Editor’s Note: Elliott attended the National Association of Publicly Traded Partnership’s (NAPTP) annual MLP Investor Conference in Greenwhich, Conn., this week and will report on his takeaways from the management teams’ presentations in an extensive Flash Alert next week.
Aside from the presentations hosted by individual master limited partnerships (MLP), one of the more interesting sessions at the NAPTP’s MLP Investor Conference focused on the proliferation of exchange-traded funds (ETF), closed-end funds and mutual funds that offer one-stop exposure to this increasingly popular asset class. The participants tackled a number of thorny issues related to the recent flood of fund products, including the volatile trading history of many MLPs in recent years.
Most MLPs own and operate midstream assets, or infrastructure to processe, transport and store energy commodities. These business lines often generate steady streams of fee-based cash flow that are relatively insulated from fluctuations in commodity prices. Despite the inherent safety of many midstream MLPs’ cash flows, these high-yielding stocks have pulled back significantly during previous market corrections.
One panelist noted that as MLPs grow more popular among institutional investors, the Alerian MLP Index’s correlation to the S&P 500 will likely rise.
How does this work? Let’s imagine that an institution has 60 percent of its portfolio invested in stocks, 10 percent in MLPs, 10 percent in commodities and 20 percent in bonds. If market or economic risks become elevated, the institution might boost its exposure to bonds and pare its equity holdings. As a particular asset class or group of equities becomes a bigger part of institutional investors’ portfolios, the potential for these allocation decisions to drive extreme moves in individual stocks rises dramatically.
The proliferation of ETFs and similar products, which enable investors to trade baskets of stocks rather than individual names, also contributes to volatility and valuation dislocations.
For example, an investor might opt for the instant diversification offered by Market Vectors Oil Services (NYSE: OIH), an ETF that owns shares of 27 companies involved in the oil services, equipment and contract drilling. If concerns about the oil-field services market in North America prompt traders to reduce their position in Market Vectors Oil Services, this move affects the share price of the 27 stocks in the ETF’s portfolio. That is, shares of Schlumberger (NYSE: SLB)–the ETF’s largest position–will sell be sold alongside shares of the North America-focused Halliburton (NYSE: HAL).
Company-specific drivers will carry the day over the long term. (Returning to our previous example, shares of Schlumberger have handily outperformed Halliburton and the rest of the services group since mid-2011.) But investors indiscriminately paring their exposure to equities will ensure that high-quality names also pull back during a correction.
Investors looking to play the market’s latest summer swoon should follow our script from the past two years: Focus on locking in elevated yields on our favorite dividend-paying names and buying high-quality growth stories at a discount.
In This Issue
1. The stock market’s recent downdraft gives savvy investors another opportunity to lock in elevated yields on our favorite dividend-paying names. See Soft and Yielding.
2. First-quarter results and management teams’ commentaries during conference calls with analysts reaffirmed our bullish take on shares of our favorite contract drillers. See Here’s the Drill: Play the Pullback.
ProShares Short S&P 500 (NYSE: SH)–Buy < 39 in Hedges Portfiolio
First Trust ISE Revere Natural Gas (NYSE: FCG)–Short > 15 in Hedges Portfolio
Linn Energy LLC (NSDQ: LINE)–Buy < 40 in Growth Portfolio
Total (NYSE: TOT)–Buy < 57 in Conservative Portfolio
Penn Virginia Resource Partners LP (NYSE: PVR)–Buy < 29 in Conservative Portfolio
Teekay LNG Partners LP (NYSE: TGP)–Buy < 41 in Conservative Portfolio
Mid-Con Energy Partners LP (NSDQ: MCEP)–Buy < 26.50 in Growth Portfolio
SandRidge Mississippian Trust II (NYSE: SDR)–Buy < 23 in Growth Portfolio
SeaDrill (NYSE: SDRL)–Buy < 45 in Aggressive Portfolio
Ensco (NYSE: ESV)–Buy < 60 in Growth Portfolio
Pacific Drilling (NYSE: PACD)–Buy < 11 in Aggressive Portfolio