MLP Funds Reveal Long-Term Staying Power

By Tom Lydon, ETF Trends

Master limited partnerships and related exchange traded funds have provided impressive capital appreciation, along with attractive yields, in a long-term portfolio.

According to First Trust Portfolios, the Alerian MLP Index has generated a cumulative total return of 1,231.8%, or an average annualized return of 19.4%, from Dec. 31, 1999 through July 31, 2014. In comparison, the S&P 500 energy index generated a total return of 346.2%, or an annualized return of 10.8%.

MLPs are limited partnerships that are traded on a U.S. exchange and traditionally generate large cash flows that payout the majority to investors as dividends.

Unlike other energy sector stocks, MLPs primarily deal with distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.

While MLPs distribute cash and their underlying value can be influenced by interest rate risk, the cash flow distributed by MLPs is not fixed. As a type of toll road business model, these companies generate revenue based on demand for the energy products, and the U.S. economy is still heavily reliant on oil.

“If interest rates are rising due to an acceleration in economic activity, the demand for energy could also rise, and that could boost revenues,” according to Bob Carey, Chief Market Strategist at First Trust. “The opposite scenario could apply as well.”

Since 2000, yields on benchmark 10-year Treasuries finished higher in five calendar years. Meanwhile, the Alerian MLP Index posted positive returns in each of those five years – 2003, 2005, 2006, 2009 and 2013.

“With the U.S. moving towards energy independence, investors may want to consider having exposure to both the distribution and production sides of the energy sector, in our opinion,” Carey added.

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The D2 Capital Management Multi-Asset Income Portfolio holds Global X MLP (MLPA) and Yorkville High Income (YYY) both of which include MLPs.  Current yield on the portfolio is 5.50% and year to date the portfolio is up 8.35% (as of 7 August 2014).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.