Energy as Coupon

Chidem Kurdas

Despite controversies over new pipelines and fracking, energy infrastructure is becoming an investor mainstay. Money has been moving into Master Limited Partnerships, which own and operate pipelines and facilities to store, gather and process oil, natural gas and other types of energy.

Among the favored products is an MLP Index-tracking exchange-traded note from JP Morgan, with annualized three-year return of 32% and current market capitalization around $4 billion. It pays a quarterly coupon linked to distributions from the MLPs in the index.

Alerian, the firm that provides the index, works with various exchange-traded fund and note sponsors. Chief executive Kenny Feng says the different products are for MLP investors with different goals. If you can invest directly in MLPs that is the best strategy but many can’t and access the industry via ETFs and other funds, he said, speaking at a Capital Link Forum.

MLPs are an alternative to fixed income, says Jerry Swank, manager of Cushing MLP Premier Fund, also at the Capital Link Forum. MLPs will act as a buffer when interest rates rise because their revenue and distributions tend to grow, he argued. By contrast, rising interest rates mean capital losses for bonds.

MLP investors do face choices. Mr. Swank advocates active management rather than the index approach. He is negative about the prospects of certain MLP business segments—for instance natural gas storage, given how cheap natural gas is. The price rose to $2.285 earlier this week on data that US gas production is shrinking.

One risk is that MLP shares can be expensive, with the market price often exceeding net asset valueBut high prices have not discouraged new investment vehicles that specialize in the partnerships. Mutual fund company Legg Mason started an MLP fund last year.  The fund now has $794 million in assets.

This year to date there have been several MLP fund initial public offerings. And energy specialist Tortoise Capital Advisors plans to offer up to $350 million in shares in one of its NYSE-listed MLP funds. Tortoise has more than $8 billion in assets.

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