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MLPs Promising Recent Jump

MLPs lead as midstream markets post gains for a 6th straight week

This summer reminds us why we have held faith in the fundamentals of the midstream MLP market. MLPs, a lesser known asset class, is beginning to shine in the second half of 2018.

The global markets have been turbulent and volatile thus far in 2018. Ongoing discussions between the U.S. and China and other key trading partners over import/export imbalances and ever-changing, multi-nation tariffs contribute to this volatility. However, despite increased coverage of tariffs and their negative effects on the global economy, pockets of U.S. equity markets out-performed global equity markets.

Because trade tariffs have little effect on small caps, the escalating trade war between the U.S. and China actually helps drive small cap prices higher. The U.S. small-cap market continues to lead equity market performance year to date. See Small-Cap Stocks Post New Highs.

MLPs positioned for long-term investors

After a frustrating couple of years, the commodity environment appears to be stabilizing. U.S. production growth trends remain strong, dividend cuts are likely nearing an end and balance sheets continue to improve. Earnings reports at the end of quarter 2 supported this stabilization. Notably, EBITA came in 3.2% better than consensus estimates and 4.6% higher than the preceding quarter.

Oil transports are far from the only players in the midstream MLP marketplace. Natural gas constituents continue to contribute to MLPs returns and were the best performing sub-sector for July 2018.  Energy exports–crude oil, natural gas and gas liquids–maintain record levels, thus providing a shining growth source for midstream companies.

Pairing current growth outlook and continued production increases with attractive current valuations, we believe MLPs are well positioned for long-term investors seeking attractive income and upside growth potential.

 

 

One asset class has rebounded to new all-time highs — U.S. small cap stocks.
Comparison of S&P 500, Russell 2000, Emerging Markets and Int'l Developed Indices

After a bullish 2017 and hopes of a continued global equity melt up, 2018 has instead reintroduced market volatility. Despite global market volatility, U.S. small cap stocks have rebounded to new all-time highs.

Factors influencing the success of U.S. small cap stocks

So what factors has caused this success versus larger capitalization stocks?

The challenge of performance measurement

People examining economic statistic. Financial examiner. Vector illustration.

When was the last time you examined your investments?

Periodic reviews of an investor’s portfolio helps ascertain whether the investment process is working, but more importantly, whether it’s on the right course for the individual investor.

The Beardstown Ladies was a 12-woman investment club that gathered monthly and managed their own stock portfolio. They became celebrities in the mid-1990s when news of their track record went viral: since their 1983 inception, The Beardstown Ladies claimed their portfolio had returned 23.4% versus the S&P 500’s 14.9% return. But in 1998, an audited performance record was released showing the club’s actual returns were actually 9.1% per year. 

This example illustrates the fact that most investors simply don’t have proper performance data to assess their investments.

Asset Allocation

No single input is more important to a portfolio’s success than asset allocation, or determining how much to allocate to various asset classes.

In 1986, authors Gary Brinson, Gilbert Beebower, and Randolph Hood conducted an in-depth study of the various sources of investment returns. Specifically, they analyzed quarterly returns from 1974-1983 for the 91 largest pension funds, and determined that 93.6% of the returns generated were a result of asset allocation.

In a follow-on study in 1991, the authors concluded that 91% of portfolio returns are determined by asset allocation.


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