Rob Thummel

Sure. So I grew up in a small town in Kansas. I've been investing in the energy sector really 30 years. And it kind of goes back to my roots. I actually started working in the Standard Gas Station when I was in high school. And then I worked with some petroleum engineers and geologists on what I still think is one of the first shale wells that was drilled in the Bakken Shale several, well, decades ago. And that got my, that piqued my interest. And so anyway, I came to Tortoise 20 years ago, started investing in publicly traded equities and have been here ever since through multiple cycles.

Well, before we get into kind of like the nitty gritty of the business, I always like to ask people, what do you like to do for fun? Any hobbies when you're not behind the desk?

Yeah, probably the same thing traditional portfolio managers do. We're all portfolio managers. Do a little golf, a little poker, and maybe occasionally a little bourbon. Yeah.

I'm more of a clear guy myself. I can't get into bourbon. It leads to a poor morning for me.

Well, just a little bit. It's just a little bit. Yeah.

So you guys do a lot of things over at Tortoise. Can you maybe talk about the firm as a whole and all the things you do to kind of help clients?

Yeah. So Tortoise, our focus is that we're really dedicated to the energy sector. That's what we've really been since the beginning for really over two decades in existence. Focused on the energy sector. Really, I've always seen a huge opportunity in the energy sector because of the essential nature of it. So our goal, obviously, is to deliver the highest risk adjusted returns we can for clients because energy is so important. Obviously, there's a lot going on in energy. And frankly, there are a lot of market cycles in energy, a lot of market cycles in general in the broad market. But our goal is to position clients, we think, where the best opportunities are in the energy sector. Yeah.

So we're here to talk today primarily about TPZ, which is the Tortoise Essential Energy Fund. So at a very high level, what is this fund trying to accomplish?

Yeah. So with this fund, what we're trying to accomplish is simply where are the opportunities in energy? So energy, we're in a new era of energy, right? So everybody likes ETFs. This ETF gives us the flexibility to look at the energy sector and say, not only where to be positioned today, but more importantly, where do you want to be positioned? Where's the puck going in energy? And that's really why we have this fund. And so that's how we're positioning it is where is the future? So the answer to that is, well, we see electrification being a huge opportunity. That's driven by AI. What does that mean? That means electricity demand in the U.S. is going up because of AI and other things.

Yeah. And we're going to kind of talk about all that. One of the things that I was curious about just from a business standpoint is this fund transitioned from a closed-end fund to an ETF kind of late in 2024. Kind of what motivated that decision and really how has that impacted investor access and really the way the fund operates? Yeah.

So Tortoise has multiple investment products across their platform. And as you highlight, Brad, we had some closed-end funds that were trading at discounts. And we brought in some new management at Tortoise. And it was their suggestion that, you know what, should we consider an active ETF? Because we didn't have an active ETF at Tortoise. And with the funds, with the closed-end funds trading at discount and obviously with the shareholder approvals, not only at the individual shareholder level, but at the board level, we were able to convert those from closed-end funds to active ETF. Obviously, that was beneficial. Great, great decision on behalf of our management here.

And so let's kind of talk about the portfolio a little bit. I know one of the objectives is to provide, income, also total return. I saw that. We'll talk about that in a little bit. But you do this through a mix of equities, bonds, MLPs. Can you kind of walk us through how that allocation works and really how you guys are deciding what mix makes sense given kind of current market conditions?

Yeah. And you hit on the point. It's market conditions. It's where we are in the market cycle. But generally speaking, we've been weighted, probably 80% equities, 20% fixed income in general. Well, we'll probably always be 10% to 20% fixed income in that range and 80% to 90% equities depending on, our view on the economy, rates, and some of the more macro driving factors. But once again, the bigger picture perspective is, where are the best opportunities in the energy sector? And how do we best capture those and provide those to the investors ultimately?

Yeah, we're definitely going to talk about that. I think what would be, interesting, as you said, the fund is active. It's got about 86% active share, which means you're doing something very meaningfully different than your benchmark. And, what kinds of exposures or strategies are you using to maybe find those opportunities and generate those kind of those active moves or, your conviction of where to move? So, this isn't a traditional energy index. This is a, it's an active product. So can you maybe kind of walk me through the investment philosophy or investment thesis on how you're figuring out where you want to move next or where your tilts are going to be?

Yeah, Brett, that's a great point. So, the traditional ETF space or investors investing in the ETF space effectively had, maybe one or two options. But the biggest option is obviously the XLE, and that's a passive product. And, it's highly concentrated in Exxon, Chevron, ConocoPhillips, basically, who are oil and gas producers. We have nothing against those companies, obviously, well-run, well-managed companies. But there's a lot going on in the energy sector. And that's what I like to say is that's why Tortoise, this is all we do. We dedicate, we're dedicated to it. We've got a good-sized team here. We focus on the entire energy sector, not just oil and gas producers. We look at oil and gas producers. But we also focus on energy infrastructure.

Yeah, so maybe diving in there just a little bit deeper, is it, kind of a top-down fundamental process? Are you using some sort of quantitative approach? Like, what is the underlying kind of investment thesis when you say, okay, here, this is what we believe. This is where we have conviction. These are the types of companies we want to invest in. can you talk a little bit more about how you derive asset allocation? Yeah, we look at that.

So we break down the energy sector into multiple subsectors. We evaluate each subsector on its fundamentals.

And when we look at the fundamentals, we're looking at the quality of the cash flows.

We're looking at the growth profile, the potential growth profile of the business, the, the operating margins, the traditional fundamental metrics. We also look at the valuations. Obviously, that's important as well. And, trying to find opportunities where, the fundamentals and the valuations maybe are disconnected. Obviously, the market hasn't reflected yet the valuations in the individual stocks. And then we look at the, obviously, focus on the quality of the management teams as well. And we've got a long track record of being in the sector and evaluate those management teams on, their governance, but also, their share ownership and things along those lines.

And we look a little bit at the technicals and how the stocks have been trading, you know,

Relative to things like RSI and things like that. But we do a top-down. But then also, we do a bottoms-up approach. We have our own proprietary financial models where we build the, balance sheets, income statements, cash flow statements. These companies really look at the companies that can grow, that can grow meaningfully, but also are disciplined as well and, don't have inflated balance sheets. And so we're doing a lot of work on the top-down, but also the bottoms-up to formulate our opinions.

Sure. So, like, if I'm reading this correctly, I'm not an energy expert, it appears you guys have quite a focus currently in that, like, liquids infrastructure and natural gas. So, like, kind of what are the outlook on those segments? And why are you kind of focusing and emphasizing that particular part of the business right now?

Yes. So, Brad, the way we look at it is we really think that the energy sector is being redefined, and the future of the energy sector is going to be about natural gas. Today, oil, a lot of people, like I said, think energy, they think oil, and that's fine. Oil is not going away. But the growth in oil demand, both domestically and globally, has started to slow. It will continue to slow, we think. The future is going to be natural gas. And the reason for that is if you think about what's going on in the energy sector, it's really exciting right now because for the first time in my, really, three decades of looking at the energy sector, the energy sector and the technology sector are kind of intertwined.

Yeah, no, I totally agree with your thesis. It is an exciting time with, you think about what the energy demand is going to be for AI, and I think that's just really getting started as we continue to see them build these giant data centers and everything that's needed to kind of support the AI infrastructure effort. But one of the things that, outside of just kind of selecting a theme and finding the right places to invest, there is an income tilt to this portfolio. So, you guys will use fixed income and option overlays. So, how do those components contribute to your income generation strategy? And are you tactical with those tools, or is it kind of, you set it to a target?

Yeah. Yeah. So, we do want to deliver some income to investors. We think that that's a really important component. I think our dividend yield, as we speak right now, is about 5% on the portfolio. And we always will strive to provide current income that's higher than competing energy ETFs, like the XLE. Higher, obviously, than the S&P 500. We think that that's important as well. And so, as a result of that, we'll always have it. Now, I have always had an allocation to fixed income. like I said, that probably is going to range from 10% to 20% of the portfolio. And then, the option overlay is an opportunity for us to generate some income.

Yeah, you mentioned their volatility, being an active ETF, it's designed to be flexible. Is there any kind of point in time where you will, based on market conditions, tilt the portfolio to be a little bit more defensive to maybe help mitigate or manage some risk? Or is the active component more or less designed to help take advantage of, longer term opportunities rather than maybe trying to, I don't know, I don't want to use the word play, but kind of play around volatility and market drawdown in the energy sector. Yeah, no, I think that's a great observation.

And we actually just have done that most recently. If you look at, what's been happening in the sector, oil prices are down significantly,

At least from, a year ago and even, from 2020. They've been declining, I guess, just in general.

So I guess the best way to say it. And, we expect that oil prices are probably going to come down a little bit more as well. Now, obviously, what does that mean? Well, you probably don't want to have a lot of exposure to oil and gas producers, especially oil producers, because, the income of oil and gas producers is tied to the fundamental commodity price, generally speaking. And, obviously, if you look at some competing products like the XLE, there's a lot of oil and gas producers in the XLE. But on the other, from our perspective, we can position, we don't have to be in the oil and gas producers. And we limited our exposure there. And we can be actually in electric utilities, which are more defensive in nature.

So let's take a look at performance. I looked at performance. The fund has a one-year return of over 40%. So first of all, congratulations. Can you just talk about a little bit about what are the key drivers that helped propel that return over the last year?

Yeah. So what I would say is, the energy sector, as many people listening to this call know and maybe even share this view, has been really underinvested and I think really underappreciated for a series of years, really all the way back to 2020. And so as a result, energy sector, from a valuation perspective, has been trading at a pretty substantial discount for several years to its historical norm and to the broader market. Last year, sector caught up a little bit. Sector really performed well, especially, well, let me say it this way. Where your position did well. So if you're in energy infrastructure and electric utilities, those stocks did really well last year.

Yeah, no, I couldn't agree more. And one of the things, your benchmark is the S&P 500 Energy Index. And, the performance is diverged significantly. So I'm a big believer that tracking error is your ability to deliver alpha. How do you kind of or should I say, how should investors interpret the difference in results between your fund, TPZ, and your benchmark, which is the S&P Energy Sector or index?

Yeah, I think that investors should interpret it as that's why, active ETF, if you're looking for an ETF, active ETF makes a ton of sense relative to the passive one. obviously, the XLD can't. It can only do what it can do, which is, it's limited based on its methodology. Our active ETF can identify the future opportunities and where the puck is going in energy and move there and move there quickly. And that's what we've done. And that's really helped us, really propel us and provide that return, that excess return over and beyond what the index has delivered.

So here's the million dollar question, right? For someone already has or is building a diversified model portfolio, what role do you see TPZ playing? should investors view it as a core energy allocation? Should they look at it as an income generating sleeve or maybe more of an opportunistic position?

Yeah. Or all the above. Yeah, I appreciate that. Well, what I was impressed, I think I do think it's a combination of several of those. I do think that investors, you want it as a core allocation. I think it's really important to understand nothing in the world works without energy. So, everything starts with energy. 98% of the things we do every day require some form of energy. And so I do think that energy is a core allocation that should be in everybody's portfolio. So I do think it's not opportunistic. It's a core holding. But I also do think that it also can provide some income and more income than what you're going to get from any other sector, basically, in the S&P 500.

Well, Rob, I couldn't agree with you more seeing that secular trend and seeing the opportunity. I think you guys are very, very well positioned. And, first of all, I really appreciate you spending some time out of your day to talk with me. But before I let you go, where can people learn more about Tortoise Capital and where can they find information on TPZ?

Yeah. So on our website, I think it's tortoisecapital.com, we've got a ton of information on TPZ. It's under our active ETF section of our website. We've got other investment products there that if you're looking for energy investments. We also do a significant amount of insights. And I would encourage people to look there. We just did a recent insight on the nuclear energy sector. We do a bunch of insights. We wrote a whole paper, white paper about AI and energy and the opportunities there. So we've got a lot of great information and insights. And we do monthly podcasts to give investors an update on what's going on in the sector. So anyway, I'd encourage you to go to our website. It's a lot of great information.

Well, again, Rob, thank you so much for spending some time with me. Thanks, Brad. Really? Thanks, Brad.

Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad. Thanks, Brad.