MLPs, Infrastructure & Energy

08/06/2020 5:00 am EST

Focus: FUNDS

Robert Carlson

Editor, Retirement Watch

June and July were especially rough on infrastructure investments, especially the midstream energy businesses. These generally are pipelines and storage facilities, explains Bob Carlson, growth and income expert and editor of Retirement Watch.

The investments surged in April and May as economic activity increased and a truce was declared in the oil price war. But a series of events outside the markets and economy caused prices to reverse course. There were intimations that Saudi Arabia wanted to resume the oil price war. It hasn’t yet, but it could at any time.

More importantly, one major new pipeline was canceled by the companies planning it and another was suspended by a court. These events caused investors to recalibrate the potential demand for the services provided by midstream energy companies.

Some good news is that Warren Buffett recently increased his exposure to the sector by having Berkshire-Hathaway (BRK.A) purchase the natural gas storage and distribution business of Dominion Energy (D).

We’ve held Cohen & Steers MLP and Energy Opportunity (MLOAX) for only a few months, but it’s been a wild ride. Because the sector is going through changes. A number of investors are panicking or making forced sales. The fund is down 13.61% in the last four weeks but still is up 19.56% over three months.

The dividend yield is 7.82%. The fund is actively managed. It focuses on companies with solid balance sheets, substantial liquidity, stable cash flows and whose shares are selling at good discounts. It has distinct advantages over index funds in the sector.

We initiated our position at a good price, and the fund has a high yield. Absent another shock to the sector, the fund should do well.

Broader infrastructure investments also had their ups and down lately. We own them through Cohen & Steers Infrastructure (UTF).

The fund is about 33% invested in electric utilities. Though normally stable investments, some of their stock prices were affected by the recent pipeline news because the utilities use natural gas.

Also, revenues declined at many utilities because of the pandemic. About 12% of UTF is invested in cell tower companies and another 9% is in midstream energy. About 16% of the fund is in corporate bonds and preferred securities.

Many infrastructure stocks should hold up well as their cash flows and dividends are shown to be more stable than those of many other companies. I like UTF because it has a global mandate, shopping for attractively priced companies anywhere around the globe.

Recently, the fund was invested about 60% in the United States, 7% in Canada and 5% each in the United Kingdom and Australia. In the last four weeks, the fund is down 6.53%. However, it is up 11.91% over three months and down 11.48% year to date.

The fund recently sold at a discount to net asset value of 2.59%, which compares to a six-month average discount of 5.92%. The recent distribution yield was 8.37%. A portion of the distribution this year is long-term capital gains. It uses about 28% leverage.

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MLPs, Infrastructure & Energy
08/06/2020 5:00 am EST

June and July were especially rough on infrastructure investments, especially the midstream energy b...