ETF Expert Corner

Essential Asset ETFs with Tortoise’s Jeremy Goff

October 3rd, 2017 by ETF Store Staff

Jeremy Goff, Director of Strategic Development at Tortoise, joins us in studio to explain investing in essential assets, including through the Tortoise North American Pipeline ETF (TPYP) and the Tortoise Water Fund (TBLU).



Transcript

You can listen to our interview with Jeremy Goff by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I am now very pleased to welcome to the program Jeremy Goff, Director of Strategic Development at Tortoise. Jeremy joined Tortoise back in 2011. Prior to that, he was with The Blackstone Group, where he raised capital for and designed Blackstone's private investment funds. I have to mention Jeremy is a military veteran. He served as a Ranger Infantry Officer in the US Army. He's also a graduate of West Point. Jeremy, it's certainly our pleasure to have you here in studio today.

Jeremy Goff: Definitely glad to be here. Thanks for having me this morning.

Nate Geraci: Jeremy, before we talk shop, I have to ask you about your military background. I actually grew up in a military family. My grandfather is a retired Air Force pilot. My dad is retired Army. My brother is currently serving in the Army. I'd love to hear more about how you ended up at West Point, and perhaps a few highlights from your military career. Then, we can pivot into how you became involved in the investment world.

Jeremy Goff: Sure. Absolutely. I guess it was really similar to your story in that I grew up in a military family, so my dad, my uncles were all military veterans, served as far back as definitely World War II, Korea, Vietnam, all of those wars. Growing up, it was just really instilled in me to have this feeling of service and want to do that. I would say starting at age six I wanted to go to West Point and go to the Military Academy. It was just sort of a lifelong dream of mine to go. Then, I guess part of the story is once I was there, what do you want to do in your military service? I thought if I'm here, I'm going to go all in. I decided I'd go into the infantry and go to Ranger School and Airborne School and all those good things. Did that and then spent about 18 months in Iraq during the surge, came back, and decided I had really sort of done what I wanted to do in the military and decided to try something new.

Nate Geraci: Are there any lessons from your military service that you think have translated over onto the investment side of your career?

Jeremy Goff: Yeah. I think one of the lessons I definitely learned was you can have a plan, but as soon as you walk out the door the plan goes out the window, similar to the financial markets. I think you can never predict what's going to happen, and what investors are going to do. I think that's definitely a lesson learned.

Nate Geraci: Now, obviously being here in Kansas City, we're all very familiar with Tortoise. But for investors who may not be as familiar with Tortoise, tell us about the firm. What's the primary niche?

Jeremy Goff: Sure. I think what I'll go back to, because we do focus on essential assets and income, but where we really got our start was in the MLP space. We started about 15 years ago and we launched a fund by the name of TYG back in 2003 that was the first closed-end fund focused on MLPs specifically, and where you could do 100% MLPs in that fund. From there, we sort of kept broadening into the broader energy value chain, did some upstream/downstream investing. What we found was that focusing on the midstream sector of the energy value chain gives you great perspective into both areas, right? From there, we said pipelines are essential assets. They're essential to everyday life. They keep our lights on. They heat our houses. We thought there's an investment thesis here that expands beyond energy. That's why we look at water. We go as far as looking at healthcare and education and local infrastructure, things of that nature, anything that forces you, or doesn't force you, but something that is necessary to everyday life. That's what we're looking at.

Nate Geraci: Before we delve into these two ETFs, can you provide some color on Tortoise's move into ETFs? I know the first ETF we'll spotlight today launched back in 2015, but the Water Fund launched earlier this year. Tortoise's history has featured a wide range of investment products from closed-end funds to mutual funds, separately managed accounts. Why ETFs?

Jeremy Goff: No, I think it's a great question. Obviously, we have a long history of active investing. I think one of the biggest reasons was when we think about investing in essential assets and income, and when we think about how do we bridge the gap from sources of demand for capital to sources of supply for capital, we really want to be structurally agnostic. We want to offer those assets to any investor, whether or not they prefer it on an active side or on the passive side. We felt like going into ETFs was a natural bridge to reaching every investor.

Nate Geraci: Our guest is Jeremy Goff, Director of Strategic Development at Tortoise. Jeremy is joining us in studio. Jeremy, the first ETF we're going to look at today is the Tortoise North American Pipeline Fund, ticker symbol TPYP. This owns pipeline companies located in the US and Canada. First, can you just explain what a pipeline company is?

Jeremy Goff: Absolutely. It's essentially an energy toll road. It basically brings crude oil, refined products, natural gas, natural gas liquids from the point of supply to the point of demand. It's really the toll road that does that - and I would just make one point - is typically what you would assume is that that toll road is dependent on the price of the commodity. In many cases, it's not. It's all about volume. I would just make that point. I think when you think about it generically, that's how I would define it.

Nate Geraci: I think when investors hear pipeline companies, they tend to automatically think MLPs, Master of Limited Partnerships. But this ETF we're going to look at, it includes some other structures as well. Corporations and limited liability companies. What's the distinction here and why is that important?

Jeremy Goff: I think really what we're talking about is a risk/return profile that's the same across the board. We're looking at pipeline companies in general, so the fundamentals whether or not you're an MLP or a C-Corp are generally the same. When you open up your investment thesis to include C Corporations, you really broaden your ability to really invest in pipelines. MLPs are merely a structural wrapper. It's a tax wrapper, right? It's not a company per se. It's just a way it's structured.

Nate Geraci: Walk us through how this pipeline ETF is constructed. How many holdings? How are they weighted? Anything else noteworthy in terms of construction.

Jeremy Goff: It's roughly just over 100 holdings I think right now. The way that it's structured is as a RIC, which we find to be relatively unique in the market. There's a couple RIC funds out there, but what that does is limit MLPs to 25% of the fund. What you avoid by doing it as a RIC is you avoid what we consider to be a significant tax drag. So when you look at a lot of structures that focus 100% on MLPs, they're structured as C Corporations. They're taxed at the fund level. That creates a significant tax drag on the overall return. By focusing on all pipelines and sort of limiting it to 25% MLPs, you avoid that tax drag and you create the ability to really expand your universe of names much greater.

Nate Geraci: When you say RIC, that's Regulated Investment Company, correct?

Jeremy Goff: That's right. That's right.

Nate Geraci: What does the high level breakdown look like in terms of natural gas and crude, and what's actually going through these pipelines?

Jeremy Goff: It's a relatively even mix across the board. I think one of the differentiators I would say in this is obviously it's relatively weighted toward when you think about the universe of crude and the universe of natural gas, it tends to follow that universe pretty well from a market cap standpoint. I think one of the interesting things is we tend to draw in some utilities into this fund as a natural component of what we consider when you think about natural gas, utilities, and local distribution pipelines and things of that nature. That's one component that people don't typically realize is in there, but it is. It tends to benefit in times of volatility.

Nate Geraci: As I look at the ETF universe, I think the MLP space, it's a pretty competitive piece of that universe. How is this ETF differentiated? Obviously, you mentioned it being structured as a Regulated Investment Company. I think that's one from a tax perspective. How else is this different from some of the other MLP ETFs that are out there?

Jeremy Goff: Yeah. What we find it to be is truly, it represents the universe of pipelines well. I think it goes back to the construction of the underlying index. What we were doing originally when we launched this entire business was taking indices that were developed as a result of research we've done on the active side. Obviously, it's nice to be able to tie a product to that index, but what we're really trying to do is create an index that defines a universe for investors so they can truly have something that's investible and represents that universe well. I think that's a real differentiator - is we're not sort of throwing a bunch of names at a wall that seem to fit into a certain sort of category. We're really trying to thoughtfully put together a universe.

Nate Geraci: Again, our guest is Jeremy Goff, Director of Strategic Development at Tortoise. We're spotlighting the Tortoise North American Pipeline Fund, ticker symbol TPYP. Jeremy, where does this ETF fit in an investor's portfolio? My sense is that most investors think income when they hear MLPs or pipelines. Is that the primary reason to own TPYP or are there some other reasons?

Jeremy Goff: I think this is more of a total return story with it being a RIC. You obviously don't see as much of the income as you would in a pure MLP fund. I think one of the funny things that we sort of find is that folks who tend to invest in MLPs for income, a lot of times we find that they're reinvesting those dividends back into the product or back into the market. If you're doing that, if you're not taking away the income, you should be looking for more of a total return story. You should be looking for a return that's commensurate with that. I would say if you have what I would call, and I would look to you guys maybe to tell me, I'd be interested in your thoughts on this, is really a real assets bucket or an infrastructure bucket. It's a great way to go there, because those are more total return type buckets.

Jason Lank: Jeremy, this is Jason Lank. Great to have you in studio. We've been talking about, in little part, taxes and how the structure of a product can lend itself to how the taxes are created, or at least are treated. As we approach the fourth quarter, investors are starting to look at taxes and gains and losses. For investors who've been in the MLP space and some of the ups and downs over the last few years or at least this business cycle, is there any opportunity to use this ETF? For example, in a tax loss harvesting opportunity, anything along those lines?

Jeremy Goff: Yeah. I think there's two things I would say to that. One, from a tax loss harvesting, obviously MLPs have had their issues this year. The opportunity to come in and harvest some of those losses from a tax perspective and redeploy it into a product and a structure that I think gives you better exposure to the overall pipeline universe - it gives you some income, but it really is a true total return story. I think it's a great opportunity. If you are again, if you're reinvesting those dividends, you really should take a hard look at what return potential are you losing on a total return basis by investing in a C Corp pure MLP fund.

Nate Geraci: Jeremy, we need to take a break here in just a moment, but before we move on and talk about the Tortoise Water Fund, can you just give us a brief outlook on the pipeline space? What are some potential drivers moving forward?

Jeremy Goff: We're extremely bullish on the overall pipeline market. I would say we have a more constructive backdrop globally for crude oil. What do I mean by that? I think that we've seen over the last few months that spring inventory is dropping. We do expect that it's most likely that OPEC will extend production cuts in crude oil past the first quarter of 2018. We see that being a definite possibility. Despite inventories normalizing, imports into the US have dropped, right? Production is up. All of these things are tailwinds for midstream energy companies or pipelines. We think that's extremely positive. I think if you think about natural gas, in particular, it's a great story, right? The US is quickly becoming the cheapest producer of natural gas. What that does is create demand sources from the export standpoint. If you think about exports to Mexico, LNG exports, and then also petchem demand on the downstream side is really driving a lot of infrastructure build out in these companies. All of these things really lend themselves to giving us a pretty positive story. I'll sort of end it with saying if you look at it from more of a technical standpoint, valuations, cashflow growth, distributions all are growing in the pipeline space. I say if you look at valuations relative to a lot of sectors that are overvalued, or at least have stretched valuations like tech, energy is really, really attractively priced right now.

Jason Lank: Jeremy, from a high level, as I'm thinking through TPYP, what are some of the challenges these companies face? In particular, how hard is it to build a pipeline today? I think you've got regulatory approvals. You've got protests, right of way issues, the NIMBY, Not In My Backyard. Everybody wants cheap gasoline very close, but no one wants the pipeline running through their backyard. Is it easy? Is it difficult to build a pipeline today?

Jeremy Goff: I think of all the issues you brought up, obviously we see that all over the news, I think it really is sort of a political story. I think when it comes to how easy is it to build a pipeline, I think positive regulatory advancement and the need for infrastructure and the funding of that infrastructure will move it forward. But, I think getting anything through Washington these days is not easy. That can be a definite headwind for pipeline companies. But, I would say that in order to grow the economy, and this is such a critical component of the economy, getting those pipelines completed is important. I think people realize that.

Nate Geraci: Jeremy, excellent overview of the pipeline space. Again, the ETF is the Tortoise North American Pipeline Fund, ticker symbol TPYP. We now want to turn our attention to the Tortoise Water Fund, ticker symbol TBLU. Jeremy, as I mentioned earlier, this ETF just launched earlier this year. First, why launch an ETF in the water sector?

Jeremy Goff: I think when we're looking at what sorts of assets do we want to build a structure around, do we want to invest in, we're thinking about what's essential. I think you could argue that water is the most essential of assets. There's a huge need for capital in that sector. One, for infrastructural improvement. When you think about just cleaning water so de-sal plants and things of that nature, there's this huge need for capital and the ability to help bridge that gap through an ETF, and allow certain investors who maybe wouldn't get exposure through a private equity strategy to come in and benefit from that I think is something we're trying to do.

Nate Geraci: Walk us through how this ETF is constructed and exactly what it holds.

Jeremy Goff: Right. It's an interesting take on it. Some people would call this smart beta. We think it's just doing an index the right way. But, what we've done is really tried to focus in on where you're getting true exposure to water. Anywhere where you're getting over 50% of your revenue derived from water assets or water-related assets, you're going to be more heavily weighted in the index than you would be if you were deriving less than 50% of your revenue from water assets. What that does is really get us to a point where we say, if you think about some of the competitors that are out there, if you just do it on a market cap basis, you're going to pull in a lot of names that maybe don't have direct exposure to water.

Jason Lank: Jeremy, taking a look at some of the particular sectors that the ETF invests in, there's of course water infrastructure equipment, water utilities, engineering, construction. I think that makes sense. But, there's another component, water management, that includes water treatment. I think you mentioned de-sal. You might talk about what a de-sal plant is, but also irrigation and water efficiency. What is water efficiency?

Jeremy Goff: If I were going to equate it to something, it's like a tech play in water. You're thinking about companies that focus on creating devices that allow us to use water more efficiently or more effectively. Think about something that you would use in your house. Sort of like a more efficient, I want to say a more efficient shower, but I don't think that's ... It's technology that allows us to use water more effectively and to not waste as much water.

Nate Geraci: Is there maybe a company or two that you could just give us an example of that's in this ETF, and maybe talk a little bit about what they do?

Jeremy Goff: I think one of the big names on here is American Water Works, right? You're thinking about everything from the build out of water infrastructure to water technology to water treatment solutions. It's sort of like an all-in company. That's one of the stars in the index as it were.

Nate Geraci: Now, this is a passively managed ETF. You alluded to this a little bit earlier, and by the way, I love how you classified smart beta - you think of smart beta as doing an index the right way - but both the pipeline ETF we spotlighted earlier along with this water ETF are passive. Why go that route?

Jeremy Goff: In some sectors, I would say that we believe generating alpha in a strategy, it gets really difficult to understand what every company is doing - how they're deriving their revenue. I think if you think about an index constructed the right way and if you weight that index correctly, you can actually get to a point where you're giving folks true exposure through a passively managed structure that you might argue there aren't a lot of great, active solutions in the market for.

Nate Geraci: Is that really the primary difference? You mentioned competitors in the space. There are some other water focused ETFs. You have the PowerShares Water Resources ETF, the Guggenheim Global Water ETF, First Trust has a water ETF. Can you do just a little further compare and contrast for us? How is TBLU different?

Jeremy Goff: What I would argue is that when we think about what's truly, it's pure exposure to water. What we mean by that is we feel like we're generating more than 75% of the portfolio is focused on water and the revenue in that portfolio is being derived by water-related assets. I think that's the big differentiator is you tend to if you just market cap weight an index and you focus on names, your big names are going to be guys that probably aren't totally focused on water. If you think about, I don't know, like a GE for instance. They're going to have some water-related assets. They're going to derive some revenue from water. Is their entire business focused on water or are you really sort of diluting it a little bit?

Nate Geraci: Again, we're joined in studio today by Jeremy Goff, Director of Strategic Development at Tortoise. We're spotlighting the Tortoise Water Fund, ticker symbol TBLU. Jeremy, what's the overall investment opportunity here? What's the investment thesis for water?

Jeremy Goff: I think it's, as I mentioned earlier in the show, it's the most essential of assets. I think when we think about bridging the gap between sources of capital and sources of demand for capital, supply of capital and demand of capital, water is one of those places where I think you guys mentioned it earlier on, people, they don't think about it every day as where should I be investing my money, water. I would say it doesn't equate to the natural tendency of an investor of where they want to put their money, but I think by bringing something to light from an essential assets perspective and showing folks that you can actually generate attractive returns associated with water, that's the thesis we're trying to bring.

Nate Geraci: That brings up a good point, because TBLU is what would be classified, I think, as a thematic ETF, right? It offers exposure to a niche area of the market. How do you think about this in the context of an investor's portfolio? Obviously, every investor is different depending upon what their goals are, but where does an ETF like this belong in an investor's portfolio?

Jeremy Goff: I would almost say it's not a true commodity by the true definition of what a commodity is. But, if we think about where water is going, water is going to need to be priced a certain way. I think we're realizing that. I think your real assets, maybe if you've got something that's a commodity-like bucket, it could go there. Infrastructure by all means is a great place for this to go into. Shoot, at Tortoise we'd love everybody to say they have an essential assets bucket, and this is exactly where it should go.

Nate Geraci: As I go back to the investment thesis, something that obviously has been in the headlines a lot this year is a potential infrastructure spending bill in the US. I'm curious, how much could the water sector benefit from a Trump Administration infrastructure bill?

Jeremy Goff: I would categorize this as sort of infrastructure, I think it's sustainability. When I think about infrastructure spending, I think you start with sustainability and you move out from there. Regardless of whether it's a trillion dollars or it's 500 billion dollars, water is going to see a tremendous amount of investment from the US Government, and rightfully so. We've got aging infrastructure out there. I was talking to someone the other day at Black & Veatch, and he was telling me they were digging up water pipe near St. Louis and dug up a leather water pipe that was actually servicing people. I was shocked at the fact that there's still a leather pipe in the ground, but it's true.

Jason Lank: First off, Jeremy, you used the term high tech water. I love that. I'm going to use that. But, sticking to the investment thesis side, as an investor, I don't necessarily become aware of water treatment plant opportunities. It's just not an area that I follow. What I do read and hear about are some of the disasters that happen in the space. For example, just the absolute fiasco in Detroit where they changed water sources and the lead got into the water. Kids are being effected. This is big stuff. Then, of course, Houston and particularly Puerto Rico, where infrastructure, it may take years to replace. I do hear about that, and I think about that from an investment thesis. There's a little bit of a feel good story here too, in that you truly are helping people. Everybody needs and deserves water. That's a fact, right?

Jeremy Goff: Absolutely. I think when you think about it, if you think about SRI and socially responsible investing, this hits right at the heart of that, right? This is socially responsible investing, and you can actually earn a decent return by investing in these assets. These companies are going to be infused with capital going forward. They're positive cash flow-wise. We're not talking about a venture investment here. It's a well understood asset class.

Nate Geraci: Again, that ETF is the Tortoise Water Fund, ticker symbol TBLU. Jeremy, we have just a few minutes left here and before we let you go, if you're comfortable, I'd love to hear just your high level thoughts on some of the main trends we're seeing within the investment industry right now. We've seen a lot in terms of a shift from high cost to low cost, active to passive. Obviously, we've seen significant flows into ETFs. Tortoise obviously is involved in the active space. You have passive products with these Tortoise ETFs. Just high level, I'm curious as to how you view some of these major trends that we're seeing.

Jeremy Goff: It's absolutely changing the way we look at the business these days. I think from an asset management perspective, what are we focused on? It's providing investment solutions that are reasonably priced within the market, and where we can provide either alpha or strong beta with regard to indexes. I think for us, it's really where is the market going? The traditional mutual fund, they're struggling, right? If you're a large cap manager and you're looking at launching a mutual fund, that's going to get more difficult for you. I think in more niche areas where we can focus in on assets, there could be potential for active managers to come in and create a lot of alpha there, which we find attractive I think in the energy space in particular in places like water and renewables. We find that active management can be a good thing, but I also think the move into alternatives, and I think the more mainstream alternatives become, we're going to have to figure out ways to one, price those accordingly, but also how do we get retail investors into those sorts of assets, because it shouldn't just be an institutional play anymore. It should be for all investors. I think all investors need good access to alternatives.

Nate Geraci: Jeremy, I think that's a perfect way to close our conversation today. Really enjoyed having you in studio. Certainly, too, very interesting segments of the market with both pipelines and water. Thank you for taking the time to join us.

Jeremy Goff: Thank you.

Nate Geraci: That was Jeremy Goff, Director of Strategic Development at Tortoise, and if you would like to learn more about the Tortoise ETFs, you can do so by visiting tortoiseadvisors.com. That's tortoiseadvisors.com.