In our view, broader energy rotation is likely to benefit the MLP, or midstream, sector. It appears that MLPs today offers the same kind of value proposition investors found interesting in 2009: Sector valuations are at historic lows and distribution yields appear attractive.
However, the fundamental backdrop for growth in North American oil and gas production and associated infrastructure development appears healthier than ever. Further, we foresee that first-quarter operating results for mid-April through May will confirm this trend—and that operators may take the opportunity to ease investor anxiety about the Federal Energy Regulatory Commission’s (FERC’s) recent announcement. As a result, we believe our suite of MLP funds may benefit as well.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. The strategy’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLPs.
Additionally, investing in MLPs involves material income tax risks and certain other risks. Actual results, performance or events may be affected by, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) changes in laws and regulations and (5) changes in the policies of governments and/or regulatory authorities. Investing in MLPs may generate unrelated business taxable income (UBTI) for tax-exempt investors both during the holding period and at time of sale.