What’s an investment conference without the excitement of a product launch?
Last week, the biggest player in the ETF space, Charles Schwab, launched its commission-free ETF platform.
And on Tuesday, one of the smaller players in that space launched a niche but not insignificant new fund: the Yorkville High Income Infrastructure MLP ETF (YMLI).
Yorkville specializes in MLP research and asset management, an area of ETFs with few competitors. Its launch last April of the Yorkville High Income MLP ETF was one of the most successful product launches in terms of net asset inflows last year, indicating growing interest in master limited partnerships’ income potential.
And while Yorkville’s Darren Schuringa, an intelligent and articulate spokesman for his product, was happy to tell me about the many virtues of infrastructure investing, the most eloquent testimony may have come from a Morgan Stanley advisor seated nearby who, on hearing our discussion, chimed in: “I don’t have a single portfolio without it [infrastructure].”
The advisor shared Schuringa’s view that infrastructure is a vital, safe and neglected asset class.
For Schuringa’s part, the reasons for owning U.S. infrastructure were many, starting with some important basics:
“MLPs offer low correlations to equities, fixed income and commodities.
“Also, it’s the only pure play—without the commodity exposure—on the shale revolution. You’re investing in the U.S.,” which he says offers comparative safety and is “good for geopolitical reasons.”
In other words, this is like buying North Dakota (now the No. 2 energy producer, after Texas and ahead of Alaska, thanks to shale) if ETFs would add state funds to their existing complement of country funds.
“You can buy Chesapeake (CHK), but 100% of their exposure is not going to be to shale.”
Schuringa’s challenge to investors is: “Do you have infrastructure in your portfolio? You have REITs, but do you have U.S. infrastructure?
The comparison to REITS is an important one, since investors usually turn to them for income, diversification and growth. In fact, REITs were the best performing asset class in 2012, according to S&P, and have topped the investment charts for the past several years.
Yet Schuringa believes they compare unfavorably to infrastructure MLPs.
“In 2008-09, in the heart of the crisis, REITs cut their distributions by 50%; yet 74% of all MLPs maintained or increased distributions.”
Schuringa acknowledges that asset prices tanked during the ’08-’09 crisis, but he hastens to point out that they turned in positive performance in 2001 and were only slightly negative in 2002.
Longer term, he says MLPs have generated returns in the mid-teens over the past 12 years and that 93% of MLPs have maintained or increased distributions year over year, though good times and bad. (Currently, those returns come from a yield of about 6% plus distributions in the 7% range; the five-year return has been 12.7%.)
So why have investors had cold feet?
Tax administration is one reason.
As a partner in the MLP, “you’re gonna get a K1,” Schuringa says. “CPAs have said ‘I don’t get paid and compensated enough for the additional work of filing 10 K1s.’ [CPAs] are big influencers of investment decision,” he says. “But for a 15% return per annum, it’s not worth [passing on].” Pay the CPA more to do it, he says.
The Yorkville exec adds that for IRAs and pension funds, MLPs create unrelated business income tax or taxable income. “Institutional investors stay away from them for tax-driven reasons,” he says.
Another reason for investors’ cold feet stems from the blowup of MLP investing in the early ’80s. But Schuringa says investing in MLPs today is weighted about 80% toward infrastructure and 20% to energy, nearly the reverse of the ratio prevailing 30 years ago when MLPs were mainly vehicles for wildcatting energy and exploration companies.
“Another change we’ve witnessed: We really didn’t have the same degree of sophisticated hedging tools to lock in pricing.”
Schuringa says Yorkville only invests in companies with a low probability of cutting distributions and a high probability of raising them. He also emphasizes that he makes no large bets on winners and losers in the sector: the new fund is equally weighted, meaning he has a 4% stake in each of 25 names.
And while Yorkville is focused on energy infrastructure, the firm also invests in ETF infrastructure.
To distribute its ETFs, the firm turned to Exchange Traded Concepts, which accommodates anyone who wants to start their own ETF with their “ETF in a box” solution. Yorkville liked the execution and concept so much, it bought a majority stake in the firm.
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