The energy sector has seen impressive growth and returns over the past 18 months, seeing the biggest gains of any sector in the S&P 500 last year.
Driven by demand for exposure toward sectors that are resilient to inflation, investors are increasingly looking to energy and MLP funds, such as the Duff & Phelps Select MLP and Energy Fund (VLPIX).
The rotation toward energy in times of rising inflation is a time-tested strategy. The energy sector is less sensitive to inflation and rising interest rates than other income sectors. Energy stocks beat inflation 71% of the time within a time span of 1973–2020 and delivered an annual real return of 9.0% per year on average, according to Zacks.
VLPIX offers exposure to North American energy infrastructure. The portfolio team applies a disciplined, bottom-up investment process, focusing on energy Midstream MLPs, GPs, and C-corporations that own midstream oil and natural gas assets backed by long-term, fee-based contracts, according to the firm.
This strategy holds growthier stocks compared with the average fund in its peer group, the Energy Limited Partnership Morningstar Category, according to Morningstar.
VLPIX has high-yield exposure, with its portfolio holding more stocks with high dividend or buyback yields; yield is an important component of long-term total returns.
Over the past three years, VLPIX beat its category index, the Morningstar MLP Composite Index, by an annualized 6.7 percentage points, and outperformed the category average by 3.5 percentage points, according to Morningstar.
When looking across a longer horizon, VLPIX outpaced the index. According to Morningstar, on a five-year basis, it outperformed the index by an annualized 4.3 percentage points.
The risk-adjusted performance only continues to make a case for the fund. The share class led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. This strategy also successfully weathered storms to provide investors more consistent returns, denoted by a lower standard deviation, 30.5%, than the benchmark’s 41.2%, according to Morningstar.
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