Key Takeaways:
The Tortoise Energy Infrastructure Corp. (TYG) is leveraging the artificial intelligence boom more than oil prices to deliver a 17 percent total return this year, while the broader stock market is down four percent. The closed-end fund offers a tantalizing 12 percent yield, but its reliance on borrowed money creates significant risks for investors.
Co-portfolio manager Robert J. Thummel acknowledged past missteps but said the fund was much better positioned to weather a crisis today. The fund has reduced its leverage and diversified away from pipelines into other types of energy infrastructure, such as electricity generation assets—a move that has also allowed it to benefit from AI growth.
The $980 million fund, which invests in energy pipelines and infrastructure firms like MPLX, Sempra, and Williams Cos., uses a leverage ratio of 21 percent to amplify returns. This is a reduction from over 30 percent in 2020, a year when the fund lost more than 70 percent of its value after being forced to sell assets at market lows.
For investors, TYG represents a high-stakes bet on the surging power requirements of AI data centers, a thesis supported by the fund’s recent performance. However, the 2020 collapse serves as a stark reminder of the volatility inherent in a leveraged fund tied to volatile energy markets, positioning it as a vehicle for specific, risk-tolerant investors.
While geopolitical instability in the Middle East has supported oil and natural gas prices, the more significant, long-term driver for TYG may be the energy demand from the AI sector. The rush to build and supply electricity-hungry data centers has analysts bullish on the power industry's prospects. This positions TYG to capitalize on a trend with more secular growth than commodity prices alone.
The fund's diversification into electricity generation assets makes it less dependent on oil price fluctuations. Should oil prices taper off as futures markets suggest, pipeline companies operating on long-term contracts provide a degree of insulation that pure producers lack. The fund's current four percent discount to its net asset value could also offer an additional cushion.
Double-digit yields rarely come without substantial risk. The fund’s 21 percent leverage ratio means it invests roughly $121 for every $100 of investor capital. This structure magnifies both gains and losses.
The catastrophic 70 percent drawdown in 2020 occurred when energy markets froze, and lenders forced the fund to de-leverage at the worst possible moment. "TYG is a fund for a specific moment and a specific investor," Michael A. Gayed, author of the Lead-Lag Report Substack, wrote in a recent report. "The risks are equally specific."
Since then, management has lowered the leverage ratio and diversified the portfolio. Thummel also notes that the fund's underlying holdings have improved their own financial health. “They’ve improved their balance sheets a lot,” he says.
This article is for informational purposes only and does not constitute investment advice.
