Investment Solutions

Quarterly Report – September 30, 2012

October 15, 2012

The “energy chain” approach in managing the portfolio was an important reason we were able to deliver a strong third quarter performance. For example, with the Federal Reserve keeping interest rates low until 2015, we added to our MLP holdings which are companies that benefit from such a policy considering their average yield approximates 6%, which compares with 1.7% for the 10-year Treasury Note. This “asset class” group represented 25% of the portfolio at September 30, and was up 8% during the quarter. In contrast, we added to our short position in utilities, a group that was down 1.25%. Additionally, drilling and service companies, which were highly depressed earlier in the year, were selectively added and rebounded. Other industry sectors such as E&P and energy infrastructure were also weak in the first half of the year and recovered in the third quarter

Oil prices remained relatively stable in the quarter, while natural gas prices improved. We continue to believe that oil should trade in the $80-$100 range per barrel, based on supply and demand, although problems in the Middle East could drive prices higher. A weakening global economy, including a possible recession, could negatively impact demand and put pressure on prices. Natural gas which has been largely trading in the $3.25-$3.50 per mcf range could move to $4.00 in 2013, based on the forward curve if weather is normal this winter. Natural gas liquids (NGLs), were down about 20% in the second quarter but rose 13% in the third quarter. This aided companies in the gas processing business.

We remain positive about the outlook for the selected subsectors. Valuations, overall, still remain attractive, while the weighting of energy in the S&P 500 Index has declined from 16.2% in June 2008, to about 10.5% currently, a five year low and roughly two-thirds below the peak of 21.8% in 1980.

In summary, we remain constructive on the Fund’s prospects and believe our energy chain approach to asset allocation will continue to drive performance.

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.