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Energy infrastructure ETF enjoys significant increase in assets

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Institutional investors are finally returning to the energy sector after a prolonged stretch of under-performance aided by collapsing oil prices, according to Simon Lack, managing partner at SL Advisors and manager of the American Energy Independence ETF (USAI).

Lack (pictured) reports that dividend-seeking investors in particular are also jumping back to midstream pipelines given increasing dividends.   

This sector rotation favouring energy and yield has created a perfect storm of demand for the American Energy Independence ETF (USAI) which saw an institutional investment at the beginning of the year that took its assets from around USD9 million to USD26 million.

Lack believes that energy infrastructure is poised for a strong comeback in 2019.

“I think for the sector broadly energy has been a miserable place to be, at the bottom of the S&P energy sector for four out of the last five years,” Lack says.

“The big issue has been the conflict between management teams wanting to reinvest cash into projects and investors wanting to see buy backs and cash coming back to them.”

On the midstream pipelines sector, dividends have been going down for years, but are now going up again, causing people to take a second look at the sector.

“Specifically our ETF has a very efficient tax structure and people who do invest with us are attracted by the absence of a corporate tax liability. Most MLP-dedicated funds are taxed at the fund level, hurting returns. ,” Lack says.

Lack’s USAI fund invests in a mixture of master limited partnerships (MLP), similar to the LLP in the hedge fund world, but specifically used in the energy sector, and the largest energy infrastructure companies.

What’s changed in the MLP world is that many have converted to corporations, so as to broaden their investor base to include institutions and reduce reliance on the older, wealthy Americans who are the main buyers.   As a result, MLPs are now less than a third of the market capitalisation of the pipeline sector.

“We are version 2.0 without the tax drag,” Lack says.

The portfolio stretches across North America, including some Canadian companies and includes all the biggest companies in the sector, a total of over two dozen names.

“It’s a great story in that volumes are growing to 12 million barrels a day in crude oil and the shale revolution continues to be almost exclusively happening in America, with natural gas exports up sharply as well.

“Companies are under pressure to raise dividends and the sector is very cheap. 2014 was when it made its last high. Our ETF has returned 19 per cent for the year.”

The unique phenomenon that lies behind the shale industry growth in the US, is that individuals own their own mineral rights – if natural gas is found under a farm, a farmer can make money out of it. This encourages resource development, and contrasts with most other countries where mineral rights are government-owned. 

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