12.01.2014
By Terry Flanagan

Income Equity Fund IPOs

Miller/Howard Investments, with $9 billion under management, has launched its first closed-end fund, Miller/Howard High Income Equity Fund, which debuted on November 25 on the New York Stock Exchange under the symbol HIE.

HIE, which priced at $20, raised $245 million from the IPO. The fund seeks dividend income as its primary objective, with a secondary objective of capital appreciation. It will invest at least 80% of its total assets in distribution-paying equity of U.S. companies, with the balance invested mainly in master limited partnerships and put/call writing.

“Our idea is to have a fund that actually earns the distribution,” Lowell Miller, CEO of Miller/Howard Investments, told Markets Media. “So at the outset, 85% of our distribution is going to be earned by the portfolio itself. We’re going to enhance that with a little bit of the spread that we can get from the difference between leverage and income that we can receive, and do a little bit of call and put writing. But only on this 20% portion, nothing on the actual portfolio portion, so the portfolio has opportunity to appreciate.”

In so doing, Miller/Howard is “addressing a problem in closed-end funds, namely the fact that almost all of the distribution initially is going to be paid for by the portfolio income, which is totally novel,” said Miller.

The closed-end fund structure is ideally suited to income equity strategies because, unlike mutual funds and ETFs, the number of shares is fixed. “When you have an open-end fund, you have a lot of cash flows in and out; with a closed-end fund you don’t,” said Jack Leslie, chief investment officer at Miller/Howard. “We can be more fully invested. Cash is earning you nothing.”

HIE is the first equity income closed-end fund since 2007, and the first fund from a manager who specializes in high net worth and ultra-high end worth investors, according to Miller.

“The only equity-like closed-end funds that have been done since then have been MLP [master limited partnership] funds,” he said. “There have been no straight equity funds.”

The idea behind HIE is simple: invest in securities with high sustainable income. “It’s not rocket science, but we execute it time after time with discipline, which is the difference between us and an amateur investor,” said Miller. “It’s no different than an income property in real estate. You raise the rent; the value of the property goes up. So you’ve got to find good tenants so you can raise the rent.”

MLPs, which are exchange-traded entities, are limited by law to enterprises that engage in businesses pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. As part of its investment strategy, HIE will invest in some MLPs.

Miller/Howard’s energy holdings, such as Kinder Morgan, Questar and NiSource, have performed well in excess of the S&P.

“People think you can’t make money on conservative stocks, which is not the case at all,” Miller said. “We tend to find income-producing stocks that have some un-priced value buried within them, that’s not reflected in the stock price. So in the case of Questar, it was their oil production. In the case of NiSource, it’s this vast network of pipes and infrastructure which happens to sit right under Marcellus [shale reserve].”

Featured image via Tomás Fano under creative commons

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