What are the benefits of investing in MLPs?
MLPs are an alternative asset class uncorrelated to equities, commodities or fixed income. The underlying assets of the public partnerships are primarily U.S. energy infrastructure. MLPs are a hybrid between fixed income, offering high current yields, and equities, offering capital appreciation and an inflation hedge through growing distributions.
How have MLPs historically performed?
MLPs have consistently outperformed broader equity markets. Yorkville’s Liquid MLP Index has outperformed the S&P 500 in ten of the past twelve years. This outperformance is consistent across economic, interest rate, and commodity price cycles. The index has delivered annualized total returns of 19.7% since 2000 versus 1.6% for the S&P 500 generating positive annual alpha of 18.1%.
How are MLPs correlated to other asset classes?
MLPs have a very low correlation to other asset classes. MLPs have an average correlation of 0.5 to equities, 0.4 to REITs, and 0.5 to global infrastructure. Their correlation to commodities is even lower dropping to 0.1 to natural gas and 0.3 to oil. Their correlation to bonds is flat, slightly negative, and slightly positive depending on the fixed income category. In short, MLPs when added to a portfolio increase diversification, lower the risk profile, and enhance returns – greatly pushing out the efficient frontier.
How stable are the cash flows from MLPs?
MLPs generate stable income streams with limited exposure to commodity prices. Pipeline operators generally enter into long-term contracts that charge rental fees based on leased capacity ("ship-or-pay"). These contracts are typically access based and not volume based. Furthermore, long-term contracts usually have some type of step-up in pricing providing a hedge against inflation.
Why did MLPs underperform equities in 2008?
The underperformance in 2008 was due to technical not fundamental reasons. Credit hedge funds were forced to liquidate their MLP holdings in 2008 to meet margin calls when they were unable to sell their collateralized debt obligations. Strong underlying fundamentals, 74% of all MLPs maintained or increased their distributions during the credit crisis, resulted in an 82% rebound in the Yorkville Liquid MLP Index in 2009.