Yorkville Capital Management LLC in New York City recently released a study of the master limited partnership (MLP) asset class, “Yorkville Publicly Traded Partnerships Universe Indices: A Complete Study of Risk and Return (1986-2011).”
Yorkville analyzed publicly traded partnerships’ (PTPs) price data and distributions from the asset class’s inception in October 1986 through yearend 2011. An interesting twist to Yorkville’s work is the firm’s development of a series of MLP/PTP indices that allow for more precise classification of the partnerships.
The sectors include, among others: gathering and processing; NGL pipelines; propane; and PTP financials.
According to the report: “While many consider all MLPs/PTPs to be similar investments, our study demonstrates that not all PTPs are created equally. In order to assist a statistical analysis of the asset class, Yorkville developed a classification methodology that groups PTPs by business fundamentals and created Yorkville’s business driver classification systems (BDCS). Classifying PTPs by business drivers grouped the complete space of publicly traded partnerships into 11 distinct sectors, which serve as the building blocks of our study.”
Here are several of the study’s key findings:
- There are two classes of MLPs: infrastructure MLPs (81%) and commodity MLPs (19%).This relationship was the inverse 25 years ago.
- 100% of MLP sectors have outperformed the S&P 500 on a total return basis over the past five years. All but two MLP/PTP sectors had a greater standard deviation of monthly total returns than the S&P 500 over the past five years. 100% of the MLP sectors have a beta less than 1.0 when compared to the S&P 500.
- The Yorkville MLP Refined Product and Pipeline Index had the best all-round investment characteristics in terms of both risk and return. It provided great downside protection and had the best defensive characteristics, while also providing sizeable returns and strong annualized alpha over the S&P 500. The Gathering and Processing sector had the worst risk profile of all the MLP sector indices, primarily due to suffering from the highest standard deviation of any PTP sector.
- NGL (natural gas liquids) Pipelines exhibited a rare combination of having less than market risk, while delivering greater than market returns. Natural Resource MLPs have delivered asset class leading returns over 5 and 10 year periods, due to superior upside outperformance and better than average downside protection.
- E&P MLPs (exploration and production) produced above average performance coupled with an above average risk profile relative to other MLPs sectors. Financial PTPs were by far the worst performing sector of the entire asset class. It was the only sector that has negative five-year performance, has not outpaced the S&P 500, and has yet to recover its losses.
Yorkville had two objectives in undertaking the study and creating the indices, according to the firm’s founder, Darren Schuringa, MBA, CFA.
The first was to provide investors with a concise source of information on MLPs in an effort to reduce some of the assets’ complexity.
The second objective was to create better benchmarks.
“We used our investment knowledge of the asset class and created a business driver classification system that grouped MLPs according to business drivers,” says Schuringa. “This gives investors a truly unique way and more granularity in looking at the asset class. And, the benefit of that, it will help them to make better investment decisions we hope going forward.”
If you invest in or are considering MLPs, the study, which is available online, makes for worthwhile reading.