If your clients have been aching to invest in master limited partnerships without the usual headaches that they bring, you now have options.
And if they haven’t been asking for that, well, you have another topic of conversation that you can raise with them.
Generally speaking, MLPs are designed to invest in natural resources. They carry tax benefits that were put in place to facilitate more investment in the country’s energy infrastructure. They’re structured as partnerships in that they pay out all the cash they generate as distributions to investors. But their complicated structure also made them difficult to own for most investors.
But SteelPath Fund Advisors launched three funds in April that basically took the MLP structure and made it available as a mutual fund. Portfolio manager Gabriel Hammond says the funds retain the high returns, low correlation and tax benefits of MLPs, while making them more convenient for advisors and their clients. For tax purposes, the client will get the 10-99 form that he’s used to instead of going through the hassle of a K-1 that MLPs would traditionally require. The new funds from SteelPath are MLP Income Fund, MLP Select 40 Fund, and MLP Alpha Fund.
Despite the tax structures involved with these investments, Hammond says SteelPath considers itself infrastructure investors first and foremost, and MLPs second. And in that respect, he lists the advantages of these investments just as any infrastructure investor would: hard assets, consistent payments, low correlation. He takes a particularly long view, however. He says a new pipe in the ground can last longer even than the world’s supply of oil. So what then? No worries, he says, because there will always be some sort of energy supply that needs to be transported, whether it’s ethanol, hydrogen or some sort of liquefied coal.
Fine, but for the next 150 years, why not just buy a good infrastructure fund to get this sort of exposure? He says many investors want a pure-play energy infrastructure exposure. And most other infrastructure funds are not so focused. They will buy other things such as toll-roads, utilities, or water resources, whereas his funds focus solely on energy infrastructure.
And in case you’re worried that the price of oil could drop (it wasn’t all that high in the 90s, if you recall), that won’t be a detriment for his funds. Since the funds are based on the transport of oil, the quantity of oil is what counts, not the price. So unless we stop using oil all together, he feels confident in the infrastructure’s ability to generate income.
To be sure, this is a new area for investors. Currently, Lipper doesn’t even track it, but Hammond compares this business today with the beginning of an IPO boom in REITs in the late 1980s. SteelPath says that there is currently a $150 billion market cap in this industry, which is double the amount two years ago and it expects that to double again in another two years.
There are a lot of issues to discuss here with your clients. If they want this type of investment, they need to first understand the structure. And they have to understand the industry of energy infrastructure. And it’s particularly important that they understand the implications of having such a focused investment and how that fits into a broader risk-return continuum.