Tax-Advantaged High Yields, Recession-Resistant Growth Potential
Master limited partnership (MLP) investments offer a simple value proposition: tax-advantaged high yields and strong recession-resistant growth potential. MLPs allow investors to defer much of their personal income tax liability for years into the future or, in many cases, indefinitely. Potential benefits of the partnership structure are the avoidance of corporate income tax and the flow through to the investor of non-cash charges against income. MLPs typically distribute 100% of their cash flow, which may be much greater than their reported taxable income, and taxes are deferred on excess distributions until the time of sale.
MLPs own, maintain and operate energy infrastructure in North America such as oil & natural gas pipelines and storage facilities. Energy infrastructure is an emerging asset class experiencing rapid growth. MLPs have the ability to generate free cash flow, income and growth potential and can possibly add valuable diversification to portfolios. MLPs distribution growth may provide a natural hedge against inflation. There are also a number of Corporations that hold MLP interests and energy infrastructure assets.
The Energy Supply Chain
MLPs are broadly categorized in three segments: Upstream, Midstream and Downstream.
Energy Infrastructure Market Overview
Since 6/1/2006 the Alerian MLP Index has outperformed the S&P 500 TR with a cumulative gain of 259% versus a gain of 86% for the S&P 500 TR, and 16.6% versus a gain of 7.7% on a compounded annualized basis.1
The total returns of the Alerian MLP Index are, in part, driven by current cash distribution yields of approximately 5.2% which we believe compare favorably to most equity or fixed income alternatives.2
The MLP market has grown significantly – In 2000, there were about 20 publicly traded MLPs with a market capitalization of $20 billion. Today there are about 100 MLPs with a market capitalization of over $500 billion.
It is estimated that the United States requires over $640 billion3 of energy infrastructure investments by 2035 to match new supplies with growing demand, providing prolific investment opportunities.
We believe long-term fundamentals for energy infrastructure remain strong—we believe valuations are structurally inexpensive relative to other yield-oriented equity classes, and today’s prolific organic investment opportunity set more than offsets a more competitive acquisition environment.
(1) Data through 09/30/2014. The launch date of the Alerian MLP Index was 06/01/2006. We believe data from 06/01/2006 through the present represents multiple market cycles.
(2) Source: Alerian. Data as of 09/30/2014.
(3) INGAA North American Midstream Infrastructure through 2035: Capitalizing on Our Energy Abundance, dated March 18, 2014. Data from Alerian and Bloomberg.