Shadowing Energy Income Partners For Domestic Infrastructure Income Seeking Investors

Includes: D, EEQ, KMR, NEE, TRP, WMB
by: Richard Shaw

Energy Income Partners LLC is a specialist in energy infrastructure investing in the US and Canada. They have been retained by First Trust to manage the portfolio for EMLP, a new ETF described on their website as:

" ... an actively managed exchange-traded fund. Energy Income Partners, LLC is the sub-advisor to the fund and will manage the fund's portfolio. The fund seeks to provide total return with an emphasis on current distributions paid to shareholders by investing primarily in securities of companies headquartered or incorporated in the United States and Canada engaged in the energy infrastructure sector."

For some, owning the ETF may be the best choice. For others, who wish to avoid the 0.95% fee, or who simply prefer to own individual securities, this portfolio may be worth close observation and possible shadowing.

Energy Income Partners are said to be among the best in this area. If that's the case, then watching what they do is worthwhile.

Figure 1: Here is a table showing the holdings of EMLP as of July 7. It shows the weight of each security in the portfolio, the weight with cash removed, and the cumulative weight with cash removed as you start with the heaviest holding adding one more each time until they are all included.

The table is marked to show the cut-off from various portions of the total holdings from 50% through 100% at 10% intervals.

Figure 2: Here is the portfolio again with the Canadian stocks removed if they do not have US listed alternatives. It is organized the same way as Figure 1.

Figure 3: We put the full list of stocks in Figure 2 into the Morningstar Principia database to take a look backward at how they did.

We set Principia to weight the securities equally and to rebalance them each month for 10 years. The benchmark we used is the S&P 500. The +/- numbers below the benchmark total return is the difference between the equal weighted, monthly rebalanced portfolio and the benchmark.

In the main body of the table is the total return for each individual security over 3-months, 1-year, 3-years, 5-years and 10-years. The data is through May 31, 2012.

Figure 4: This table, using Principia, is for the 12 heaviest weight positions in the EMLP portfolio which come closest to representing 50% of the total securities weight in EMLP. They are also equal weighted and monthly rebalanced.

Figure 5: This table uses the same 12 securities as Figure 4, but weights them in the same proportions that they have to each other in EMLP.

Figure 6: This table compares the +/- to benchmark in Figures 3 - 5 to show the degree of "excess returns".

The data show that over the past 10 years, energy infrastructure income outperformed the S&P 500 for the measured periods, with the exception of a minor underperformance for the larger list over 3 months through May.

Figure 7: This table shows the difference between the excess returns for the two 12 security portfolios and the full 43 equal weighted US listed securities portfolio.

The data show that for 3 months and 1 year the equal weighted and the 12 weighted relative to each other as they are in EMLP was superior to the full 43 US listed securities in equal weight.

Over 3 years and 5 years, the three portfolios were approximately equal in total return.

There as a minor negative advantage owning only the top 12, but a major convenience and administrative advantage versus holding 43 securities.

Over 10 years, the full 43 securities produced a meaningful return advantage. However, should you be shadowing, the EMLP portfolio would be shifting selections and allocations over time, so it is the 3-month and 1-year differentials that would be most important.

Figure 8: These three histograms show the difference between the quarterly total return of three portfolios versus the S&P 500 benchmark.

The general pattern of under and outperformance is about the same, which would be expected for a category, but the top 12 in the relative weighted allocation has less severe underperformance quarters than either the full 43 in equal weight or the top 12 in equal weight.

Figure 9: This table shows the yield, worst rolling year out of ten, and the 3-year Sharpe Ratio.

The full 43 securities in equal weight provides a substantially higher yield, a somewhat less severe worst year and a slightly higher Sharpe Ratio.

However, should you purchase EMLP, the 0.95% expense ratio would put the current yield much closer to, but still higher than, the equal weight top 12 (3.84% versus 3.20%).

For immediate yield purposes, the ETF seems a more attractive choice.

However, for the short-term (3 months or 1 year) shadowing and purchasing their top choices appears historically to create more value than the ETF.

Linked Symbol for Securities in the EMLP Portfolio:

Name Symbol Alt.
Kinder Morgan Management, LLC. KMR
Enbridge Energy Management LLC EEQ
TransCanada Corp. TRP.CN TRP
The Williams Companies, Inc. WMB
NextEra Energy Inc. NEE
Dominion Resources, Inc. D
The Southern Company SO
Spectra Energy Corporation SE
UGI Corporation UGI
CenterPoint Energy, Inc. CNP
NiSource Inc. NI
Duke Energy Corporation DUK
TC Pipelines, LP TCP
NuStar Energy LP NS
Northeast Utilities NU
Enbridge Inc. ENB.CN ENB
Teekay Lng Partners Lp TGP
Keyera Corp. KEY.CN
Pembina Pipeline Corporation PPL.CN
Plains All American Pipeline, LP PAA
National Grid Plc (ADR) NGG
Kinder Morgan, Inc. KMI
Exelon Corporation EXC
TransMontaigne Partners, LP TLP
Enbridge Income Fund ENF.CN
Holly Energy Partners, LP HEP
Buckeye Partners, LP BPL
AmeriGas Partners, L.P. APU
ITC Holdings Corporation ITC
Alliance Resource Partners, L.P. ARLP
Energy Transfer Equity, LP ETE
El Paso Pipeline Partners, LP EPB
Emera Inc. EMA.CN
Questar Corporation STR
Spectra Energy Partners LP SEP
Wisconsin Energy Corporation WEC
Magellan Midstream Partners MMP
Sempra Energy SRE
Fortis, Inc. FTS.CN
Canadian Utilities Limited (Class A) CU.CN
Veresen Inc. VSN.CN
Sunoco Logistics Partners L.P. SXL
Enterprise Products Partners LP EPD
NuStar GP Holdings, LLC NSH
Williams Partners LP WPZ
Alliance Holdings GP LP AHGP
Natural Resource Partners LP NRP

Disclosure: QVM has positions in SO and TRP as of the creation date of this article (July 9, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.