Investment Solutions

Quarterly Report – March 31, 2015

April 20, 2015

As has been the case over many quarters, the Fund’s performance benefitted from our “Energy Value Chain” approach, which allows for diversification and enables the Fund to shift asset allocations between various subsectors to take advantage of trends occurring in the macroeconomic environment. The portfolio also was aided by our ability to utilize short stock positions to offset the impact of a 50% decline in the oil price over a six month period. In particular, we are encouraged that although the Fund was down modestly in the month of March, results did compare favorably to the S&P 500 Index. As noted in our most recent monthly commentary “the bulls and bear continue to slug it out in the energy space especially regarding their views on oil prices.”

Our position is that the unprecedented 50% decline in the number of drilling rigs since June 2014, coupled with stronger gasoline demand because of the lower price, should result in reduced production and a higher oil price in the second half of the year. Although, it is early, and perhaps premature, there are signs that oil is stabilizing around the $50/barrel level at this time. Importantly, reflecting the energy sector’s challenges, we have been aggressive in upgrading companies across all the subsectors in the portfolio to assure that we are invested in what we believe are the highest quality stocks. At the same time, we have been opportunistic in taking advantage of market inefficiencies when they occur. Many companies have strengthened their balance sheets by raising equity.

We continue to favor MLPs that currently represent the portfolio’s largest allocation. They offer relative superior earnings visibility because they are less directly exposed to commodity price volatility. Our largest investments are involved in regulated pipeline operations and midstream businesses that are protected by long term contracts and fee based rates. Importantly, recent comments by MLP managements notwithstanding the significant oil price drop, have reiterated largely positive outlooks for continued distribution growth in 2015 and longer term. For example, most of our midstream holdings are expected to raise their distributions (dividends) over the 2015-2016 period.

During the quarter, we continued to be negative on the electric utilities, generally because of their high valuations and the oil drillers in view of the very adverse impact on this sector from the weak oil price. We have actually been short selected utilities and deep water drillers because we believe they have particularly negative outlooks.

Overall, despite the macro challenges, we are encouraged by the performance of our major holdings during the quarter. Oil is beginning to show signs of stabilization as the rig count declines. We remain diligent with our hedges and exposures as we navigate the space. While the energy markets have many moving parts, we continue to be mindful of portfolio volatility and are active in hedging and taking profits.

Paul Elliot, CFADan Tulis, CFAJames Elliot, CFA

Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors. This report is not a recommendation to either buy or sell any securities mentioned.


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About ELCO Management, LLC
Established in 1995 and based in New York, ELCO Management ( offers investment solutions to high net worth individuals and institutions. ELCO also manages two highly specialized energy funds: the ELCO Energy Fund, L.P. and the ELCO Select Fund L.P.