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Cushing Asset Management: 2014 Specialty SMA Manager of the Year

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This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor’s July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

That the United States is heading steadily toward energy independence is an exciting prospect for the global energy industry as well as for the U.S. economy. But the energy renaissance isn’t just about increased production and sale of oil and natural gas.

What’s really important at this stage and will continue to matter going forward, according to Libby Toudouze, president at Dallas-based Cushing Asset Management, is the infrastructure—pipelines, transportation facilities, storage and treatment assets—that’s required to bolster the U.S. energy industry in order to ensure the production and supply of oil and natural gas.

Toudouze believes there’s a need for close to $900 billion in new infrastructure by 2025. That represents a huge investment for investors in the midstream Master Limited Partnerships (MLPs) that own the requisite energy infrastructure, and for investors including pension funds and endowments that are looking at the space with great interest.

MLPs, Toudouze said, offer superior-risk adjusted total return potential and an attractive relative yield among income-oriented vehicles. They also have a low correlation to other asset classes and provide a less risky exposure to the energy markets than traditional energy exploration and production companies.

However, “there are winners and losers in the MLP space and they are not cheap,” she said. “But the potential for returns is certainly there, and the key to maximizing those lies in going with a manager who has been in this space and dedicates the time and the resources to do the necessary research.”

Cushing’s Key to Success

Cushing, which manages over $3.8 billion in assets under management, has a long track record in the MLP space, and offers a broad range of MLP investment options including long-short and long-only vehicles, open- and closed-ended mutual funds and index products.

The key to the firm’s success and what drives the strong performance of its products lies in “consistent and disciplined” stock picking, said Toudouze, who manages the long-only MLP Alpha Total Return Strategy, the SMA Manager of the Year in the Specialty category.

“That’s what helps us minimize company specific risk, energy industry risk and also market risk,” she said. “Stock picking helps us create portfolios that deliver the high income and attractive growth opportunities of this asset class, but within a framework that values risk and diversity, and I believe that this is what sets us apart as a firm.”

Growth in distribution is the first attribute Toudouze and the team look for in their universe of MLP names. They’re interested in companies that can consistently grow their distribution at a very high level and over a five-year period at least.

“We also want to make sure there’s quality to that growth and that it isn’t just based on a bunch of M&A transactions,” Toudouze said. “We want to see high-quality growth that will be built organically and on a company’s existing footprints.”

So those companies should also have strong and flexible balance sheets to meet Cushing’s requirements, as well as a management team that’s capable of setting targets and meeting them in a timely and efficient manner.

Finally, “we want to know what kind of customers a company has, whether they’re the kind who will continue to fuel money in and keep production going, or are they someone who’s just going to pull out and go elsewhere,” Toudouze said.

Cushing boasts a strong, 18-member investment team and 12 research analysts, all of whom have vast experience in the energy sector, infrastructure in particular. They’ve served as energy consultants, engineers, investment banking underwriters and asset allocators.

The firm’s founder, Jerry Swank, is a leader in the MLP space, Toudouze said, and has over 40 years experience in energy research and investing.

“Jerry started the firm knowing that the energy industry was changing and that there’d be a lot of stand-alone energy infrastructure companies,” Toudouze said. “He created a firm founded on very fundamental and thorough research, and that continues to guide us in creating portfolios and delivering alpha.”

What’s most important about Cushing, though, is its knowledge of the entire energy industry: midstream, upstream and downstream.

“So although our portfolios only invest in midstream companies, we make sure we understand the entire energy supply chain because it’s important to identify the dynamics of the industry as a whole,” Toudouze said.

In the midstream MLP area, Cushing is also looking for names that are attractively priced and are trading at compelling valuations that indicate that the market hasn’t yet priced in all their positive attributes. The firm’s research also looks to uncover those positive attributes that will serve as catalysts for better performance and growth going forward.

However, “the key element in portfolio construction that results in superior performance is position sizing,” Toudouze said.

That means that no matter how wonderful a company’s prospects may be, it may not be included in the portfolio if it isn’t deemed sufficiently liquid.

“It’s tough to tell an analyst, ‘Sorry, this doesn’t meet the liquidity bar,’” Toudouze said, “but ultimately, this is what works for sound portfolio construction.”

This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor’s July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.


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