I have discovered that I can buy Steelpath MLPDX.lw with the load waived through Vanguard which seemed an attractive option until I reviewed the Tax Analysis on M* and found the comparison to AMLP and AMJ for example was not so compelling regardless of the 7.38% current yield. In my research there is also mention of paying capital gains on the accrued tax liability when selling the fund which I am not sure how to quantify (there is an estimated 17.05% allowance made in the expense ratio for deferred taxes shown in the Prospectus if realised). Yes, the yield is attractive but are there dangers lurking over and above the general risks associated with this asset class?
I know there have been prior discussions on MLP's but would be grateful for any thoughts on this particular subject. As my first post please take it easy on me until I get up to speed.
Comments
Personally, I owned Salient MLP Energy and Infrastructure, which I think is an excellent and unique MLP closed-end fund (SMF), which can hedge. However, it ran up and I took profit; I think people really piled into this asset class because of the yields and they are overbought. I own BIP (Brookfield Infrastructure) and that's the only single MLP I currently own, as for me that's a unique and long-term holding. I also own TTO (Tortoise Capital), which is a private equity MLP fund that is transitioning to be an infrastructure REIT, and I'm in that to a mild degree as I'm interested in the infrastructure REIT it will eventually transition towards.
I do think MLPs are interesting longer-term, but as a smaller, supporting player investment. In the short-term, I think interest in the asset class is a little overdone, but seems to be calming down since the start of the year.
This is definitely not a conservative asset class, as well - while MLPs provide a big yield, they also went down quite a lot in 2008.
http://seekingalpha.com/article/500871-master-limited-partnerships-dark-clouds-ahead
and in particular, the following:
2. As interest rates start to move up, it will negatively affect the MLP. First, investors may choose other income producing assets. We see this phenomenon in other high yield sectors, such as utilities.
Additionally, MLPs constantly need access to capital to continue to grow. As interest rates rise, their costs rise and their margins shrink. If they issue shares to raise capital, well, there is asset dilution. This problem is unlikely to arise until interest rates move up, but it is worth keeping on your "radar".
3. Launching of ETNs vs. ETFs. This is a very big problem as ETNs, by their very nature, do not buy any securities but just track an index. This is very different from an ETF, where new money is put to use through direct purchases in the securities comprising the fund.
Though it is not disclosed anywhere, the ETN issuer typically trades derivatives (calls, puts, etc) which would allow them to completely hedge their upside exposure with zero risk and next to no capital expenditure. Their tracking fee (85 basis points) pays for the hedging costs. The ETN issuer doesn't worry about downside exposure because the bulk of the money is invested somewhere else. If the index goes down, they can actually show a profit.
By completely hedging the position, the ETN issuer can now use the investor capital in any way it pleases. The result is that much of the money invested by the public does not go into the sector which would otherwise have increased the share value of the MLPs.
This creates a problem for the MLP investor, as it draws money away from the sector. Imagine if all the investor monies went into an MLP ETN. No-one would be buying actual shares and the sector would collapse.
Though this is extreme, as more investors move towards ETNs, instead of individual MLPs, the share price of MLPs will not show a level of price appreciation consistent with the money that is, in theory, allocated to them. Several more ETNs are due to launch soon, so the problem will likely be exacerbated.
Holding MLPs long-term for yield is fine (or in the case of Brookfield, yield + unique take on infrastructure investing), but I'd wait for more attractive entry points, in other words. I own Brookfield Infrastructure and I own - through owning Loews (L) - Boardwalk Pipeline and Highmount Exploration/Production. I also own a small position in TTO which, as I noted above, is a long-term hold as it transitions from an MLP fund.
The only fund I'd own is the Salient fund mentioned above, which is a more flexible fund that can hedge (interest rate, equity, credit, commodity). ("The Fund may enter into various swap transactions, including interest rate, total return, currency and credit default swap
contracts (“CDS”) to manage interest rate, currency or credit risk. The Fund may enter into futures contracts to manage exposure to interest rate, equity and market price movements,
currency and/or commodity risk.")
That fund also offers shareholder conference calls and an informative website. (In my experience) one of the fund managers also answered an email question.
So, that's really the only thing I'd be interested in in terms of MLP funds, but it would have to really come in in terms of price and premium.