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.

Oil Drops 56% Since June: What to Do

The hot topic in the new year has been the falling price of oil.  A barrel of oil to $48 for West Texas Intermediate crude.  Fund managers are positioning their portfolios to take advantage and protect themselves from the situation.  Some opinions and investment ideas were presented in two articles in Pensions & Investments on January 12, 2015.

Winners:

• Countries that import oil in the emerging markets (Turkey, Indonesia and India) 
• Stocks in the consumer discretionary sector
• Infrastructure investments

Risky:

• Countries that export oil in the emerging markets (Russia, Venezuela and Nigeria)
• Oil industry stocks
• High yield bonds
• Index investors for UK and emerging markets

The sources for these ideas can be found here and here.

Hedge Fund Hopes for 2015

Since the global credit crisis of 2008, the central banks of various nations have been using various utilities (i.e. non-existent interest rates, quantitative easing and expanding their definitions of conservative debt) to prop up asset values to protect the banking industry according to Frank Brosens, co-founder and risk manager at Taconic Capital Advisors in New York.  These actions reduced asset price volatility and hedge funds' opportunities to produce alpha.  This is now ending.  The last three months of 2014 saw increased volatility and portfolio managers are predicting it to continue in 2015.

Managers with different strategies are seeing good investments:

• Long/short
• Joel Greenblatt, managing principal and co-chief investment officer of Gotham Asset Management in New York, believes there are "..good opportunities on the short side with currently very expensive stock prices if the market drops."
• Eric Mindich, CEO of Eton Park Capital Management in New York, is long in Japanese and Chinese markets.  Both countries will benefit from cheaper oil prices and valuations are very low in China.
• Global macro - Kenneth Tropin, chairman of Graham Capital Management in Rowayton, Connecticut, is monitoring the quantitative easing initiated by Japan's and European central banks, the improvement in the US economy and unrest in various political hotspots around the world.
• Multi-strategy - Michael Hintze, CEO and senior investment officer of CQS (UK), sees short trades based on geopolitical situations (i.e. Ukraine and Russia), failling oil prices and terrorist activities.
• Credit - Several fund managers are positioning their funds on different themes.  The most interesting one is from Paul Twitchell, partner and global head of event strategies of Whitebox Advisors.  He is looking at energy-related distressed debt.  He is interested in "...supplying secured debt to energy companies at a certain price..."

The source for this article can be found at here.

Emerging Managers To Launch in 2014

Several hedge fund industry service providers are predicting 2014 to be the year of the emerging manager launch according to an article in Pensions & Investments.  These include consultants, fund of fund managers, law offices and capital introductions departments.  Experienced managers are launching new firms because their former firms are closed to new investors.  Not only are managers starting new firms, they are also hiring their investment teams at their former firms. Banks continue to divest from proprietary trading desks and hedge funds.  Investors are seeking emerging managers to meet their asset allocation target or replace their current funds according to Stephen Nesbitt, CEO of Cliffwater LLC, an alternative management consultant.   As most investment is based on relationships, they are more willing to invest with managers with a shorter history according to Dean Backer, managing director of Goldman Sachs.

Asset raising will be easier for these intact teams according to Robert Kaplan, co-CIO of the Permal Group.  The largest ones are Three Bays Capital ($500 million in assets under management) which is run by Matthew Sidman, an alumnus of Highfields Capital Management and Junto Capital Management ($317 million in AUM) which is run by James Parsons, an alumnus of Viking Global Investors.  On the horizon are Aravt Global with Wui Yen Liow, formerly of Ziff Brothers Investments, and Anand Desai, formerly of Eton Park Capital Management.  It is anticipated that they will launch with $500 million to $1 billion in AUM.  Everyone else will need to provide incentives for their seed money such as reducing their management and performance fees and offering investors equity in their business according to Tracy McHale Stuart, partner and CEO of Corbin Capital Partners, a hedge fund of funds manager.