The MLP team at this investment manager has a decade-long track record and an impressive one, at that.

A major advantage for investment managers in attracting institutional money is being able to demonstrate a performance history over three- and five-year periods. A compelling track record over shorter periods can work, but many institutional investors view three- and five-year returns as key hurdles for allocating funds. And if you have a 10-year track record, all the better!

Todd Williams, CFA, and his master limited partnership (MLP) team at Westwood Holdings Group, based in Dallas, can boast a 10-year track record. Performance histories stretching back a decade or more are not around every corner in the investment-management business, and perhaps even less so in the realm of MLPs, a sector that has flourished in recent years.

The track record is more than respectable for Westwood MLP Infrastructure Renewal, which was launched in January 2003. Over a 10-year trailing period, it has outperformed its benchmark Alerian MLP Index by 370 basis points (330 basis points net of fees), earning returns of 19.7% per annum (19.3% after fees), as compared to the 16% per year chalked up by the Alerian MLP Index over the same period.

Williams says Westwood's MLP assets under management total nearly $600 million. For separately managed accounts, there is a $5-million minimum. There is no public MLP investment vehicle, although there is a qualified plan vehicle available through Westwood's trust services. Total assets under management at Westwood are close to $16 billion.

What's the secret sauce in the blend of investment process and style used by the Westwood MLP team to put together strong returns?

Williams gives due credit to his team, which includes director of research Mark Easterbrook, CFA, and research analyst Matthew Na, CFA. In addition, he notes that Westwood—as a larger firm managing assets across all market-capitalization segments—has a total of 16 research analysts and can extend its research coverage to all the publicly traded oil and gas producers as well as undertake research on the broader economy and on certain sectors important to MLPs.

“We take what we call a holistic approach to the asset class, meaning that we don't believe MLPs operate in a vacuum, and that time spent analyzing the supply-and-demand trends affecting energy infrastructure is really the leading edge to successful MLP stock selection,” says Williams.

“We follow closely what's happening on the supply side, because that's a key driver of where the infrastructure is headed. And on the demand side, we follow what the utilities, refiners, industrials and the petrochemical sector are doing, and what that means for MLPs, because the MLP sector is really the logistics provider between the two.”

Williams describes Westwood as having a “value-oriented” investment style and using a bottom-up process in stock selection. Analysts are charged with coming up with recommendations, which are presented to a formal research group and vetted by it as a peer-review body. If an idea is approved, it is then passed on to the portfolio team for possible inclusion. Historically, the portfolio has been made up of 25 to 35 securities. Weightings may vary; the average position size is around 3%.

In addition to typical spreading of risk over a number of portfolio holdings, Westwood pays particular attention to levels of aggregate risk in its portfolio using various risk measures, including geographic risk, commodity-price risk, exposure to certain asset types, liquidity requirements, etc. The team further enhances risk management by devoting considerable focus to quantifying the downside risk of names held in the portfolio.

“A differentiating factor for us is we focus on the downside risk in our analytical work at the analyst level,” says Williams. “We spend a lot of time trying to quantify that, because a hallmark of our firm is protecting the downside. We really want to make sure that it is tolerable and also quantifiable. That's an important step in our research process.”

In terms of sub-segments of MLPs, Westwood divides its holdings into a half-dozen categories. The largest is a natural gas/diversified group, made up in large part of MLPs with long-haul assets, including Enterprise Product Partners LP, Kinder Morgan Energy Partners LP and others. This group recently comprised about 41% of portfolio holdings. Crude and refined products made up the next largest, with 23% of holdings, followed by midstream gathering and processing, with 19%. Upstream MLPs accounted for 9% of holdings, and coal made up 3%.

MLP picks

In an early September interview, Williams discussed favorite names.

Westwood acquired Summit Midstream Partners LP (NYSE: SMLP) on the company's initial public offering (IPO). At the time it was yielding 8% and reflected the market's expectation of limited growth prospects. The Westwood team met with Summit's chief executive officer, Steve Newby, and came away convinced that the market was underestimating its potential. In addition, Summit was attractive for its underlevered balance sheet, limited downside, strong distribution coverage and attractive valuation.

“That's the combination we really look for,” says Williams, noting SMLP has raised its guidance on EBITDA (earnings before interest, taxes, depreciation and amortization) twice already in 2013, bringing the estimate up 26% from the original guidance level.

Williams checks off a variety of other achievements by the company. SMLP has benefited from a dropdown of assets from the general partner, made a significant acquisition, and announced further growth projects at the limited partner and general partner level. The market has now recognized its growth, trading it up to yield just 5%.

“And we still like it from a longer-term standpoint,” he says. “Even though it's been revalued, we still think that there is upside opportunity.”

Another preferred stock is NGL Energy Partners LP (NYSE: NGL), a name that's been “flying under the radar screen and has really transformed itself over the last 18 months,” Williams says. Since its IPO in 2011, NGL has grown new businesses—water and crude logistics—to the point that its original propane operations constitute only about 20% of EBITDA, down from as much as two-thirds earlier. In the current fiscal year (ending March 31, 2014), EBITDA is projected to reach $225- to $260 million, up from $170 million last year and $36 million a year earlier.

“We're talking about 600% EBITDA growth over the last two years,” says Williams, who estimates distributions by NGL will grow by close to 15% this year. “I don't know of another MLP that has grown that fast. It's really the only MLP out there with a significant water-handling and water-treatment business. They recently did an acquisition in the Eagle Ford on the water side, and that has really given them significant scale when you combine that with their existing assets down there.”

Although an MLP manager, Williams' mandate is such that he can also invest in infrastructure and upstream plays through C-Corp positions. These account for about 9% of the portfolio's assets, split between Consol Energy Inc., EQT Corp., Kinder Morgan Inc., Occidental Petroleum Corp. and Williams Companies Inc.

Williams highlights Consol Energy (NYSE: CNX), a company with assets in both coal and natural gas, in addition to other assets whose value is less recognized by the market.

“Of all our holdings, I think this one has the largest disconnect between its public market valuation and its intrinsic value,” says Williams. “They have great assets on both the coal and natural gas side. They're a low-cost producer of both of those commodities. Even in today's low-cost environment for coal and natural gas, they're generating positive cash flow. In terms of a possible restructuring, we think the sky is the limit for them, either breaking up the company, or selling assets to other MLPs, or forming their own MLP.

“There are just a lot of avenues they can pursue to unlock value.”

In the meantime, Williams says Consol will harness its “vast natural gas base” in the Marcellus and the Utica basins—acreage that is predominately held by production—where output is expected to grow by about 10% this year and about 25% next year.

As for often-overlooked assets, he points beyond Consol's joint venture in the Marcellus with Noble Energy Inc. to a further 60,000 acres in the Marcellus that it owns by itself. On the coal side, Consol also owns a port in Baltimore and a dock-services business with a fleet of more than 600 barges.

Of course, although Westwood selects stocks using a bottom-up approach, the team still has to handle headwinds in the form of rising interest rates. In an environment in which the yield on the 10-year US Treasury has recently risen from around 1.65% to, briefly, touch 3%, what tools can investors turn to?

“I think what you can do as a portfolio manager is pay attention to the valuations in your portfolio, and that should drive your decision making,” Williams says. During the recent backup in interest rates, MLPs outperformed other assets classes that are yield-oriented by a substantial margin, he says, noting this in part reflected the expected growth in MLP distribution. He estimates the pace of distribution growth for the Alerian MLP index at 7% to 8%. The Westwood portfolio distribution growth is expected to be closer to 10%.

“If rates are going to continue to rise, there naturally is going to be an adjustment period that MLPs will have to go through,” he cautions. “But that growth component is pretty significant if you can grow your distributions 7% to 8%.”

How far out can he see the infrastructure buildout and opportunities in the MLP sector continuing?

“We're clearly at a unique and exciting time in the world of energy. I'm not sure of another time when so much is changing in energy production growth, in drilling and completion efficiencies, and in growing infrastructure needs,” he says. “According to our numbers, the backlog of midstream infrastructure projects stands at between $120- and $130 billion over the next four years, so we may be past the midpoint of the current infrastructure wave.”

Williams acknowledges being surprised by as much as $30 billion in infrastructure projects announced by Spectra Energy, Williams Companies, TransCanada and others in the second quarter of 2013.

“We think we are starting to enter a transition period away from 'supply push' projects and toward 'demand pull' projects. Unless there is a step-function increase in future supply out of these growth basins, then we've largely solved a lot of the de-bottlenecking and infrastructure requirements to move energy out of these areas to where it needs to go.

“We may start seeing more 'base hit' projects on the demand side of things going forward, which would mean, in theory, that backlog growth would be slowing.”

In any event, Williams expects to see a continuing bifurcation between what he calls the “haves”—MLPs operating in growing supply basins that have connection to the right markets—and the “have-nots,” which lack the same elements for success.

“It's obviously becoming increasingly expensive to go from being a 'have-not' to a 'have.' We believe we're at a critical point where active MLP management is going to be crucial going forward.”