Who Stole My Alpha - Part 2

Summary

• InfraCap MLP fund performance review.
• No alpha, but keeping up with the benchmark.
• Where we stand on it.

The virtually never-ending downslide in the InfraCap MLP ETF (NYSEARCA:AMZA) has investors questioning the validity of investing in it once more. We had previously examined the performance of this fund and concluded that it did an adequate job of keeping up with its levered benchmark, but the option return was being neutralized by lost upside during rallies.

Is that still true today or has something gone wrong and is the fund performing worse than before?

AMZA Total Return Price data by YCharts

Over the last one year, AMZA has produced a total return of -15.7% compared to the benchmark of the Alerian MLP Index total return of -14.6%. Running this over every time period and adjusting for the fact that AMZA uses a leverage of up to 30% shows how much "alpha" or excess returns, adjusted for leverage, AMZA produces.

Source: YCharts, Author's calculations

There are a few messages from that table. First that over every time frame, going back to AMZA's inception in October 2014, the Alerian MLP total return has been negative. That makes life difficult for any manager. Bear markets are notorious for punishing the slightest bad news and rarely rewarding good news. The second is that AMZA has produced pretty much in line with what a levered 130% benchmark would produce with minimalistic alpha over any time frame.

There is good and bad news in that second point. The good news is that in spite of management fees and a declining market, AMZA kept up with its levered benchmark. While this may seem like an easy task, it is not, as leverage is very hard to adjust and keep constant in declining markets. The bad news is that as we reiterated a few dozen times already, AMZA's option selling strategy has been effectively useless. No sugarcoating that fact. Buy-Write indices and option arbitrage strategies outperform in bear markets. The CBOE S&P 500 Buy/Write Index outperformed in the 2000-2002, 2008-2009 and even in the mini 2011 bear markets.

AMZA has not outperformed the benchmark in any time frame, and has outperformed the leveraged benchmark by razor-thin margins in two. This must have taken some effort. We can recount multiple cases where we have got the direction of a stock incorrect, but actually made money by using a more defensive option. Uniti (UNIT) is one that comes to mind, where the underlying is down 16% since we sold puts, but our put adjusted stock position is up 3%.

The cause of this underperformance or rather failure to benefit from option strategy can be debated, but extremely bad timing with selling derivatives and /or constant influx of money are likely to be at the top of the list.

Are there alternatives?

One reason we are sticking with it is because we feel we are late into a MLP bear market and valuations look extremely good everywhere. Even among MLP stocks we don't like here, we are hard pressed to make a short case. AMZA's leverage should allow it to outperform in a bull market. We say "should" as so far we have very little evidence to support this. But it is one investment for us. Within this sector we have made several direct, option related and closed end fund investments. As such AMZA represents one basket where we have put a few eggs. We would never bet the house on this one.

Conclusion

From expecting a mighty outperformance, we have reset our expectations out of this one to just be a levered, non-K-1 producing MLP sector bet. However, we continue to be on the lookout for deep value situations in the MLP space, and we are finding plenty where we are executing common stock, preferred stock or option trades. We made one switch away from AMZA in late 2017, when we saw a good opportunity for the Nuveen Energy MLP Fund (JMF) and that has done ok since then versus AMZA. Should we find a more compelling choice, we might exit AMZA completely.

JMF Total Return Price data by YCharts

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Analyst’s Disclosure: I am/we are long AMZA, UNIT, JMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We may trade any of these positions from either side without further notice. Trapping Value is a Co-author at "The Wheel Of Fortune". The Fortune Teller is a fan of Trapping Value.