04/14/20 | Stacey Morris
Past performance does not mean anything for future performance as practically every piece of financial collateral will remind you. However, it can be informative to look at historical MLP sell-offs to get a sense for how the space has recovered in the past. Today’s note examines the forward three-month, one-year, and three-year returns for the Alerian MLP Infrastructure Index (AMZI) for instances when the index has fallen by 15% or more on a total-return basis from relative peak to relative trough going back to 2011. This simplistic approach is meant only to provide context, not predictions. The table of AMZI drawdowns and recoveries below offers several interesting data points. In the eight occurrences when the AMZI has fallen by more than 15% on a total-return basis, the average forward three-month total return is 15.4%, and returns have been positive 75% of the time. The average one-year total return has been 26.3%, and the three-year return has averaged 25.8%. Forward one-year returns have been positive six out of seven times (85.7%), and forward three-year returns have been positive four out of five times (80%). The single instance when forward one-year and three-year returns were negative corresponded to the AMZI’s relative bottom on December 15, 2014. At that time, West Texas Intermediate (WTI) oil prices traded at $56 per barrel (bbl) and were more than a year away from their relative bottom in February 2016. The forward one-year and three-year losses were admittedly significant at ~40% and ~20%, respectively. Many investors have looked back to 2014-2016 as a reference (read more) for today’s environment given that WTI oil prices bottomed at $26/bbl in February 2016. In contrast to 2020, there was a slow grind lower from oil’s relative peak in the summer of 2014 to its bottom. The strongest forward returns in the table followed weak performance in early 2016 that coincided with oil’s relative low on February 11, which also marked a relative low in the AMZI (see row in orange box). In just three months, the AMZI had gained 51.0%, and a year later, the total return was almost 86%. However, the three-year return was flat with the three-month return. In 2020, the price move in oil and MLPs has been quick and drastic with the unprecedented demand impact from COVID-19 exacerbated by an oil price war that has finally been resolved with agreed production cuts. Each sell-off and recovery is unique, and the shape of the recovery for MLPs this time around could be swift as seen in 2016 or a slow grind. Through April 9, less than a month from the relative bottom, the AMZI had already gained over 40% on a price-return basis. However, considering the magnitude of the recent sell-off, there is still much ground to regain for a true recovery to be realized.