The Best Way to Evaluate MLPs

The component MLPs are equally weighted in the index, and Yorkville will review the list quarterly and adjust it as needed on a regular basis.

Large- and mid-cap partnerships represented 90% of the index as of the late 2013, and infrastructure MLPs accounted for 65% of it.

Growth Case

Yorkville compared the performance of the distribution-growth leaders with its overall MLP index.

The results of the study make a strong case for using distribution growth when evaluating a partnership’s investment potential.

• Distribution growth leaders delivered average distribution growth more than two times that of the MLP Universe:  12.3% versus 5.2%
• MLPs in general, as measured by the MLP universe, were 11 times more likely to cut distributions than distribution growth leaders.
• Distribution growth leaders exhibited greater distribution stability than the overall asset class. Of the observations studied, the leaders increased their distributions year-over-year 97% of the time versus 79% of the time for MLPs in general.
• Growth leaders significantly outperformed the broader MLP universe with annualized returns of 24.8% versus 17.9%. That translates to 39% greater returns per annum.
• Average yields for the leaders were slightly lower than the universe average but still attractive: 7.4% versus 8.6%.
• Distribution growth leaders have exhibited slightly more risk than the MLP universe as measured by the standard deviation of monthly returns: 23.6% vs. 19.5%.
• The growth leaders index had low correlations to every asset class, including equities (0.51), fixed income (-0.15), commodities (0.56), REITs (0.40) and utilities (0.43).

“MLP Distribution Growth Leaders provide more reliable income than the broad MLP universe, while growing income streams preserve purchasing power by serving as a hedge against inflation and protection against rising interest rates,” Schuringa said. “Growth MLPs offer optimal fundamental total return exposure to MLPs.”

(The report, “Yorkville MLP Distribution Growth Leaders Index: A Complete Study of Fundamentals, Returns, Risk, and Correlations,” is available online.)