Enablers & Potential Beneficiaries

The traditional classifications for energy chain companies are Upstream, Midstream, and Downstream. Miller/Howard Investments adds a fourth category: Enablers and Potential Beneficiaries. Enablers are companies that facilitate energy operations such as oil field service companies, engineering and construction companies, and waste service providers. Potential Beneficiaries are companies that can experience increased global competitiveness as a result of the shale revolution's newly abundant, inexpensive, domestic natural reserves. Petrochemical companies are an example of a Potential Beneficiary. Most foreign plastics manufacturers use petroleum-based inputs, while US manufacturers rely primarily on natural gas liquids (NGLs) that are byproducts from shale wells. Because NGLs are available in abundant supply and at relatively lower cost, US petrochemical companies' production costs are lower than their foreign competitors.

Why Focus on Enablers and Potential Beneficiaries?

We view the emergence of shale energy as more than just an additional source of oil and natural gas for the US market. It is first and foremost a technological revolution. As with all technological disruptions, the Potential Beneficiaries of the industry's structural changes are not limited to those creating the disruption, in this case the commodities' producers and transporters.

Adding Enablers and Potential Beneficiaries to a portfolio can increase portfolio diversification, as well. Investing in the energy value chain is cyclical, a dynamic that can accentuate returns when the market outlook for energy prices is positive. But when the industry falls out of favor, energy company stock prices can fall substantially, even if a particularly company's results are solid. The performances and stock prices of Enablers and Potential Beneficiaries are less correlated to energy prices, and these companies can profit in different energy-price scenarios. Including these energy industry participants can help smooth out the cyclical highs and lows associated with energy investing.

What Makes Enablers and Potential Beneficiaries Different?

Enablers and Potential Beneficiaries don't fit neatly into any single industry. The primary characteristic is that these companies are likely to benefit from emerging, long-term energy market trends, particularly the growing supply of shale gas. A company's inclusion in the category is not based solely on its sensitivity to commodity prices, either. For example, petrochemical manufacturers may benefit from lower natural gas prices because this tends to decrease their feedstock expenses.

That's true, but that reasoning focuses solely on operating impact and ignores other relevant investment factors, such as market prices and demand, or company fundamentals.

The domestic nature of the natural gas market is another factor that influences Enablers and Potential Beneficiaries. Oil is a globally traded and readily transported commodity, which makes it more difficult for most end users to develop and sustain a strategic advantage based on access to lower-priced oil. But production of US natural gas costs less than in other countries, and currently it is not easy to export that gas. That combination gives US companies an energy cost advantage when it comes to natural gas and is an important consideration in our investment analysis.

In many ways, the shale revolution's impact is similar to that experienced by some businesses operating during the California gold rush in the 1840s. Some miners struck gold and became fabulously wealthy, but many more went bust. In contrast, the Enablers and Potential Beneficiaries of those times, such as Wells Fargo for gold transport and Levi Strauss for dry goods and jeans, prospered and survived. The shale revolution could have a similar wealth-generating capacity on some industries that do not directly participate in the production, transport, or processing of oil and gas.

How Natural Gas Touches Our Everyday Lives

Everyone knows that power and steam are generated from natural gas. But many investors are unaware of the ubiquitous role natural gas plays in our daily lives. An estimated 90% of all manufactured material contains some form of natural gas derivative. Consider the following natural gas byproducts and their common uses:

Ammonia, for example, is used in fertilizers, explosives, feeds, and carpets.
Chlor-alkali is used in siding, solvents, electronics, adhesives, toothpaste, and cosmetics.
Thanks to ethylene and propylene, we have food packaging, diapers, siding, automotive antifreeze, pantyhose, instrument lenses, and tires.

Hydrogen, another byproduct of natural gas, makes gasoline and heating oil burn cleaner, and is essential in the manufacture of fuel cells.

Methanol is responsible for the gasoline, plywood, insulation, paints, adhesives, electronics, and signs we use every day.

All of these come from natural gas. So the next time you go to the dry cleaner (chlor-alkali), buy a pair of sneakers (ethylene), or paint a sunset with acrylics (methanol), remember the importance of natural gas in our daily lives.

Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. The prospectus contains this and additional information regarding the Fund. To obtain a prospectus, please download from this site or call 1-844-MHFUNDS. The prospectus should be read carefully before investing.

IMPORTANT DISCLOSURES AND RISKS

An investment in the Miller/Howard Drill Bit to Burner TipĀ® Fund is subject to risk, including the possible loss of principal. Fund risks include, but are not limited to, the following: The Fund's focus on the securities that are the beneficiaries of the North American energy value chain presents more risk than if it were more broadly diversified over additional industries and sectors of the economy.

Depositary receipts may be less liquid than the underlying shares in their primary trading market. Companies that issue dividend yielding equity securities are not required to continue to pay dividends on such stock. The Fund may be exposed to liquidity risk when trading volume, lack of a market maker, or legal restrictions impair the Fund's ability to sell particular securities or close call option positions at an advantageous price or in a timely manner. The Fund invests in small and medium size companies, which carry greater risk than is customarily associated with larger, more established companies.

The Fund may invest in energy companies and energy producers, including pipeline and gas distribution companies. General problems of energy companies include volatile fluctuations in price and supply of energy fuels, international politics, terrorist attacks, reserve and depletion risk and reduced demand.

The Fund may be subject to increased expenses and reduced performance as a result of its investments in other registered investment companies and MLPs. An investment in units of MLPs involves certain risks that differ from an investment in the securities of a corporation. MLP entities are typically focused in the energy, natural resources and real estate sectors of the economy. A downturn in the energy, natural resources or real estate sectors of the economy could have an adverse impact on the Fund. Changes to current tax law could affect the treatment of distributions, including (but limited to) ordinary income, capital gains or return of contribution. The Fund is new with no operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size.

Distributed by Foreside Fund Services, LLC.

More information about the Fund can be obtained by calling a MHI Funds, LLC sales representative at 845-679-9166.

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