Guest Commentary – MLPs and Rising Rates

Whenever poNeuberger_Berman_logo2ssible, we like to share resources from our speakers and partners in the Family Office Club.  The Rachlin Group produced the following educational article for their November 2015 newsletter and you can read it in its entirety here.

The Rachlin Group

November 2015       

MLPs and Rising Rates

We are often asked about the prospects for MLPs in a rising rate environment. Among the many headwinds facing investors today, a rising interest rate seems to have taken a back seat relative to global growth. Nevertheless, MLPs historically have often underperformed in short periods prior to a Fed interest rate hike. However, the build-up to a hike has often been a greater headwind than the actual raise and often times MLPs have experienced periods of positive performance in the months following past rate hikes.

Since November 2010 the effective federal funds rate has been range bound at less than 0.2%. In June of this year, we saw our first ripple of interest rate uncertainly in the equity markets as MLPs were down and fared far worse than both WTI and the S&P. MLPs -8.3% vs. -1.9% for the S&P and -1.3% for WTI. The last time market volatility picked up before a change in interest rates was eleven years ago, when the federal funds rate moved from 1% to 1.25% in June 2004. From March to April of that year MLPs dropped -9.4% while the S&P fell only -1.6%. There was light, however, at the end of that tunnel. From June 30th through year-end 2004, the Alerian MLP Index was up 17.9% exclusive of dividends – 10% above the S&P 500 over that time.

We believe the FED will likely raise interest rates when the US economy is healthy and growth is selfsustaining. A healthy economy should help drive growth in energy throughput and supports the need for adequate infrastructure. There are many factors influencing MLP performance today – from forced technical selling to unexpected energy correlation. Stable and growth oriented cash flows are, in our view, the foundation to a recovery in midstream MLPs. Investor fear around rising interest rates and the volatility it produces can ultimately create a dislocation between MLP prices and their fundamentals and in our view, establish a buying opportunity.

Rachlin MLP

Source: FactSet.
For illustrative and discussion proposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. The performance of asset classes following interest rate hikes has varied significantly and are no indication of how the markets may perform following any future interest rate increases. See the disclosures at the end of this piece, which are an important part of this presentation. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. The performance of asset classes following interest rate hikes has varied significantly and are no indication of how the markets may perform following any future interest rate increases. MLPs and equities have different overall risk-return characteristics which should be considered before investing.
Master Limited Partnerships (MLPs) are limited partnerships that are publicly traded and which have the tax benefits of a limited partnership and the liquidity of a publicly traded company. As an income producing investment, MLPs could be affected by increases in interest rates and inflation. The total market capitalization of the MLP universe is approximately $500 billion (Sources: Bloomberg and Alerian). Investors should consider relative exposure and liquidity in this asset class before making an investment.
S&P 500 Index: Consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. The “500” is one of the most widely used benchmarks of U.S. equity performance. As of September 16, 2005, S&P switched to a float-adjusted format, which weighs only those shares that are available to investors, not all of a company’s outstanding shares. The value of the index now reflects the value available in the public markets.
The Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. The index is disseminated by the New York Stock Exchange real-time on a price return basis (NYSE: AMZ). The corresponding total return index is calculated and disseminated daily through ticker AMZX.
Neuberger Berman LLC is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2015 Neuberger Berman LLC. All rights reserved. 2

About Richard C. Wilson