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September 18, 2011 at 02:32 PM
Energy master limited partnerships (MLPs) have an enviable performance record. Over the 3-, 5- and 10-year periods ending June 30, 2011, the Alerian MLP Index (AMZX) of 50 prominent MLPs has outperformed REITs, the Dow Jones Industrial Average, utilities and the S&P 500. Additionally, MLP-investors continue to benefit from high, tax-advantaged and increasing distributions.
The main drawbacks for prospective investors are MLPs’ tax accounting with the dreaded Form K-1 and the potential for unrelated business taxable income (UBTI) treatment if the MLP units are held in a retirement plan. Separate managed account managers who invest in MLPs downplay the importance of these two features; nonetheless, they matter for many advisors.
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“Many advisors do not want to receive K-1s for their clients and a lot of that goes back to their underlying clients who tell their advisors I don’t want to deal with K-1s,” said Gabriel Hammond, founder of SteelPath Fund Advisors in Dallas, in an interview with AdvisorOne.
“So direct (MLP) ownership through a separately managed account or a private fund typically isn’t an option for advisors allocating across a wide client base,” Hammond explained. “They want an investment vehicle that they can allocate across all of their accounts regardless of the size of the investor, regardless of whether, for example, it’s an IRA or 401(k) plan. They want an investment vehicle option that’s essentially one size fits all; that’s plug-and play-across their investment platform.”
Until 2009, closed-end funds were the only available alternative to direct MLP-ownership. Since then, however, numerous exchange-traded funds (ETFs), open-end funds (OEFs) and exchange-traded notes (ETNs) have launched. Although the structures vary, they share several features. First, they provide diversified portfolios. Second, these funds report on the more familiar Form 1099 instead of K-1s.
There are some key differences among the funds, however, and those differences can be significant. In its MLP Monthly: July 2011 issue, Wells Fargo Securities reviewed MLP funds’ one-year performance versus the Wells Fargo MLP Index.
