Leveraged midstream closed-end Kayne Anderson funds:
KYN and KMF suffered a third price assault because the Double Black Swans led to margin calls. This Triple Black Swan culminated in a feedback loop of selling where forced liquidations reinforced panicked selling in the normally stable midstream energy Master Limited Partnership sector. Neuberger Berman’s MLP analyst Douglas Rachlin described the sell-off as a 10 standard deviation event. Those sober investors who heeded our recommendations enjoyed stellar returns until the summer resurgence of COVID-19 cases cooled the sector.
As of Aug 7th, 2020:
- Kayne Anderson MLP/Midstream Investment Company KYN closed at $5.10/share with a $6.51 net asset value [21.6% discount to NAV] and a yield of 11.7%.
- Kayne Anderson Midstream/Energy Fund KMF closed at $4.62/share with a $6.42/share net asset value [28% discount to NAV] and a yield 7.7%.
We continue to like both Kayne Anderson Funds closed-end funds KYN and KMF, but, investors should understand their inherent leverage is a double-edged sword. Both KYN and KMF have changed their mandates to emphasize more natural gas, ESG and renewable energy investments. These mandates have been board approved and will become effective on or about September 28th, 2020. This increased clean energy focus should drive smaller discounts to net asset value and increase investor demand for both funds. The Kayne Anderson portfolio transition is not a dramatic change, rather, it is a reflection of the changing energy market where carbon generating businesses are being outmoded.
MLPs continue to be undervalued. The chart below shows that the yield spreads for MLPs remain historically high. As such, a double for the sector is possible as MLP yield spreads revert to their mean of under 5% from its current 11.46% yield.
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