By Jared Cummans
Darren Schuringa is the founder of Yorkville Capital Management, a Global Investment Performance Standards (GIPS) Compliant Registered Investment Adviser (RIA) which offers research depth on MLPs that often exceeds existing industry efforts. Yorkville Capital’s sister company, Yorkville ETF Advisors, launched the Yorkville High Income MLP ETF (NYSEARCA:YMLP) in 2012. The fund that tracks the Solactive High Income MLP Index and focuses primarily on high quality yield opportunities in the commodity MLP segment with investments in natural resources, marine transportation, propane, and exploration & production partnerships. It employs a rules-based investment strategy that emphasizes quality and quantity of distribution by placing current income, distribution coverage ratio and distribution growth foremost.
Commodity HQ (cHQ): The MLP ETF sector has exploded in recent years with new products as well as a surge in assets, why do you think that is?
Darren Schuringa (NYSE:DS): The surge results from a general increase in the awareness of MLPs and broader recognition of MLPs as a separate asset class. MLPs have been publicly traded since the mid-1980s, but most investors, even sophisticated ones, were not even aware of the asset class until recently. Now that the MLP universe has a market capitalization of around $300 billion, and with investors searching for yield, it only makes sense that MLPs are garnering more attention.
When investors look deeper at the asset class, it’s hard not to like what you see. For example, MLPs have outperformed the S&P 500 in 11 of the past 12 years, according to Yorkville’s own research. Yorkville Capital Management (YCM), has an audited 10-year plus record of 13.2% annualized returns going back to 2001.
MLPs offer high current income, growing distributions, and have low correlations to the broad market, providing excellent diversification benefits. Investors can also now access MLPs through funds that enable direct investment in MLPs without the problematic K-1 forms that the partnerships require. This feature is certainly attractive and expands the asset class’ investor base to include institutional investors and retirement accounts.
cHQ: The Yorkville High Income MLP ETF (YMLP) debuted earlier this year, but already ranks among the top five MLP ETFs as far as assets are concerned. Why do you think it has been so quick to catch on with investors?
DS: In a word: Yield. More specifically, high quality yield. The last quarterly distribution on May 15th for YMLP was at an annualized yield of 8.7%; over 40% greater than AMLP’s yield during that period.
The rules-based investment strategy that YMLP follows leverages Yorkville’s 20 years of investment experience in MLPs to identify the highest quality yielding partnerships. We define high quality as those MLPs least likely to cut their distributions and most likely to increase them.
YMLP, as a result, is currently the highest yielding non-leveraged MLP product out there. Moreover, we anticipate the majority of income received by investors will be return of capital. The fund paid out 40 cents in May, and is going ex-dividend on August 15th for its second distribution.
cHQ: What sets YMLP apart from the field? Why should an investor consider this product over some of the other options out there?
DS: YMLP focuses on and offers pure exposure to an overlooked segment of the MLP asset class: Commodity MLPs. Our research shows this half of the MLP asset class offers higher yields than their infrastructure counterparts, but in recent years haven’t demonstrated any greater volatility, and have actually been growing their distributions faster.
Commodity MLPs represent a mispriced segment of the MLP market and an intriguing investment opportunity. So YMLP isn’t just another basket of pipeline MLPs – it provides diversification of exposure within the MLP asset class.
Also, YMLP was designed as an investment product versus a passive benchmark. As MLP investors, we felt the most efficient ETF strategy was not to choose the twenty largest MLPs, weighted by market cap. Instead, the Solactive High Income MLP Index tracked by YMLP employs a fundamental strategy that looks at the universe of Commodity MLPs and focuses on yield, distribution growth and distribution coverage to pick the best 25 partnerships.
Furthermore, we developed a tiered liquidity weighting methodology to account for liquidity constraints and increase diversification of the portfolio.
cHQ: There seems to be a big debate over whether the ETF or ETN structure is better for an MLP fund, why did Yorkville ETF Advisors go with an ETF?
DS: First, an ETF structure provides the most tax efficient source of current income to investors. While MLP ETNs pay out ordinary income, income paid out by an MLP ETF retains much of the favorable income tax efficiency of the underlying holdings, with the best case scenario 100% return of capital and the worst case 100% qualified dividend income.
Also, ETN investors have to deal with potential issuer credit risk. As we saw recently with JPMorgan capping AMJ’s share count, ETN investors are ultimately at the mercy of the issuer. ETF investors don’t need to worry since ETFs actually invest in the underlying partnerships.
That being said, we see benefits to both structures and all investors have different goals and preferences, so there are merits to either structure.
cHQ: What are some longer-term trends you are seeing in the energy market?
DS: We remain very positive about the long-term outlook for the production of oil and gas in North America.
The United States has become the fastest growing oil and gas producing country in the world and should remain so for at least the next 10 years. Additionally, Canada will continue to develop its reserves, especially in the oil sands, regardless of progress of the Keystone pipeline. [Also], Mexico appears to be halting its recent production decline. We are highly optimistic because of the technology revolution taking place in the development of unconventional oil and gas production. The vastly improved use of hydraulic fracturing and horizontal drilling has led to extensive new oil and gas reserves being developed in unconventional shale plays.
This cheap, secure and abundant source of newfound oil and gas is having a profound effect and we believe it will redound to the benefit of the U.S. economy in a number of ways. It will help our balance of payments, lower our trade and federal deficits, and rejuvenate our petrochemical and fertilizer industries. It has been estimated these developments could add as much as 2% to our GDP.
We believe investors can benefit from this trend by investing in Infrastructure and Commodity MLPs. To the best of our knowledge, YMLP is the only fund to offer pure, well-diversified exposure to Commodity MLPs.
Disclosure: No positions at time of writing.
Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.