This column is the first in a new collection of our “Structure Matters” series of question and answer interviews with leading ETF and index industry figures. They are conducted by Dan Weiskopf, a portfolio manager at New York-based Access ETF Solutions LLC. In today’s piece, Weiskopf interviews Jay Hatfield, a portfolio manager at Infrastructure Capital Advisors, the firm that sponsors the InfraCap Active MLP ETF (AMZA), the ETF market’s only actively managed fund focused on master limited partnerships (MLPs).
The goal of this next “Structure Matters” series is to provide practical guidelines on how factor-based investing should be monitored, measured and used. In this new series, we’ll interview ETF portfolio managers and key decision-makers involved in the ETF construction and factor weightings that drive index and “real money” performance.
Although the label “smart beta” is at the core of the factor question, investors in passively managed funds need to recognize that a “do nothing strategy” arguably results in the automatic acceptance of certain risks. For example, market-weighted indexes overweight winners while also potentially increasing risk. There is no free lunch!
Our belief at Access ETF Solutions is that investors need to study the factors that drive the index construction within any ETF so they understand how the engine works or run the risk of driving off course. As a tactical investor, we believe curves in the road will affect factor outcomes and that portfolios need to be reviewed in the context of changes in the investment environment. Ignorance will not be forgiven if you get stuck in the mud in your fancy sports car when the road requires an off-road vehicle.
Dan Weiskopf: Given your experience in the industry, what is your vision for how the different indexes might perform under various circumstances, i.e., consolidation, higher interest rates and energy volatility?
Jay Hatfield: We have seen some consolidation in the industry and expect the trend to continue as companies vie for attractive assets in growing basins and markets. First, we believe the trend of consolidation is positive for the overall sector and asymmetrically benefits the general partners of public MLPs whose cash flows substantially increase as the underlying MLP increases its own cash flow and share count.
In addition, companies in the industry have also moved to consolidate to lower their cost of capital. Notably the Kinder Morgan (KMI) entities consolidated into one company; Enbridge Energy Partners reset its incentive distribution rights; and Williams Companies (WPZ) and Energy Transfer (ETE) consolidated their underlying MLPs.
Second, over time, MLPs have shown a very low correlation to Treasurys—less than 10 percent. MLPs may experience volatility as a result of possible Fed actions later in the year, but we do not believe that it negatively impacts the long-term attractiveness of the midstream MLP sector.