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October 19, 2011

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Thoughts on MLP Conference

Dealflow Media put on a conference this week in New York.  It was a great opportunity to have intimate conversations with some very important professionals and investors who have helped shape the MLP space over the years.  The folks at Dealflow will be launching a subscription based newsletter very soon, and have committed to another conference next year, which will likely be just as interesting, but with more attendees.

A few highlights from me on the conference.  There were some very informative panels on taxation and capital markets activity, but there were 2 panels that were most interesting to me, with V&E’s Larry Nettles discussion of Fracking a close 3rd (click here to get great animation he showed of Barnett Shale production’s evolution over the years).
The first one I really like was the panel titled: “Retail Investments through Publicly-Traded Units & Fund Products” and included Kenny Feng from Alerian and Jim Cunnane from Fiduciary Asset Management.  It’s not really a secret that owning MLPs directly is the best way to have MLP exposure (which is what Curbstone offers to investors, in case you were wondering).  But it was nice to hear that conclusion confirmed by the leader of a firm which offers more than one alternative to investing directly in MLPs.  Kenny Feng of Alerian said the following regarding MLP alternatives: “If you can own MLPs directly, that’s always better from a tax perspective”.  He went on to explain that for people who cannot own MLPs directly (most common reason being they have investable assets in tax-free account and not a taxable account), there are many opportunities available including the Alerian ETF ($AMLP) and the Alerian exchange traded note ($AMJ).
Fiduciary Asset Management Chief Investment Officer Jim Cunnane echoed Kenny’s comment in terms of alternatives.  Jim also discussed some of his thoughts on active management and how difficult it is to beat the market if your benchmark is the market cap weighted index of Alerian.  He pointed out that he sees value in small cap names these days and feels they are not getting enough credit for potential growth: “any growth you can find these days is going to be very valuable”, and small caps offer more opportunities for such growth given that they can grow with smaller acquisitions than larger cap MLPs can.
The other panel that was really interesting featured three mini-presentations on the current state of the MLP market from Ethan Bellamy of RW Baird, Kyri Loupis of Goldman Sachs and Diego Kuschner of EQC Funds (a hedge fund group with exposure to MLPs).
It should be noted that per dollar of resources at his disposal, Ethan is the hardest working and most original MLP analyst out there.  Ethan’s slide presentation shared some of his research that showed how the VIX and credit spreads have traded compared with the Alerian MLP Index.  The takeaway is that historically, when the VIX gets above 30, around 80% of the time, your returns a year later were positive if you bought the MLP Index.  When the VIX gets above 40, around 95% of the time your returns are positive if you bought MLPs at that point.  There were similar numbers for when the MLP yield spread to treasuries blows out vs when it is really tight.  Alternatively, Ethan said when VIX is below 15, it’s probably a good idea to sell.  Selling stocks of any kind when VIX is low and buying when VIX is high is probably a good practice, and intuitive in a vacuum, but we don’t invest or trade in a vacuum, and psychology can make it hard to buy when fear is peaking.
Diego highlighted that the sector is very illiquid and as a result it remains very expensive to purchase protection against MLP sector declines generally.  He also noted how MLPs are often sold as low correlation vehicles, when in fact during times of market stress, they can be very correlated with the stock market generally, and it’s just through the compounding effect of MLP returns that you get low correlation over time.
Kyri’s presentation focused on what the ultra high net worth clients he deals with at Goldman Sachs think about when it comes to MLPs.  He said K-1 administration was very low on their list of concerns (which is contrary to what you often hear and contrary to what firms hawking MLP exchange-traded products will focus on).  For the very wealthy, their focus is on the long term growth story of energy infrastructure, the total returns that will likely translate into, and the tax advantages of MLPs.
Anyway, it was a good time, and it’s always good to visit New York City, even if my wife was afraid I would somehow get swept away amid a mass Occupy Wall Street riot or something else she imagined from the TV coverage…
More on my panel and financial engineering in MLP space here.

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