From the beginning of 2020 to mid-March 2021, the following Tortoise Energy Funds have suffered substantial losses, ranging from nearly 50% to as much as 75%.
- Tortoise Energy Infrastructure Corp. (NYSE: TYG) (Approximate Loss: 64%)
- Tortoise Midstream Energy Fund, Inc. (NYSE: NTG) (Approximate Loss: 75%)
- Tortoise Pipeline & Energy Fund, Inc. (NYSE: TTP) (Approximate Loss: 58%)
- Tortoise Energy Independence Fund, Inc. (NYSE: NDP) (Approximate Loss: 49%)
During this same time period, the overall S&P 500 Index was up over 22%, and even the S&P 500 Energy Sector Index was down less than 15%. Why have these funds performed so poorly in comparison?
Each of the Tortoise Funds mentioned were heavily allocated toward the energy sector. While these particular funds were not identical, they each invested heavily in various portions of the energy sector. For instance, Tortoise Energy Infrastructure Corp. (TYG) invested in master limited partnerships in the energy infrastructure sector. Tortoise Midstream Energy Fund, Inc. (NTG) invested in midstream energy entities in pipeline and logistical and infrastructure assets. Investors who were recommended to purchase significant percentages of these funds in their portfolio may have been over-concentrated in the energy sector and subject to unnecessary risks.
Leverage and De-Leveraging
Leverage is a strategy used in some Closed-end Funds (CEFs) generally involving the borrowing of money to invest the proceeds, with the goal of increasing the fund’s return or its income. While the use leverage can increase the return, leverage can also significantly increase the risk to investors.
The Tortoise Closed-End Funds utilized significant leverage, as much as 30% or more of a an individual fund’s total assets.
On April 14, 2020, Tortoise announced its recent completion of de-leveraging. Tortoise stated in its press release that it was:
completing leverage reductions for TYG, NTG and TTP, which results in each company being in compliance with all applicable 1940 Act leverage tests, as well as the covenants on its debt agreements and the terms of its preferred stock. Leverage has been reduced by utilizing cash raised through trading activity in a manner that minimized prepayment premiums in order to maximize shareholder value.
However, this de-leveraging may have had an adverse impact on investors. De-leveraging can cripple a closed-end funds ability to fully regain losses incurred, and the timing of the leverage reduction in April 2020 in the midst of substantial market turmoil, may have further exacerbated the losses.
“Closed-end” funds differ from traditional “open-end” mutual funds. Open-end funds are compilations of underlying investments in which investors purchase an interest, or share. Open-end funds don't have a limit as to how many shares they can issue. When an investor purchases shares in an open-end mutual fund, more shares are created, and when somebody sells his or her shares in the mutual fund, the shares are taken out of circulation. If a large number of shares is sold (called a redemption), the fund may have to sell some of its investments in order to pay the redeeming investor. Open-end funds do not trade on the open market, like stocks, but are re-priced each day based on the total amount of fund shares outstanding at the end of the day and the value of the underlying assets. The open-end fund share price that investors receive upon redemption, or that investors pay to purchase fund shares, is based on the calculated net asset value (“NAV”). NAV is the total value of underlying assets (less liabilities, if any) divided by total fund shares outstanding.
In contrast, “closed-end” funds trade like stocks. They are launched through an IPO in order to raise money and then they trade in the open market. Closed-end funds only issue a set number of shares. Significantly, unlike open-end funds, as mentioned above many closed-end funds use leverage in an attempt to magnify gains to investors. Although NAV for closed-end funds is also calculated to give some indication of the value of the underlying fund assets, the prices at which fund share transactions occur are affected by supply and demand. The prices of closed-end fund shares often deviate from NAV, and they may trade at a premium or discount to NAV. A discount to NAV means the market price of the fund is trading below the actual value of the net assets contained within the fund. The Tortoise Closed-End Funds were no exception, with several Tortoise Funds trading at significant discounts below the actual NAV as of November 2020:
- Tortoise Energy Infrastructure (TYG) Discount to NAV: (23.2%)
- Tortoise Midstream Energy Fund (NTG) Discount to NAV: (23.9%)
- Tortoise Pipeline & Energy Fund (TTP) Discount to NAV: (24.1%)
- Tortoise Energy Independence Fund (NDP) Discount to NAV: (23.1%)
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