Energy limited partnerships dominated the domestic equity rankings for the year ended Sept. 30.
The master limited partnerships held nine out of the top 10 spots in the ranking in Morningstar Inc.'s separate account/collective investment trust database.
The median return of overall domestic equity strategies was 14.9% for the 12 months ended Sept. 30. However, the energy limited partnerships category had a median return of 33% for the year, said Nick Sundberg, data analyst, separate accounts at Morningstar in Chicago. (This was the second quarter that Morningstar has included energy limited partnerships as a distinct category in its separate account database.)
“Quarter three was pretty much the quarter of the energy limited partnerships category,” said Mr. Sundberg in a telephone interview. “They have nine of the top 10 for the one-year rankings and nine of the top 10 spots for the five years.”
Non-energy strategies dropped out of the top 10 mostly because of an inferior third quarter. The median return for overall domestic equity for the third quarter was -1.42%,
“This is the first quarter that has a median negative return for the overall domestic equity in the last year,” Mr. Sundberg said. “The last three quarters have all been positive.”
“Domestic growth, domestic value, domestic blend all had their first negative returns in about a year,” he added.
The Russell 3000 index returned 17.76% in the year ended Sept. 30, and 0.01% during the third quarter.
The top overall domestic equity manager was Chickasaw Capital Management LLC's MLP energy strategy with a 48.8% gross return for the year ended Sept. 30. The strategy was also the top overall for the five years, with an annualized gross return of 36.96%.
“MLPs retain an "all-weather' characteristic because of their hard assets and certainty of cash flows,” said Matthew Mead, co-founder, principal and portfolio manager at Memphis-based Chickasaw, in an e-mail.
“MLPs operate fee-based assets such as pipelines, which have stable and predictable cash flows. Current market conditions favor the MLP asset class, particularly the midstream sector. Midstream MLPs stand to be beneficiaries of the build-out of energy infrastructure needed to develop shale energy basins such as the Bakken, Eagle Ford, Marcellus and Permian.”
Holdings that have performed particularly well for the firm include Energy Transfer Equity LP and Magellan Midstream Partners LP.
“The backdrop for U.S. energy development continues to be robust and MLPs stand to be major beneficiaries,” Mr. Mead said.
Ranking second was Cushing MLP Asset Management's MLP institutional alpha strategy, with a gross return of 44.85% for the year ended Sept. 30. The strategy also ranked second for the five years ended Sept. 30 with an annualized gross return of 33.14%.
Libby Toudouze, Dallas-based president of Cushing MLP, said the strategy has benefited from its total return focus. “The investment universe we select the portfolio from is the 150 or so publicly traded energy infrastructure companies,” Ms. Toudouze said. “I say "energy infrastructure' because many of the companies we invest in may not be in the MLP structure, it may be a C corporation.”
“We try to identify the MLPs that are going to have the fastest growth and ... (then the) MLPs that the market has not recognized that that growth is coming. ... We have a 19-person investment team with 12 analysts, so we cover every single stock,” Ms. Toudouze said. Contributing to the success of the strategy in the past year has been focusing on investing in general partners; the portfolio has been 30% to 40% exposure to energy infrastructure through the general partner structure.
“We have always had a favorable view on the general partner (structure),” Ms. Toudouze said, which “have a revenue stream coming from the same assets and the same management team. It's just a levered revenue stream, so if the MLP is going to grow at 6%, the GP will grow two to three times that.”