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Portfolio > Alternative Investments

Morningstar Rolls Out Two MLP Indexes as Sector Soars

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Morningstar said Thursday that it has created two MLP-focused indexes, the Morningstar Composite Index and the Morningstar MLP Focus Index, which track energy master limited partnerships (MLPs).

According to the research firm, the composite index targets the top 97% of all publicly traded energy MLPs by market capitalization, while the focus index comprises 20 high-quality MLPs that are trading at the most favorable risk-adjusted prices relative to what Morningstar’s equity research analysts believe they’re worth.

“We’re launching the Morningstar MLP Indexes to offer investors benchmarks that they can use to compare, select and monitor their investments to help them make better investing decisions,” said Sanjay Arya, senior vice president of Morningstar Indexes, in a press release.

According to Morningstar analyst Jason Stevens, MLPs have “been on a tear this year.” The Morningstar MLP Composite Index was up 37% year to date on Wednesday, compared with the 11% gain on the S&P 500. And the MLP Focus Index has risen 40% year to date.

Energy master limited partnerships engage in the transportation, treating, processing, refining, storage, marketing, exploration and production of natural resources. MLPs are asset-heavy, capital-intensive businesses that tend to enjoy partial structural monopolies.

In many cases, such as long-haul pipeline transportation, MLPs benefit from government-regulated rates of return that can be more favorable than regulated utilities.

“Energy master limited partnerships tend to have generally stable cash flows, which can support generous cash distributions. They may also provide portfolio diversification as they have shown little correlation with most of the major asset classes,” said Jason Stevens, senior equity analyst and head of Morningstar's MLP research, in a statement.

“Thanks to their high yields and solid performance, MLPs have attracted a good deal of attention. Through November of this year, more than $2.4 billion has flowed into diversified MLP investments, like open-end mutual funds, ETFs, and ETNs. There has also been tremendous growth in MLP offerings. In 2009, there were only about five diversified MLP investments, now there are closer to 20,” Stevens said.

The Morningstar MLP Composite Index is a diversified, distribution-dollar weighted index that emphasizes partnership size as well as distributions. To qualify for inclusion in the index, the MLP must be involved in the production, processing or transportation of energy or natural resources. The Morningstar MLP Focus Index consists of the top 20 analyst picks from Morningstar’s MLP coverage list.


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