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Industry Overview - January 2017

Master Limited Partnerships (“MLPs”) returned 4.89%¹ during the month compared to 1.90% for the S&P 500. The positive momentum that started in December 2016 carried over into the first month of 2017. The strong January performance was driven mostly by actions and messaging from the Trump administration, a more stable commodity environment, and strong January fund flows.

Trump Administrations Bodes Well for Infrastructure

The Trump administration has been very clear during its first couple of weeks in power that infrastructure development and spending will be a main focus area for the next four years. This rhetoric has been backed up by concrete actions that have driven much of the recent outperformance relative to the broader market. During January Trump signed 2 executive orders regarding two of the most controversial and well-known pipeline projects, the Keystone XL pipeline and the Dakota Access pipeline (DAPL). Despite the orders not being able to single-handedly push the projects forward, they did send a clear and strong message to the market. We expect the Trump administration to continue to be a positive catalyst for energy infrastructure companies, especially those with large organic build projects.

Crude Prices Find More Stable Footing

It is no secret that most, if not all, MLPs/midstream companies were affected by crude prices throughout 2016, even though some of these companies do not even handle crude oil. The correlation in 2017 remains elevated, but the crude price volatility experienced during the first half of 2016 has largely abated – it appears that crude prices have found a new equilibrium in the $50 - $55 / barrel range. The correlation during January 2017 was 0.54, a welcome decrease relative to the 2016 annual correlation of 0.64. Despite the decrease in correlation we expect for crude oil prices to continue to have an impact on the equity performance of MLPs/midstream companies during 2017.

2017 Fund Flows Start Off Strong

Fund flows into MLP products had a very strong start to 2017, coming in at $1.01b for the month – the best fund flow month since May 2015. The ~$1.0 billion inflow seen this month compares to an average monthly inflow in 2016 of ~$550 million. This large monthly inflow is probably a combination of several factors including, but not limited to, reversal of tax-loss harvesting, improving investor sentiment, and the “Trump” effect. We would expect for retail investors to slowly start coming back into the space as most, if not all, corporate restructurings and distribution cuts are behind us and crude oil prices stabilize.