As the Wall Street Journal noted this morning (‘The Oil Crash is Hitting this Investment Hard’), “the plunge in crude-oil prices is sending shock waves through closed-end funds tracking the energy sector, highlighting how the market turmoil is hitting products popular with ordinary investors seeking to boost returns during the long bull market.
Shares of the Goldman Sachs MLP and Energy Renaissance Fund have fallen 78% this month, while shares of the Kayne Anderson MLP/Midstream Investment Co. and the Kayne Anderson Midstream/Energy Fund Inc. have fallen 74%, respectively. Shares of the Tortoise Energy Infrastructure Corp. and the Tortoise Midstream Energy Fund Inc. have lost more than 80% of their value.
A closed-end fund is similar to a mutual fund, but its shares trade on an exchange. A professional manager oversees the fund’s holdings, deciding what to buy and sell. Unlike mutual funds, closed-end funds issue a fixed number of shares, after which capital rarely flows in or out of the fund. Also, unlike mutual funds, they tend to use leverage to juice their payouts – borrowing at short-term interest rates and investing the proceeds in longer-term securities that pay higher returns.
That is a tactic that makes them attractive to investors when things go well, but one that can also amplify losses when markets sour. There are laws that cap the funds’ leverage, so when the value of their underlying securities falls, they often need to reduce their leverage by selling assets, as they cannot easily raise capital by issuing new shares.
That is what is happening now: As crude prices have plummeted, hurting shares of energy companies and the market value of the funds’ holdings, several have been forced to reduce their leverage by selling securities. That has cut down on the amount of money available to pay investors, which likely will lead to funds cutting their distributions, asset managers say.”
Although all brokers and investment advisors have the obligation to ensure that any investments held in a customer’s account are suitable and appropriate for their customers based on their investment objectives and risk tolerance, when significant price declines are experienced and/or dividends/distributions are substantially reduced, what may have been an appropriate investment a few months ago may now be inherently unsuitable.
If you are an investor who has any concerns about your energy investments with any brokerage firm, please contact attorney Steven B. Caruso in the New York City office of our firm at (212) 837-7908 for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).