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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Midstream Movember: Updated Returns Through Month End

Because the end of the month fell on a Monday, we felt it might be useful to post a wrap up on monthly performance for midstream, outside of the normal weekly cycle.

Movember is an annual event involving the growing of mustaches in November to raise awareness of men’s health issues.  I did not participate in that Movember this year.  Midstream and MLPs had a different kind of Movember, riding surging momentum in value stocks and energy stocks to a big rally throughout most of November.  The Alerian MLP Index (AMZ) rallied 23.8% (including distributions) and the Alerian Midstream Energy Index (AMNA) rallied 18.9% with dividends.

Even with a rough last day of the month (-3.5%), November for MLPs was their 2nd best month all-time, which also happens to be their 2nd best month in 2020.  Extreme volatility continues in 2020, but this time to the positive on vaccine headlines and rising hopes for a hydrocarbon demand recovery.  Weak YTD returns heading into the month was clearly a factor, too, attracting investors when sentiment shifted.

Broad market conditions were supportive as well, with the S&P 500 +10% in November.  The FTSE Global Core Infrastructure 50/50 Index, the most representative infrastructure index, produced +7.9% total return in November, and has YTD -4.7% total return. 

The infrastructure index includes midstream stocks, but also includes other U.S. and global stocks in the utility, transportation (airports, railroads, toll roads) and communications (towers, satellites) sectors.  Even with a global pandemic grinding traffic to a halt this year for many transportation stocks, the diversification and regulated cash flows of infrastructure have helped it hold up much better than the midstream component alone.

MLP Status Update

MLPs have now put up consecutive positive months for the first time since the initial April and May recovery.  4Q returns thus far are approaching 30% for MLPs, but YTD return remains -30%+.  If December holds flat or trades up, 2020 will avoid being the worst ever year for MLPs.  But even with a decent rally in December, 2020 will be among the worst 2-3 years for MLPs ever (2008 and 2015 being the others).

Midstream Status Update

The broader AMNA index, which includes lower beta Canadian Midstream stocks, lagged the AMZ for a second straight month.  But it was still the second-best month ever for the index at nearly 19%.  4Q return to date sits at almost 20%, and YTD return is still -23.8%, much better than AMZ, but not great.

Over the years, December has averaged positive returns for MLPs, and it tends to benefit from rotation ahead of an anticipated January effect.  The January effect tends to be exaggerated for MLPs because K-1 averse MLP investors will put off fresh positions in MLPs for a fresh tax year.  

December has been positive for AMNA and AMZ in 3 of the last 4 Decembers, but the one negative (2018) was a sizeable drawdown of more than 9%, the worst December for the group ever.  Over the last 15 years, the best December was last year’s 8.5% return for AMZ (+7.4% for AMNA), but that came after two negative months in a row.  This year, we enter December after a 20-30% bounce.