MLP Returns

According to an August 2013 WSJ article, “over the decade ending July 31, 2013, MLPs generated an average total return, or income plus price changes, of 16% annually; U.S. stocks overall (S&P 500) returned an annual average of 7.6%.”

 

Since June 2006, the Alerian MLP Index had a total return of 76.2% through June 29, 2013. For the 5-year period ending June 29, 2013, the index was up 71.6%. According to a July 2013 article by Max Chen, “the Alerian MLP index and the Cushing 30 MLP index have earned an annual return of 20.5% and 23.6%, respectively, compared to the S&P 500’s 4.5%.” Historically, MLPs have not moved in synch with the S&P 500 (source: WSJ).

 

MLP ETNs

Advisors interested in the track record of these two indexes should look at two ETNs: JP Morgan Alerian MLP Index ETN (AMJ) or the Credit Suisse Cushing 30 MLP Index ETN (MLPN); both of these ETNs have a 0.85% annual expense ratio. Since its April 2009 inception through July 29, 2013, AMJ had a total return of 136.8% (vs. 100.1% for SPY, an S&P 500 ETF). In the case of MLPN, its total return was 49.6% from its April 2010 inception through July 20, 2013 (vs. 41.2% for SPY).

 

The Alerian MLP Index is a capitalization-weighted composite of 50 energy MLPs; the Alerian MLP ETF (AMLP) tracks the Alerian MLP Index.

 

MLP Volatility

Over the past three years (ending 6/2013), the Alerian MLP index had a 0.7 beta. Since January 1997, there has been a very high correlation between the Alerian MLP Index Yield and the BBB-rated Index Yield. During almost the entire period (1/1997 through 6/2013), the yield from the Alerian index was higher.

 

MLP Mutual Fund Expenses

The typical MLP mutual fund has an annual expense ratio of 1.44%; an ETF specializing in energy stocks can have an expense ratio of < 0.15%.

 

MLP GP Incentive

There are two parties to a MLP, the limited partners (investors) and the general partner (GP) who oversees the partnership’s operations. The GP receives incentive distributions rights (IDRs). These IDRs are largely performance-based incentives and are based on cash distributions to limited partners; as distributions increase, so does the GP’s pay (and overall percentage).

 

In most instances, the GP receives at least 2% of what is distributed to the limited partners. As the distribution dollar amounts go up, so does the GP’s share.

 

For example, when a MLP is formed, it might be structured so $10 of distributions per unit are split 98% to investors and 2% to the GP. Annual distributions of $10-$20 per unit result in an 80/20 split. If $20 is going to be distributed, the investor will get $17.80 and the GP will get $2.20 (20 cents + $2.00); GP receives 2% of the first $10 and 20% of the second $10.

 

If distributions are $20-$30 per year, the result might be a 65/35 split (2% of the first $10, 20% of the next $10, and 35% of the final $10 or fraction thereof). Thus, if $26 is to be distributed, the GP would get: 20 cents for the first $10, $2 for the second $10, and $1.80 on the final $6. The GP would receive a total of $4 and each limited partnership unit would receive $22 ($26 - $4).

 

With a number of MLPs, the GP’s cut may get up to 50% for the final range (i.e., the amount of any annual distribution > $50 a unit). This type of incentive is good for the investor and great for the GP, particularly for MLPs lasting a number of years. For example, a price increase due to pipeline demand could easily double the dollar amount distributed after X years. Using the $10 incremental price changes above, the limited partners would see a 78% increase (from $9.80 to $9.80 + $8.00), if the distribution went from $10 per unit to $20 per unit. The GP would experience a 1,000% increase (from 20 cents to 20 cents + $2.00).

 

The split and who gets what and when varies, depending on the structure of the MLP. The MLP may also have a financial relationship with vendors or lenders. Such relationships could increase the amount going to the GP. 

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