 28

30 I. MLP RETURNS - TIGHTENING CYCLE: Tightening Cycle: /2003 3/2004 6/2004 9/ /2004 3/2005 6/2005 9/ /2005 3/2006 6/ Month Treasury Yield MLP Returns 29

31 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) III. MLP RETURNS 6 MONTHS BEFORE AND AFTER INTEREST RATE BOTTOMS A. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENTS: AVERAGES Performance of MLPs vs 10-Year UST Rising Rate Environment Average Trading Days Post Trough % Yield Change % MLP Change B. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10-Year UST Rising Rate Environment: /5/1993 4/5/1993 6/5/1993 8/5/ /5/ /5/1993 2/5/1994 4/5/1994 6/5/ % Yield Change % MLP Change 30

32 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) C. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10 Year UST Rising Rate Environment: /26/1998 4/26/1998 7/26/ /26/1998 1/26/1999 4/26/1999 6% 2% -2% - -6% -8% -1-12% -1-16% % Yield Change % MLP Change D. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10-Year UST Rising Rate Environment: /4/2002 1/4/2003 4/4/2003 7/4/ /4/2003 1/4/ % Yield Change % MLP Change 31

33 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) E. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10-Year UST Rising Rate Environment: /22/2008 7/22/ /22/2008 1/22/2009 4/22/2009 7/22/2009 % Yield Change % MLP Change -5 F. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10-Year UST Rising Rate Environment: /28/2010 4/28/2010 7/28/ /28/2010 1/28/2011 4/28/ % Yield Change % MLP Change 32

34 Yield (% Change) MLP (% Change) Yield (% Change) MLPs (% Change) G. MLP TROUGH RETURN ANALYSIS - RISING RATE ENVIRONMENT: Performance of MLPs vs 10-Year UST Rising Rate Environment: /23/ /23/2012 2/23/2013 5/23/2013 8/23/ /23/ % Yield Change % MLP Change H. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLES: AVERAGES 5 Performance of MLPs vs 3-Month UST Tightening Cycle Average Trading Days Post Trough % Yield Change % MLP Change 33

35 Yield (% Change) MLP (% Change) Yield (% Change) MLP (% Change) I. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: Performance of MLPs vs 3-Month UST Tightening Cycle: /19/1993 8/19/ /19/1993 2/19/1994 5/19/1994 8/19/1994 % Yield Change % MLP Change J. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: Performance of MLPs vs 3-Month UST Tightening Cycle: /11/1998 2/11/1999 5/11/1999 8/11/ /11/1999 2/11/ % Yield Change % MLP Change 34

36 Yield (% Change) MLP (% Change) K. MLP TROUGH RETURN ANALYSIS - TIGHTENING CYCLE: Performance of MLPs vs 3-Month UST Tightening Cycle: /18/2003 7/18/ /18/2003 1/18/2004 4/18/2004 7/18/2004 % Yield Change % MLP Change 35

37 IV. MLP MAXIMUM DRAWDOWNS DURING RISING INTEREST RATES A. MLP MAXIMUM DRAWDOWNS - IN RISING INTEREST RATE ENVIRONMENTS Rising Interest Rate Environments- Pullbacks Period Trading Days post Trough Duration MLPs Index Price- Start Index Price- End Percentage Change Trough Start End Days 10/15/ % 10/5/ /13/ /30/ % 10/7/ , , % 5/2/ , , % Average % Minimum % Maximum , , % B. MLP MAXIMUM DRAWDOWNS - IN TIGHTENING CYCLES Tightening Cycles- Pullbacks Period Trading Days post Trough Duration MLPs Index Price- Start Index Price- End Percentage Change Trough Start End Days 1/26/ % 7/21/ /26/ % Average Minimum Maximum % 36

38 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) V. MLP RETURNS 6 MONTHS AFTER INTEREST RATES BEGIN TO RISE A. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: Performance of MLPs vs 10-Year UST Rising Rate Environment: /15/ /15/1993 2/15/1994 4/15/1994 6/15/1994 2% -2% - -6% -8% -1-12% -1 % Yield Change % MLP Change B. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: MLPs vs 10-Year UST Rising Rate Environment: /5/ /5/ /5/1998 1/5/1999 2/5/1999 3/5/1999 4/5/1999 5/5/1999 6/5/ % 1 8% 6% 2% -2% - -6% % Yield Change % MLP Change 37

39 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) C. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: MLPs vs 10-Year UST Rising Rate Environment: /30/2003 7/31/2003 8/31/2003 9/30/ /31/ /30/ /31/2003 1/31/2004 2/29/2004 % Yield Change % MLP Change D. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: Performance of MLPs vs 10-Year UST Rising Rate Environment: /30/2008 2/28/2009 4/30/2009 6/30/2009 8/31/2009 % Yield Change % MLP Change

40 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) E. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: Performance of MLPs vs 10-Year UST Rising Rate Environment: % 16% /7/ /7/2010 2/7/2011 4/7/2011 6/7/2011 % Yield Change % MLP Change 1 12% 1 8% 6% 2% F. RISING INTEREST RATE ENVIRONMENT MLP PERFORMANCE: Performance of MLPs vs 10-Year UST Rising Rate Environment: % 6% 2% -2% - 5/2/2013 6/2/2013 7/2/2013 8/2/2013 9/2/ /2/ /2/ /2/2013 1/2/2014 % Yield Change % MLP Change 39

41 Yield (% Change) MLPs (% Change) Yield (% Change) MLPs (% Change) G. TIGHTENING CYCLE MLP PERFORMANCE: Performance of MLPs vs 3-Month UST Tightening Cycle: % -2% - -6% -8% -1-12% -1 1/26/1994 2/26/1994 3/26/1994 4/26/1994 5/26/1994 6/26/1994 7/26/1994 8/26/1994 9/26/ % % Yield Change % MLP Change H. TIGHTENING CYCLE MLP PERFORMANCE: Performance of MLPs vs 3-Month UST Tightening Cycle: /21/1999 8/21/1999 9/21/ /21/ /21/ /21/1999 1/21/2000 2/21/2000 3/21/2000 % Yield Change % MLP Change 40

42 Yield (% Change) MLPs (% Change) I. TIGHTENING CYCLE MLP PERFORMANCE: Performance of MLPs vs 3-Month UST Tightening Cycle: % 12/26/2003 2/26/2004 4/26/2004 6/26/2004 8/26/2004 % Yield Change % MLP Change 8% 6% 2% -2% - -6% -8% -1 41

43 VI. MLP MONTHLY RETURN ANALYSIS DURING PERIODS OF RISING RATES A. AVG. CUMULATIVE MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS 16.0 Average Cumulative MLP Returns Rising Rate Environments 14.8% % % 9.7% % 4.3% Trading Days Post Trough B. AVG. CUMULATIVE MLP RETURNS: TIGHTENING CYCLES % Average Cumulative MLP Returns Post Trough Tightening Cycles % Trading Days Post Trough -7.6% -7.3% -5.7% 42

44 C. MONTHLY MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS % Monthly MLP Returns Post Interest Rate Trough Rising Rate Enviroment % 12% % % 6% 2% 2% 1% 2% -2% -8% 6% 3% - 3% 3% -1% -1 3% -1% -1% -1% -2% -2% -2% Trading Days Post Trough Oct '93 - Nov '94 Oct '98 - Jan '00 Jun '03 - Jun '06 Dec '08 - Jun '09 Oct '10 - Feb '11 May '13 - Dec '13 D. MONTHLY MLP RETURNS: TIGHTENING CYCLES Monthly MLP Returns Post Interest Rate Trough Tightening Cycles % 2.0 1% 1% % - -1% -2% -3% -2% -1% % -8% -8% Days Post Trough Jan '94- Feb' 95 July '99 - Nov '00 Dec '03 - July '06 43

45 E. AVG. MONTHLY MLP RETURNS: RISING INTEREST RATE ENVIRONMENTS Average Monthly MLP Returns Rising Rate Environments % % % % -1.3% Trading Days Post Trough F. AVG. MONTHLY MLP RETURNS: TIGHTENING CYCLES 2. Average Monthly MLP Returns Post Trough Tightening Cycles 1.6% % 0.3% % % % Trading Days Post Trough 44

46 VII. REITS AND UTILITIES PERFORMANCE RISING INTEREST RATE ENVIRONMENTS A. REITs PERFORMANCE: YTD REITs and Rising Rate Cycles Tightening Cycles Rising Rate Environments REIT Total Return Index B. UTILITIES PERFORMANCE: YTD Utilities and Rising Rate Cycles Tightening Cycles Rising Rate Environments DJ Utilities Total Return Index 45

47 REIT Return (1/1/ ) US 3-Month Treasury Yield REIT Return (1/1/1992 = 100) US 10-Year Treasury Yield C. LONG TERM CORRELATION: REITS VS. 10-YEAR TREASURY YIELDS Long Term Correlation REITs vs 10-Year Treasury Yield Correlation (10-Year)= % 8% 140 7% 6% % 110 2% 1% 100 Dow Jones Equity All REIT Total Return Index US 10-Year Treasury Index D. LONG TERM CORRELATION: REITS VS. 3-MONTH TREASURY YIELDS Long Term Correlation REITs vs 3-Month Treasury Yield Correlation (3-Month)= % 8% 7% 6% % 110 2% 1% 100 Dow Jones Equity All REIT Total Return Index US 3-Month Treasury Index 46

48 DJUSUTT Return (1/1/1992 = 100) US 3-Month Treasury Yield DJUSUTT Return (1/1/1992 = 100) US 10-Year Treasury Yield (%) E. LONG TERM CORRELATION: UTILITIES VS. 10-YEAR TREASURY YIELDS Long Term Correlation Utilities vs 10-Year Treasury Yield Correlation (10-Year) = % 8% 130 7% 6% % 100 2% 1% 90 Dow Jones US Utilities Total Return Index US 10-Year Treasury Index F. LONG TERM CORRELATION: UTILITIES VS. 3-MONTH TREASURY YIELDS Long Term Correlation Utilities vs 3-Month Treasury Yield Correlation (3-Month) = % 7% 6% % 2% 1% 90 Dow Jones US Utilities Total Return Index US 3-Month Treasury Index 47

49 G. RISING INTEREST RATE ENVIRONMENT: CORRELATION COMPARISON Trough Rising Interest Rate Environments Period MLPs REITs Utilities Peak Correlation 10-Yr UST Correlation 10-Yr UST Correlation 10-Yr UST 10/15/ /7/ /5/1998 1/20/ /13/2003 6/28/ /30/2008 6/10/ /7/2010 2/8/ /2/ /31/ Average Minimum Maximum H. TIGHTENING CYCLE: CORRELATION COMPARISON Trough Tightening Cycles Period MLPs REITs Utilities Peak Correlation 3-Mnth UST Correlation 3-Mnth UST Correlation 3-Mnth UST 1/26/1994 2/1/ /21/ /6/ /26/2003 7/18/ Average Minimum Maximum