Senior Managing Director, Portfolio Manager
First Republic Investment Management Inc.
AUM: $25 Billion
How do you use MLP exchange-traded products in your asset allocation models?
We have an allocation to “commodity/other” as an asset class, which, for my clients, consists mostly of energy infrastructure. We originally separated out this small class because of the tax characteristics of master limited partnerships.
Is this a fixed-income play or an energy play or both?
I call it an “income-oriented” investment with a play on energy—some of both.
Do you prefer the ETF or ETN structure when it comes to these products, and why?
The ETF structure has a tax drag associated with it that is eliminated with an ETN. Both can be used, though, in tax-deferred accounts without running afoul of the unrelated business income designation.
I think the data I have seen over the last year or two would suggest that the ETN structure will do better over the long run, but you have the added risk in the form of the credit risk of the issuer, and some folks don’t like that extra risk layer. These are indeed notes rather than equities in the true sense.
In particular, I’ve invested a lot in the Yorkville High Income MLP (YMLP), Yorkville High Income Infrastructure MLP (YMLI) and now RBC ETNs Linked to Yorkville MLP Distribution Growth Leaders Liquid PR Index (YGRO).
I like an intelligent approach to pooled investing rather than a simple market-cap index. I like the idea that the stocks in the three indices are reviewed each year for sustainability and suitability, and that they start off equal weighted. There is also attention paid to liquidity, especially with YGRO, so that the strategy is sustainable. The energy infrastructure sector is not a large sector, so liquidity, or the lack thereof, can be an important consideration.
Is there a particular part of the natural resource world you are more interested in than others?
I’m quite partial to energy, but then I worked as a chemical engineer for almost 20 years at Chevron. Energy is the largest commodity in the world by almost any measure and is the lifeblood of our modern economy. The geopolitical aspects along with the technical and economic aspects are fascinating to me.
Are falling oil prices a concerns for you in regard to MLP funds?
I’m an optimist and opportunist. When prices fall, that’s usually a good time to buy. I don’t try to hit the very bottom—if I do, it’s simply luck, but the values are much better near the bottom.
Of course, you have to have a long-term positive view on energy, and oil prices in particular, which I do. So much of the new oil production in the U.S.—and virtually all MLPs are U.S.-based—is in areas that didn’t have a lot of infrastructure where there’s still a tremendous need for investments in this type of business. I think it’s still a good growth sector, with above-average income because of the MLP structure.