MLPs, interest rates, and the U.S. energy revolution: what it means for client portfolios

OppenheimerHigh net worth clients–and their advisors–need not be reminded about the risk that low interest rates pose. They may already be investing in master limited partnerships (MLPs) as a way to generate relatively high income and potentially protect against rising rates. But MLPs lost value just like other yield-sensitive asset classes when interest rates rose this spring. Many clients are aware that in a panic, almost everything sells off. For those invested in MLPs, however, the pressing question quickly became: what happens to MLPs when interest rates increase consistently, as they may in the environment many expect going forward?

MLPs have not historically been correlated to interest rate moves over longer periods.  In the short-run, MLPs, like most yield-sensitive assets, are affected by significant rate moves. But over a longer time frame, such as over the last decade, there has been no material correlation between changes in interest rates, as measured by the 10-year U.S. Treasury rate, and MLP yields, as measured by the Alerian MLP Index. Portfolio Manager Brian Watson explains in MLPs and Rising Rates: Not What You’d Expect the dynamics for this lack of correlation.

Immense, recoverable U.S. oil and natural gas reserves could transform the economy.  Investors should understand that thanks to a combination of new oil and natural gas discoveries, along with major advances in extraction technology, the U.S. is moving toward a more secure energy future. Consumers and a wide range of industries stand to benefit from this radical transformation. In his paper U.S. Energy Revolution, Art Steinmetz, Oppenheimer’s President and Chief Investment Officer, highlights:

  • The full scope of the U.S. energy boom
  • Changes in the U.S. economic equation
  • Winners from the new domestic energy supplies

The march toward energy independence is real. Notably, energy infrastructure will have to grow substantially over the next decade and beyond to keep pace with increases in oil and gas production, and demand. Certain MLPs investments may benefit from this long-term trend, rising rates or not.

Today’s investment environment demands portfolios that are more globalized, diversified and nimble. Visit oppenheimerfunds.com/advisors or call our Wealth Management Group at 800.981.2773 to learn more.

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For Institutional Use Only. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors.
Diversification does not guarantee profit or protect against loss.
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. 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. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. 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. Distributions from MLP funds have been classified as “return of capital” which reduces the investor’s adjusted cost basis. Diversification does not guarantee profit or protect against loss.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.
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DM2000.091.1113 November 25, 2013
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