Riverfront Investment Group
AUM: $4.8 Billion
How do you use MLP exchange-traded products in your asset allocation models?
We have MLPs in our asset allocation process for two reasons: First, attractive relative yield: MLPs offer distribution yields of roughly 4-5%, which we find attractive relative to other equity yield-producing vehicles, such as real estate investment trusts (REITS) and utilities. Secondly, more attractive relative growth: MLPs have traditionally grown their distributions 5-10% annually. Other income-producing vehicles—such as bonds, REITS and utilities—typically grow their coupons or dividends at much lower rates, if they grow them at all. Furthermore, we anticipate distribution growth rates should accelerate over the coming years due to the rapid growth of energy infrastructure (pipelines and storage facilities) in the shale gas regions in the country.
Is this a fixed-income play or an energy play or both?
In general, MLPs will have some sensitivity to both rates and commodity prices. However, the main rationale for owning them is for the reasons mentioned above. You get an attractive relative yield that comes with growth opportunities as well.
Do you prefer the ETF or ETN structure when it comes to these products, and why? Any specific products you use that you can single out?
We own a blend of the Global X MLP & Energy Infrastructure (MLPX), Credit Suisse Cushing 30 MLP ETN (MLPN), and Barclays ETN+ Select MLP ETN (ATMP) in our portfolios. MLPX is an ETF, while the other two are ETNs. None of these products issues a K-1, they’re not subject to unrelated business income tax, nor are they structured in a way that could potentially lead to punitive capital gains tax withholdings.
However, there will still be capital gains taxes for the investor if the security appreciates, but these capital gains will not be held back at the corporate level.
At Riverfront, we have exposure limits in place for ETNs, because at the end of the day, you’re taking on the credit risk of that issuer.
In the ETF space, we believe Global X has created a unique product with MLPX in that it caps the limited partner exposure to 25%, with the remaining 75% comprising the general partners. In our opinion, shareholders of general partners typically accept a slightly lower initial yield, but get a significantly higher distribution growth rate, which should lead to less susceptibility to rising interest rates.
Is there a particular part of the natural resource world you are more interested in than others?
The key here is to focus on energy infrastructure—pipelines, storage, etc. We prefer these assets because their revenues are more predictable, because they are generally long-term contracts and fee based, so they have less vulnerability to rising or falling commodity prices.
Are falling oil prices a concerns for you in regard to MLP funds?
Falling oil prices are definitely a concern, but per the comments just mentioned, there is some insulation from the volatility of energy prices. That said, the recent headlines have all been about Saudi Arabia trying to break the back of the U.S. shale boom, so we’ll continue to monitor how lower energy prices are affecting capacity and utilization rates.