MLP Update: Favorable Time For Entry Now Exists

We believe MLPs offer an attractive combination of tax-advantaged income and growth. Cumberland manages special MLP portfolios and has asked our subadvisor, Rick Daskin, for an overview of the current state of MLPs. This input is timely, since a column last weekend in Barron’s discussed this asset class. Rick’s bullets follow.

• The market seems to focus on MLPs’ vulnerability to declining oil prices. There is only a moderate positive correlation to energy prices. Midstream MLPs are primarily in the business of transportation; and while they are affected by prices, their primary risk in the market is volumetric and spread-based.

• While some energy-related companies are cutting or freezing dividends, midstream MLPs are primarily slowing distribution growth, a vast and positive difference for valuations.

• The market also appears worried about MLPs’ exposure to generally higher interest rates in the future. Our research indicates that MLPs, for various fundamental reasons, are more exposed to credit-spread risk and not as much to the level or direction of interest rates.

• The factors mentioned above have created a favorable entry point for investing in MLPs. Current yields on the Alerian Index, a benchmark for MLPs, are slightly under 6%. This figure represents a healthy 375 bps (3.75%) pick-up to U.S. 10-Year Treasury bond yields.

• The infrastructure build-out of the North American energy business still has a number of years of attractive growth ahead of it. MLPs stand to benefit from further growth in the infrastructure needed to transport energy.

• Some mature partnerships are being bought out by their corporate sponsors/general partners. In our view such buyouts represent a combination of knowledgeable buyers acquiring cheap assets, attractive financing terms, and a reset of incentives for partners based on market forces. This trend highlights the attractive asset valuation of MLPs. We also expect other types of consolidations to benefit MLPs and backstop their prices.

At Cumberland, we believe that well selected MLPs have a place in a broadly diversified portfolio owned by an individual American taxpayer. We do not expect any tax-change attack to succeed, so we are recommending MLPs based on a “no change assumption” in their federal income tax status.