Articles for Financial Advisors

MLP Returns

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).



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. 

Previous Post

For Advisors by Advisors. Browse all Programs.