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SteelPath Brings MLPs to the Masses: AdvisorOne Interview

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It’s been quite a summer for the managed limited partnership provider SteelPath. The firm announced in July it would be acquired by mutual fund behemoth OppenheimerFunds, something Brian Watson, the firm’s director of research and portfolio manager calls “validation,” not only for SteelPath, but for the MLP space as a whole.

Once thought of as an area for qualified, sophisticated investors who knew the underlying investments well, it’s headed downstream to the investing masses, like so many other alternative investment asset classes recently.

Brian Watson“It was time for this sector to have product offerings that were attuned to the fact that it’s no longer a teeny, tiny niche,” Watson (left) says. “It’s beginning to become more of a mainstream asset class.”

Watson sat down with AdvisorOne to discuss the Oppenheimer deal and its larger implications for the industry as a whole.

Where are we with the development and adoption of alternative investments, especially in light of 2008 and the correlation the markets experienced?

Watson: Investors are willing to look at an asset class that they hadn’t previously looked at. Master limited partnerships still get blank stares from a lot of investors, but the fact that the asset class has gotten a bit more attention is indicative that they’re willing to look beyond traditional equity. We benefit relative to other alternatives because they really get more exotic mean. Once you explain the basics of what we offer, it really doesn’t require much more education. Also, the OppenheimerFunds announcement we made recently suggests that investors are looking for something different.

MLPs were known for their exclusivity and being very illiquid. Is that loosening up? Are you starting to see a perception change among those investors that know MLPs?

Watson: What’s really changed about the MLP marketplace is it’s gotten to a market cap and flow that is needed in order for institutions to get interested. If you go back just a few years, market cap and flow was half of where we are today. In the mid-1990s, they began to really develop into its own asset class. It was once a niche; now institutions can really look at them.

What kind of research process do you have? Are you on site?

Watson: We try to get out to onsite tours—talk to the guys building the pipelines, running the processing plants. We talk to the folks downstream and upstream from them. We try to keep our ear to the ground and talk to the CEOs and CFOs.

Certainly management is an important part of the equation. But the assets are really key. One thing we like to point out is that if you have an MLP that is structured in such a way that’s taking on commodity price exposure, it doesn’t matter how great of a manager you are. If commodity prices fall, your business will fall as well. So we really look at how the business is constructed, first and foremost, and make sure the kind of situation I just described isn’t present. And if it is, we’re going to avoid the name.

Tell me about the Oppenheimer deal. What does it mean to you?

Watson: It’s exciting. We’ve been really impressed with what we’re seeing and I think it’s going to work out great. For me it means I can wear fewer hats going forward.

Are you worried about autonomy in how you run the firm now that you have a parent company?

Watson: We feel really comfortable with that. They have a culture of letting their teams do what they do best. We don’t fear somebody coming in and creating a lag on our ability to react to the market. It’s not how their process works.