There Are Buyers of Master Limited Partnerships Even in Commodity Sell-off

A fallout of the the crash in on oil prices has been the performance of Master Limited Partnerships (MLPs).  According to the January 11, 2016 issue of Pensions & Investments, the Alerian MLP Total Return index was down 43% from its peak in August 2014.  In the first two weeks of January alone, the Alerian MLP index is down 18%.  Anthony Merhige, general counsel and chief operating officer of Harvest Fund Advisors ($7.5 billion in MLP AUM), and Todd Williams, senior vice president, portfolio manager and senior research analyst of Westwood Holdings Group ($500 million in MLP AUM), are seeing interest from some investors even in this difficult environment.  Valuations have become lower and are attracting institutional investors.

Here are some investors that have made investments in the product in 2015:

• December 2015 - Ohio School Employees Retirement Systems invested $50 million with Harvest Fund Advisors
• December 2015 - Colorado Fire & Police Pension Association invested $25 million with Kayne Anderson Capital Advisors' Midstream MLP fund
• October 2015 - Dallas/Fort Worth International Airport Board invested $15 million with First Trust North American Energy Infrastructure Fund

In addition to the lower prices, institutional investors are buying because of the current yield, potential growth, diversification trends into real assets and the safety net of real asset collateral such as pipelines and storage.  Mr. Merhige believes that MLPs are transitioning from a retail to institutional investor dominated base that is less worried about the short term volatility.  The ten year return of the Alerian MLP index is 8.22% annually.  Adding the yield portion would give an investor a double digit return.

The source for this article can be accessed here.

Are Oil Prices Off the Cliff?

Oil is in an intense bear market.  The price for U.S. West Texas Intermediate Crude hit $29.93 per barrel recently due to concern about lowered demand from China and the ongoing supply glut.  "...Standard Chartered said fund selling may not relent until it reaches $10."  This has affected the oil sector, OPEC and the oil producing countries and the prices of certain investment products such as MLPs and High Yield bonds.

Energy companies such as Exxon Mobil and Royal Dutch Petroleum have seen their stock prices slide.  The sector has been down 9% in the last 9 days of trading.  Others are cutting capital expenditures and workers.

Countries affected negatively by the price slump are Russia, Saudi Arabia and the OPEC nations and shale oil dependent states in the U.S.  These include Alaska, North Dakota, Oklahoma, Louisiana and New Mexico.

As always, there are some buyers trying to catch a falling knife.  Gary Bradshow, portfolio manager of Hodges Small Cap Fund, is buying natural gas firms in the belief that oil will rally to $55 per barrel.

The source for this article can be accessed here.

Favored Hedge Fund Strategies for 2016

In the Hedge Fund Outlook article in Pensions & Investments, the fund strategies most likely to outperform in 2016 were global macro, long/short equity and long/short credit.  The survey included chief investment officers, strategists and allocators.  Excess returns would be generated by several factors:  differences in the economic recoveries of developed and emerging markets, volatility and the current high yield credit and energy situations.

Let's review each of the strategies' opportunities:

• Global macro - Dominic Wilson, managing director and head of strategy and research for MKP Capital Management, likes going long in US dollar and Euro and shorting currencies in emerging markets countries that are reliant on commodity exports.  He predicts that developed countries' economic growth will be higher in 2016.
• Long/short equity - Christopher Pucillo, CEO and chief investment officer of Solus Alternative Asset Management is shorting energy, minerals and mining companies.  He sees that sector as being in distress. There are companies that would be a great value to buy.
• Long/short credit - William Ferri, group managing director and head of global products of UBS Asset Management, and Daniel Och, CEO and executive managing director of Och-Ziff Capital Management, are bearish on corporate credit.  UBS does not like it generically.  Mr. Och is focused on the energy sector and is predicting that " a lot of (energy) firms will be experiencing distress" and may be attractive investments in 2016.

A Look Ahead to 2016

In the December 28th issue of Pensions & Investments, a group of investment strategists was polled regarding their outlook for the markets in the new year.  The panel consisted of Krishna Memani, chief investment officer and head of fixed income of OppenheimerFunds Inc.;  James Paulsen, executive vice president and chief investment strategist of Wells Capital Management;  A. Gary Shilling, president and economist at A. Gary Shilling & Co. Inc. and Tim Hopper, managing director and chief economist of TIAA-CREF.

• Mr. Memani is modestly bullish on equities, predicting returns in the mid- to high single digits only.  He is negative on fixed income.
• Mr. Paulsen likes international equities and real assets - real estate, commodities, etc.  He is negative on fixed income. 
• Mr. Shilling likes 30-year Treasury bonds and the U.S. dollar.  He is short commodities.
• Mr. Hopper likes international equities.  He is negative on fixed income.

The issues discussed included the list below:

Factors for 2016

• U.S. economic growth
• Different actions by Central Banks
• Falling commodity prices
• China
• Geopolitics

US economic growth is being forecast between 2% and 3%.  Mr. Shilling is at the low end and Messrs. Hopper and Paulsen are at the high end of the spectrum.  Mr. Shilling views this as the continuing deleveraging process from the credit crisis.  "...we are eight years into..." a ten year process.

Much ado has been made about the Federal Reserve's raising the interest rate by a quarter point.  Elsewhere, in Europe, China and Japan, the central banks have been adding monetary stimulus to their economies.  Mr. Paulsen said, "...the U.S. is at full employment and is going to have to tighten...The U.S. has crossed over (into) full employment, while no one else is even close to it."  

The other stimulus for the world has been the fall in commodity prices, especially crude oil.  There has been an excess of supply in the world with U.S. shale oil production, Iranian sanctions to be lifted and no cooperation among OPEC members.

China will continue to slow down according to Mr. Memani and may place "deflationary pressures...That will depress prices and create intense bouts of volatility".  Mr. Shilling pointed out that it is still an export driven economy despite the efforts of the Chinese government to change to a consumer based economy.  If the western economies are growing slowly, then China and the emerging markets will be impacted.

The strategists did not view geopolitics as affecting investments, even with the ongoing U.S. presidential race.  Investors should be have enough diversification in their portfolios to handle any events.  Mr. Shilling did not agree.  Investors buy Treasuries and the U.S. dollar in these instances, same as in 2007.