Infrastructure investing has gone absolutely mainstream over the last decade. When I first started writing about listed infrastructure funds in the Financial Times over a decade ago, there were just a handful of funds (including HICL and INPP) and yields were nearly always above 5 to 6%. Now we have dozens of funds operating in a spectrum that has broadened to include everything from social housing through to energy storage. The sheer range of listed funds as in fact now become so broad that we’ve also seen the advent of what are in effect fund of funds who invest in this spectrum of listed funds, making life easy for the adviser or investors. Gravis and Foresight dominate this space. One side effect of this huge increase in popularity is that yields have fallen pretty much across the board, partly as a result of many funds trading at chunky premiums. Now the average income investor would be lucky to get a blended average of much above 5 – although there are still some outlier, higher yielding funds out there.
What is interesting though is that a growing number of these funds have investments in some form of energy infrastructure. This small exposure to everything from power transmission grids through to pipeline and storage facilities pales by comparison with the US market though. There energy infrastructure assets have been hugely popular with private investors (especially those after an income) for many decades. That is largely because stuff like pipelines and storage centres can be owned by tax efficient limited liability partnerships called MLPs. These can – like REITs – distribute nearly all their income tax free to investors. Yields have traditionally been in the range of 5 to 10% but the rub is that volatility has also usually been off the Richter scale. That’s because investors have come to view these structures as a play on energy prices although the direct relationship between income payouts and the spot price of oil is at best indirect and sometimes negligible. These energy infrastructure operators charge fees for their services which means that revenues can indeed go up and down but that income doesn’t always move in line with oil prices – not least because some of the assets also transport natural gas which has its own pricing dynamic. And it’s also important to add that some storage systems can also see their fee income move in the opposite direction i.e experienced increased revenues even with a declining oil price. Although oil prices crashed earlier this year, demand for storage shot up. So, the direct linkage between plummeting oil prices and fees for using pipeline and storage facilities is not a simple, linear one.
That should make MLP based income relatively attractive to UK income investors used to much lower yields from their more ‘mainstream’ infrastructure assets. But in reality, all that price volatility has put off UK investors – all we see are a bunch shares in pipelines and storage hubs moving up and down in value based around the prospects (currently dire) of the US unconventional oil and gas space.
UK investors have also been discouraged from investing in this space because of the tax laws, especially around withholding taxes which apply to UK investments in US income producing shares. In recent years there’s been some good news on this issue. The good news on this score is that the issuers of exchange traded funds have found ways of overcoming that tax problem by building structures that do away with all the tax risk.
Sadly, what these MLP ETFs can’t do away with is the volatility in the share price of these MLPs. Invesco has for a number of years had a fund called the Invesco Morningstar US Energy Infrastructure MLP ETF (both accumulating and distributing versions of the index) with about £200m in assets, ticker MLPP. The total costs in the fund run around 1.25%. LGIM also has a small US Energy Infrastructure MLP ETF with a TER of 1.25% total cost, ticker MLPX. Both funds are down around 15% over the last month, up 25 to 30% over the last three months and down just over 40% in the last six months. Volatile, as I said.
Now these two, small in size, ETFs have been joined by a big new name – Alerian. In the US MLP market Alerian as a fund manager and index provider is absolutely huge. At the mid-way point in 2020, Alerian had a 75.8% AuM market share for US-listed passive MLP exchange traded products. It has now teamed up in Europe with specialist white label ETF issuer HANEtf to launch the Alerian Midstream Energy Dividend UCITS ETF (MMLP) which is due to list any imminently on the London Stock Exchange. The ETF will track the Alerian Midstream Energy Dividend Index, which has a historic 5 year average yield of 7.25% and invests in what are called midstream energy infrastructure compares such as pipeline and storage businesses. The last time I looked this index was yielding a whopping huge 10.36% dividend yield.
That kind of bumper yield would imply high risk borrowers, but according to Alerian, companies with investment grade credit ratings represent around 82.2% of the Index by weighting. The index – and the imminent ETF – comprise around 30 businesses including Canadian corporations such as Enbridge (collectively just under a quarter of the value of the index), and the stocks within the index are dividend weighted i.e the size of the yield determines the size of the holding. The TER of the fund is 0.40% and the top five holdings are Enterprise Product Partners, Enbridge, Energy Transfer Operating, MPLX and Kinder Morgan.
Whilst it is very obvious that this putative new ETF is very far from a classic widows and orphans investment idea, I do think investors need to see past the obvious volatility in recent oil prices and their impact on the share price of MLPs. The energy infrastructure market is still necessary – for at least the next decade – and I think we could see oil prices stabilise, and possibly head even higher. And even in a zero-carbon world – many decades hence – there could be a role for these energy infrastructure plays in the nascent hydrogen economy and in storing CO2. In the meantime, you pick up a bumper yield from real asset backed players with inflation protection built in. Alerian is the dominant name in this space and this new ETF could prove very useful for those investors who want some exposure to energy and income but who want to own some more defensive real assets.
Fund details : Alerian Midstream Energy Dividend UCITS ETF (MMLP), USD version MMLP, GBP version PMLP.