MLPs May Increase Portfolio Performance

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MLPs May Increase Portfolio Performance
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MLPs May Increase Portfolio Performance

MLPs May Increase Portfolio Performance

Owning oil and gas pipelines can add octane to a portfolio’s performance, particularly in today’s energy and economic backdrop.

It’s our job to help clients gain the proper exposure to safety, market and aspirational asset categories. It’s also our job to identify pockets of the market that, when available, have attractive fundamentals and/or characteristics worth considering. Oil & Gas MLPs in the midstream space (storing and transporting energy) has caught our interest for years and remain an asset class of interest. While we take care of researching and handling the details for our clients, it doesn’t hurt for you to pipe into the conversation. Here’s a quick primer on the space.

What are MLPs?

To qualify as a Master Limited Partnership (MLP), ninety percent of a company’s income must derive from exploration, production or transportation of natural resources or real estate. Currently, most MLPs provide oil and gas pipelines or refinery services for oil companies. They are like the tollways and parking lots for the oil and gas industry, tasked and contracted to move product which, at least in the current environment, is always in demand to fuel homes, businesses and automobiles.

MLP Characteristics

MLPs represent a relatively small sector of the market and have some interesting characteristics. They were first formed in the 1980s, and they combine aspects of a partnership and aspects of a corporation. For tax purposes, MLPs are treated like limited partnerships, meaning profits and losses pass through to the limited partners. Generally, MLPs offer tax advantages with risk commensurate with this currently high yielding equity asset class.

MLPs 2018 Performance

This summer, in particular, reminds us why we like the fundamentals of the midstream MLP market. MLPs began to shine in the second half of 2018. In fact, MLPs led as midstream markets posted gains for a sixth straight week. Over the past six weeks, MLPs jumped nearly 20%.

Oil transports are far from the only players in the midstream MLP marketplace. Natural gas constituents continue to contribute to MLPs returns and were the best performing sub-sector for July 2018 and are on track to do the same for August 2018. Energy exports–crude oil, natural gas and gas liquids–maintain record levels, thus providing a shining growth source for midstream companies.

[note added 10-01-18: Since August 15, 2018, the Alerian MLP Index is up 11.69%. Current yield is 7.68%, and at 33% tax, the tax equivalent yield is 11.46%.]

MLPs and Long-Term Investors

Pairing current growth outlook and continued production increases with, in our opinion, attractive current valuations, we believe MLPs are well positioned for long-term investors seeking attractive income, upside growth potential commensurate with the volatility risks in this asset class. The investment represents an investment opportunity we believe can add octane to a portfolio. Whether used modestly in the market category or slightly more concentrated in the aspirational category, it’s worthy of consideration.

Next Steps

We are available to answer your specific questions about MLPs, Evidence-Based Investing, or any other wealth management or portfolio management topic. If you are a client, call us at 303-721-7000 and we’ll have one of our investment team members answer your questions.

If you are not yet a client, call (303-339-4482) or email Cathy Wegner, Director of New Client Engagements at cwegner@janiczek.com. She’ll get things set so we can begin the conversation and explore opportunities to work together.

Learn more about Evidence-Based Investing here.

 

Kyle Kersting

Kyle Kersting, CFA is Director of Investments at Janiczek® Wealth Management. Kyle’s experience includes expanding the firm’s Evidence-Based Investing platform for high net worth investors ($2 to $20 million portfolios) and ultra-high net worth investors ($20 million+ portfolios). He graduated from Colorado State University with a Bachelor of Arts degree in Finance and Real Estate, and Regis University with a Master in Business Administration degree with a concentration in Finance.

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