Master Limited Partnerships Have Come a Long Way
Rachel Koning Beals
Yield hunt, commodities demand bring more Master Limited Partnership funds and ETFs to market
They may not have always had the best reputation, but Master Limited Partnerships (MLPs) are worth a new look.
MLPs, which trade on major exchanges, grant a "partnership" share in a project or business enterprise, like a natural gas pipeline. Individuals or asset managers buy an ownership stake, and shares trade much like stocks. There are more than 90 MLPs on the market, with the majority in industries related to energy and natural resources.
They're growing in popularity now because the partnership structure offers investors a rare income source in this low-yield world, paying north of 5 percent, on average, compared with near-zero or even negative bond yields. Plus, MLP indexes have outperformed the broader equity market over the past decade.
They're also a straightforward energy play that keeps investors from full submersion in an oil market that can prove a bit too sticky for the retail investing crowd.
That's a shift from a checkered past, where MLPs' historic illiquidity and lack of transparency earned them the unfortunate nickname "roach motel," as in the famous commercial jingle: You can get in, but you can't get out.
Now, their rise in popularity is evident in an increasingly crowded field of MLP-focused mutual funds and exchange-traded funds (ETFs).
"Investors are increasingly seeing the value in MLPs as a permanent allocation to their portfolios as a way to provide the potential for compelling yield, attractive total return potential, and low correlation to the broader market," says
"MLPs are a little less volatile than stocks but more volatile than bonds," says
A little history.
MLPs pay out the vast majority of their profits (up to 90 percent) after expenses in cash distributions (similar to dividends) to shareholders. MLP investors have historically received a generous income stream -- even greater than those holding MLPs' utility-company cousins. The lack of institutional ownership in MLP units has caused the indexes' fluctuations to act somewhat independently of other equity markets. Returns to high-yielding MLPs are, however, often correlated to interest-rate changes. Broad market indexes, such as the
Investors might, for example, opt for an MLP that operates a pipeline and charges a "toll" for the interstate flow of oil and natural gas, says
"Motivations for investors holding AMLP are likely to include beliefs that the country's basic infrastructure requires further investment, that these companies will continue to be able to tap capital markets effectively, that fuel demand will stabilize or start growing going forward, and that interest rates will not dramatically increase. While it may be quite a multifaceted thesis, all of those factors will ultimately decide this fund's fate," says
In early March,
Direct investments in MLP securities are also notorious for providing tax headaches. Payouts are considered distributions, not dividend or interest payments, and investors are required to file schedule K-1 returns for every state that the MLP derives profits from. Proponents say the extra time filing is worth the extra yield relative to other lower-risk investments.
Tax time has gotten a little easier, however. Both the ETF and exchange-trade notes (ETN) structures circumvent K-1 filings by providing investors with dividend and interest payments, which require only a single 1099 tax filing.
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