This Fund’s 17.3% Yield Looks Interesting
A Closed-End Fund With a Big Payout
Longtime readers of Income Investors would know that I mostly cover high-yield stocks in this column. But today I want to do something a little bit different. I want to talk about something that offers a high yield but is not actually a stock in the traditional sense.
Check out Goldman Sachs MLP and Energy Renaissance Fund (NYSE:GER), which is a closed-end fund managed by Goldman Sachs Asset Management, the asset management arm of Goldman Sachs Group Inc (NYSE:GS).
The fund, which came into existence on September 26, 2014, trades on the New York Stock Exchange (NYSE) under the ticker symbol “GER.” Therefore, while the fund isn’t a stock in the traditional sense, investors can still buy and sell it throughout the trading day just as they can with a regular stock.
As the name suggests, Goldman Sachs MLP and Energy Renaissance Fund focuses on master limited partnerships (MLPs).
MLPs combine the tax benefits of limited partnerships with the liquidity of publicly traded securities. Most MLPs come from the energy sector, particularly at the midstream level. A lot of them are owners and operators of energy pipelines and storage terminals.
Notably, MLPs are pass-through entities. That means, as long as an MLP distributes most of its available cash to unitholders, it pays little to no income tax at the corporate level. As a result, MLPs have become some of the highest-yielding names in today’s stock market.
The goal of Goldman Sachs MLP and Energy Renaissance Fund is to provide “a high level of total return with an emphasis on current distributions to shareholders.” (Source: “Goldman Sachs MLP and Energy Renaissance Fund Announces Quarterly Distribution of $0.16 Per Share,” Goldman Sachs Asset Management, February 7, 2020.)
It intends to achieve that goal by investing in MLPs and other energy investments. And while the fund has an emphasis on midstream operators, it invests across the energy value chain, including upstream, midstream, and downstream investments.
As of December 31, 2019, the fund had 22 holdings. The three largest holdings were Targa Resources Corp (NYSE:TRGP), MPLX LP (NYSE:MPLX), and DCP Midstream LP (NYSE:DCP). They represented 9.9%, 9.1%, and 8.8% of GER’s portfolio’s market value, respectively. The fund also had a 0.5% cash position. (Source: “Holdings Report,” Goldman Sachs Asset Management, January 13, 2020.)
The No. 1 reason to consider GER stock is the sheer size of its payout. Right now, the fund has a quarterly distribution rate of $0.16 per share, which comes out to an annual yield of 17.3%.
That’s very, very high, even by MLP standards.
One of the reasons why the fund can provide such a massive yield is that it uses leverage. At the end of 2019, GER’s leverage, net of cash, as a percentage of managed assets, was 34.9%. The fund’s cost of leverage, i.e. the weighted average annual interest rate on its borrowings, was 3.8%. (Source: “Goldman Sachs MLP and Energy Renaissance Fund (GER),” Goldman Sachs Asset Management, last accessed February 21, 2020.)
Of course, as an actively managed investment vehicle, Goldman Sachs MLP and Energy Renaissance Fund does charge a management fee. Its expense ratio, with leverage, ex-taxes, is 2.9%. (Source: “Goldman Sachs MLP and Energy Renaissance Fund,” Goldman Sachs Asset Management, December 31, 2019.)
And I should point out that, as is the case with any MLP, this fund’s payouts are not carved in stone. In the latest distribution announcement, the fund manager said clearly that “Given the volatility in the midstream sector, the portfolio management team will continue to evaluate the level of leverage employed by the Fund and the resulting impact on a sustainable distribution level in the coming quarters.” (Source: “Goldman Sachs Asset Management, February 7, 2020, op. cit.)
Last but certainly not least, Goldman Sachs MLP and Energy Renaissance Fund has a net asset value (NAV) of $4.09 per share at the time of this writing. The fund’s actual price is $3.94, which represents a 3.7% discount to its NAV. (Source: “Performance & Prices,” Goldman Sachs MLP and Energy Renaissance Fund, last accessed February 21, 2020.)
Bottom Line on Goldman Sachs MLP and Energy Renaissance Fund
Keep in mind that there are many actively managed closed-end funds that invest in MLPs. There are even index funds focusing on the MLP sector. And because those are passively managed, they tend to charge much lower management fees. Choosing the right MLP would depend on an investor’s investment goals and risk tolerance.