Etikett: MLPs

Real Assets Fueled by Energy

Real Assets Fueled by Energy

The VanEck Vectors Real Asset Allocation ETF (RAAX) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

April Performance Summary

The VanEck Vectors Real Asset Allocation ETF (RAAX) launched, on April 9, into a period of strong performance for real assets. RAAX performed well on both an absolute and relative basis. Through April, in the first 16 days of its life, RAAX returned +2.98% based on net asset value versus +2.41% for its benchmark, the Blended Real Asset Index, which is comprised of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck Natural Resources Index*. Equal weightings are reset monthly.

Total Returns (%) as of April 30, 2018
1 Mo† YTD† 1 Year Life
(04/09/18)
RAAX (NAV) – – – 2.98
RAAX (Share Price) – – – 3.26
Blended Real Asset Index* – – – 2.41
Total Returns (%) as of March 31, 2018
1 Mo† YTD† 1 Year Life
(04/09/18)
RAAX (NAV) – – – –
RAAX (Share Price) – – – –
Blended Real Asset Index* – – – –

The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that distributions have been reinvested in the Fund at NAV.

†Returns less than a year are not annualized.

Expenses: Gross 0.81%; Net 0.74%. Expenses are capped contractually at 0.55% through February 1, 2020. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

RAAX’s positioning was moderately defensive in April, and it was fully invested across commodities, natural resource equities, and Master Limited Partnerships (”MLPs”). The largest real asset investments were in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%).

May Positioning: Fully Invested and Mostly Bullish

RAAX remains fully invested across commodities, natural resource equities, and MLPs. As they were at launch, the largest weightings remain in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%). However, its allocation to gold equities now stands at 10%, increasing overall gold exposure to 30%.

We are bullish on most real assets. Based on the model’s analysis, diversified commodities, gold, agribusiness equities, MLPs, steel equities, oil services equities, and unconventional oil and gas equities are all well positioned to perform. We are bearish on Real Estate Investment Trusts (REITs), infrastructure, base metal equities, and coal equities.

Asset Class Weights

Source: VanEck. Data as of May 2, 2018.

This month we increased our exposure to gold equities and removed our exposure to coal equities. Another notable point is that we are bearish on two interest rate sensitive sectors, REITs and infrastructure, as interest rates continue to rise.

Remember, RAAX only invests in asset classes that the model is bullish on, and the weightings themselves are not an indication of conviction but a byproduct of a quantitative process that seeks to maximize diversification and minimize volatility. Let’s take a look at some of the reasons why RAAX maintains a bullish or bearish position on certain asset classes.

Gold

The model remains bullish, and overall exposure increased based on the portfolio diversification benefits that gold provides. Gold prices have been flat this year, but the precious metal has provided stability during periods of broad market stress.

Cumulative Growth of $10,000 of Gold and S&P 500 Index in 2018

Source: FactSet; Bloomberg. Data as of May 2, 2018. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Oil Services Equities

Research conducted here at VanEck has identified that oil price and the S&P 500 Index can be used to explain most of the performance of oil services stocks historically. Using these variables to generate an expected return for oil services stocks, we can look at the difference between this and the actual return of oil services stocks. Right now, based on these variables, oil services stocks are trading at a substantial discount, and the chart below shows that oil services stocks haven’t been this cheap since 2001.

Performance Variance of Oil Servicers and Key Independent Variables

Source: VanEck; FactSet; Bloomberg. Data as of April 2018. Past performance is no guarantee of future results. Oil servicers measured by the MVIS U.S. Listed Oil Services 25 Index. Investors cannot invest directly in an index.

The model remains bullish on oil services stocks. Key bullish indicators include strong oil prices, reasonable volatility in oil services equities, and strong demand for natural gas. The chart below shows that oil prices are up 14.83% this year through April.

Cumulative Growth of $10,000 of Crude Oil in 2018

Source: FactSet. Data as of April 30, 2018. Past performance is no guarantee of future results. Oil measured by West Texas Intermediary (WTI) oil price. Investors cannot invest directly in an index.

Coal Equities

At launch, RAAX had a small weighting to coal, but in May, this exposure was completely eliminated based on falling coal equity prices and weakening supply and demand data. Below is our economic composite for coal. It turned bearish at the end of April due to declining demand for coal in the U.S. and China, and declining production in the U.S.

Coal Economic Indicator Composite

Source: VanEck. Data as of April 30, 2018. Past performance is no guarantee of future results. Coal equities measured by MVIS Global Coal Index. Investors cannot invest directly in an index.

A Closer Look at the What, When, and How

Step One: What to Own

The aphorism ”a rising tide lifts all boats” is appropriate here. April was a great month to invest in real assets. Each real asset in our investment universe and the approximated holding period return of the underlying index is listed below. The assets that we were bearish on are shaded.

Holding Period Return
April 10 – April 30, 2018

Gold Equities 1.42% Oil Services Equities 13.97%
Agribusiness Equities 1.22% Unconventional Oil & Gas Equities 12.36%
Coal Equities -1.78% Global Metals & Mining Equities 4.65%
Gold Bullion -1.56% Diversified Commodities 3.60%
MLPs 6.08% REITs 1.53%
Global Infrastructure 1.53% Steel Equities 7.42%

Source: Bloomberg; FactSet. Data as of April 30, 2018. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Step Two: When to be Invested

We were fully invested in April. This was the right call as real asset investments rallied. RAAX begins to raise a cash position when five or more assets become bearish. This is typically indicative of a systemic market event. RAAX has not raised cash since it launched.

Step Three: How to Allocate

Capital is allocated amongst assets on which the model is bullish on using an optimization process designed to maximize our diversification and minimize our volatility. In April, this resulted in a 50% exposure to commodities, a 45% exposure to natural resource equities, and a 5% exposure to MLPs. RAAX’s allocation in May has not changed drastically.

Monthly Asset Class Changes

Asset Class May-18 Apr-18 Change
Gold Equities 10% 5% 5%
Diversified Commodities 30% 30% 0%
Agribusiness Equities 20% 20% 0%
Gold Bullion 20% 20% 0%
Limited Partnerships 5% 5% 0%
Service Equities 5% 5% 0%
Cash 0% 0% 0%
Unconventional Oil & Gas Equities 5% 5% 0%
Steel Equities 5% 5% 0%
Estate Investment 0% 0% 0%
Global Infrastructure 0% 0% 0%
Metals and Mining Equities 0% 0% 0%
Coal Equities 0% 5% -5%

Source: VanEck. Data as of May 2, 2018.

Additional Resources

IMPORTANT DISCLOSURE

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The Blended Real Assets Index consists of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck® Natural Resources Index. Equal weightings are reset monthly. The S&P Real Assets Equity Index measures the performance of equity real return strategies that invest in listed global property, infrastructure, natural resources, and timber and forestry companies. The VanEck Natural Resources Index is a rules-based index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the production and distribution of commodities and commodity-related products and services. Sector weights are set annually based on estimates of global natural resources consumption, and stock weights within sectors are based on market capitalization, float-adjusted and modified to conform to various asset diversification requirements. U.S. Equities: The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors. Agribusiness Equities: The MVIS Global Agribusiness Index is a modified market cap-weighted index tracks the performance of the largest and most liquid companies in the global agribusiness segment. Its unique pure-play approach requires that companies have to generate at least 50% of their revenues from agri-chemicals and fertilizers, seeds and traits, from farm/irrigation equipment and farm machinery, from agricultural products (incl. Grain, tobacco, meat, poultry and sugar), aquaculture and fishing, livestock, plantations and trading of agricultural products. Coal Equities: The MVIS Global Coal Index is a modified market cap-weighted index tracks the performance of the largest and most liquid companies in the global coal segment. Its unique pure-play approach requires that companies have to generate at least 50% of their revenues from coal operation (production, mining and cokeries), transportation of coal, from production of coal mining equipment as well as from storage and trade. Gold Equities: The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange. MLPs: The Solactive MLP & Energy Infrastructure Index tracks the performance of MLPs and energy infrastructure corporations. Oil Service Equities: The MVIS U.S. Listed Oil Services 25 Index is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. Unconventional Oil & Gas Equities: The MVIS Global Unconventional Oil & Gas Index is intended to track the performance of the largest and most liquid companies in the unconventional oil and gas segment. The pure-play index contains only companies that generate at least 50% of their revenues from unconventional oil and gas which is defined as coal bed methane (CBM), coal seam gas (CSG), shale oil, shale gas, tight natural gas, tight oil and tight sands. Global Metals & Mining Equities: The MSCI ACWI Metals and Mining Index is composed of large and mid cap stocks across 23 Developed Markets countries and 24 Emerging Markets countries. All securities in the index are classified in the Metals & Mining industry (within the Materials sector) according to the Global Industry Classification Standard (GICS®). Commodities: The DBIQ Optimum Yield Diversified Commodity Index Excess Return is an index composed of futures contracts on 14 heavily traded commodities across the energy, precious metals, industrial metals and agriculture sectors. Steel Equities: The NYSE Arca Steel Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the production of steel products or mining and processing of iron ore. REITs: The MSCI US Investable Market Real Estate 25/50 Transition Index is designed to capture the large, mid and small cap segments of the U.S. equity universe. The Index will transition completely from the starting MSCI US REIT Index into the MSCI US IMI Real Estate 25/50 Index over a specified period. Infrastructure: The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

An investment in the Fund may be subject to risks which include, among others, fund of funds risk which may subject the Fund to investing in commodities, gold, natural resources companies, MLPs, real estate sector, infrastructure, equities securities, small- and medium-capitalization companies, foreign securities, emerging market issuers, foreign currency, credit, high yield securities, interest rate, call and concentration risks, all of which may adversely affect the Fund. The Fund may also be subject to affiliated fund, U.S. Treasury Bills, subsidiary investment, commodity regulatory, tax, liquidity, gap, cash transactions, high portfolio turnover, model and data, management, operational, authorized participant concentration, absence of prior active market, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares, and non-diversified risks. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Diversification does not assure a profit or protect against a loss.

The ”Net Asset Value” (NAV) of a VanEck Vectors Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF’s intraday trading value. VanEck Vectors ETF investors should not expect to buy or sell shares at NAV.

Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called ”creation units” and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

MLPs, Keep, Reject or Renegotiate

MLPs, Keep, Reject or Renegotiate

MLPs, Keep, Reject or Renegotiate Midstream master limited partnerships (MLPs) have come under intense scrutiny after bankruptcy courts permitted Sabine Oil and Gas, an upstream producer to renege on two of their midstream contracts. Many such contracts were framed when the oil production outlook was more promising and it’s evident that producers will now decide to keep, reject or renegotiate contracts to survive. While Sabine Oil and Gas has rejected contracts with Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC (both midstream MLPs) on the pretext of savings worth $115mn. Other midstream MLPs have been more accommodative to preserve liquidity and avoid the risk of losing relationships. For example, Williams’s Partners (another midstream MLP) renegotiated contracts in advance with Chesapeake Energy (producer) with the caveat of higher volumes and longer maturities and Quicksilver Resources have kept the gathering and processing contracts with Crestwood Midstream Partners intact despite filing for bankruptcy in March 2015.

Nonetheless, it’s evident from the CDS spreads that producers have been struggling with high debt loads given the ensuing low oil price environment, driving midstream MLPs to trade more like upstream MLPs.

(Click to enlarge)

Source: ETF Securities, Bloomberg

Midstream MLPs that currently have contract rates above the market and/or minimum volume commitments (MVC) are at highest risk of having contracts renegotiated . However, this is by no means reflective of midstream MLPs ability to stay afloat, as evidenced by Q4 results highlighting a 24% rise in distributions and 30% rise in revenue over the prior year. Midstream MLPs with gathering contracts closer to the well head and contracts rates in line with the market without stringent MVC are best positioned to take advantage of the current dislocations in the market.

Aneeka Gupta, Equity & Commodities Strategist at ETF Securities

Aneeka Gupta is an Equity & Commodities Strategist at ETF Securities. Aneeka has 10 years of experience working as a Research Analyst across a wide range of asset classes. In her current role she is responsible for conducting analysis for all in-house commodity and macro publications and assisting the sales team with client queries around products and markets. Prior to ETF Securities, Aneeka worked as an Equity Sales Trader at Sunrise Brokers across US and Pan European Exchanges. Before that she worked as an Equity Derivatives Sales Manager at Mashreq Bank in Dubai.

Aneeka holds a Bsc in Mathematics from the University of Delhi and a Masters in Mathematics from Oxford University and is also a CFA Charterholder.

The Master of Yields interrupted by negative sentiment

Midstream MLPs: The Master of Yields interrupted by negative sentiment

The Master of Yields interrupted by negative sentiment

Summary

•    Master limited partnership (MLP) distributions continued to grow in Q4 2015.

•    MLP valuations are attractive when assessed by appropriate valuation metrics.
•    Midstream MLPs’ revenues are more resilient to oil price fluctuations than upstream oil companies’ revenues.
•    Yet they are trading more like upstream oil companies. We believe there is potential for an upward correction as MLP resilience becomes apparent.

Download the complete report (.pdf)

The MLP structure remains intact

Master limited partnerships (MLPs) are tax exempt limited partnerships that are required to pass through majority of their earnings as distributions to investors. A confluence of factors from restrained capital market access, declining oil prices and fears of rising interest rates have seen the price of MLPs fall by more than 46%. We believe that this price reaction has been overdone. Negative sentiment over single MLPs such as Kinder Morgan, which became overleveraged after the additional purchase of 30% of Natural Gas Pipeline Company of America LLC, appear to have affected the sector at large. However, we see sustainable distributions and low valuations opening an attractive entry point to this sector.

For the purpose of this report MLPs refer to the 24 constituents (as on 12 Feb 2016) of the Solactive US energy infrastructure total return index.

Sustainable distributions

In their latest fourth quarter 2015 results MLPs have reported a 15% growth in quarterly distributions over the prior year allaying widespread concerns of distribution cuts.

(Click to enlarge) Although funds available for distribution have been on the decline since their peak in 2014, MLPs have been prudent in adjusting their capital budget by keeping distributable cash flow in sync with distributions paid as outlined by the weighted average coverage ratio of 1.27x.

(Click to enlarge)

Attractive valuations

When analysing distribution yields, we believe it’s vital not to view MLPs in isolation. We can draw a comparison to both utilities and real estate investment trusts (REITs). Utilities and MLPs are known to derive their primary source of earnings from services indelible to society that have high barriers to entry. In fact utilities were the original owners of many of the assets from which today’s MLPs are formed. Real estate investment trusts (REITs) and MLPs can be linked by their ownership of tangible, long lived assets ruled by underlying contracts that provide a stable income stream. MLPs also have a similar structure to REITs that escape being taxed at a corporate level. Midstream MLPs currently offer a 6% distribution yield, attractive relative to history of earnings yields of similar assets. The current low interest rate environment has investors searching for yield from non traditional sources, supporting the case for MLPs.

(Click to enlarge) Given that MLPs pay a vast percentage of their income in distributions and rely on debt and equity capital markets to fund capital growth, we use valuation metrics such as enterprise value (EV) to earnings before interest tax depreciation and amortisation (EBITDA) multiples, in tandem with net debt to EBITDA rather than traditional price to earnings and price to book ratios. Since the latter half of 2014, MLPs were cautious not to raise debt in large proportions as they did in the prior valuation peaks. In the last valuation peak, MLPs did not leverage as high as in previous peaks because funding costs were higher and they had less capex need. While it has not yet reached the trough of 7x last seen in the financial crisis, EV/EBITDA is currently at 13.5x below its median of 14x. The price to cash flow from operations multiple for MLPs at 7.8x is trading at a discount to the 10-year average of 12x, also highlighting MLP’s attractive valuation.

(Click to enlarge) Midstream MLPs derive their revenues from the volume and not price of the product being transported. MLP revenues are far less correlated to oil prices than oil companies. MLP revenues rose by 2.4% in 2015 while revenues for the top 30 oil companies (by market capitalisation) fell by 5%.

Despite MLPs’ greater revenue resilience to oil price, they have been trading more like upstream oil companies and we believe that there is potential for an upward correction in their price when this becomes more apparent to the market.

(Click to enlarge) Correlation of MLPs with oil, natural gas and the US benchmark S&P 500 index have been rising this year. The correlation of MLPs with the S&P 500 index has risen to 0.8. This underscores the effect of negative sentiment emanating from the global equity market rout on MLPs and not just weak oil prices. MLPs are likely to remain correlated to the oil price and a potential rebound in oil prices could play in MLP’s favour.

(Click to enlarge) Credit default swap (CDS) spreads that measure the cost of protecting MLPs from default have risen astronomically compared with energy companies and have surpassed levels last seen in the 2008 financial crisis. What stands out from the historical data for CDS spreads is that upstream MLPs (compiled from the weighted average of the top 20 upstream MLPs) are at a greater risk of default and are denting sentiment among midstream MLPs. It’s imperative to distinguish between the energy silos as they carry different cash flow dynamics. While upstream MLPs are directly involved in exploration and production of oil and natural gas products, midstream MLPs differ from them as they generate a significant amount of fee based revenue tied to storage and transportation. In fact the vast majority of distribution cuts that occurred in Q4 2015 were from upstream MLPs and we have seen no distribution cuts from our current midstream MLP universe. Valuations are treating upstream and midstream MLPs similarly, while in reality their default risks, are inherently different, a result of their different business models.

(Click to enlarge)

Conclusion

In light of the above discussion we believe midstream MLPs are trading at levels that reflect the distress in the energy sector. By virtue of the resilience of their revenue streams, current valuations on EV/EBITDA basis and managed debt levels, midstream MLPs are well positioned to appreciate given a turnaround in stressed capital markets and sentiment.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E infoUK@etfsecurities.com

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