I have always favored owning individual master limited partnerships [MLPs] as opposed to the closed-end fund [CEF] alternatives. The reasons for this were twofold:
1. I started accumulating MLPs around 2004, when few, if any closed-end [MLP] funds were in existence.
2. Every time I checked the [MLP] closed-end funds, just about all of them were selling at fairly staggering premiums to their net asset value [NAV].
Recently, when perusing CEFs on cefconnect.com I noticed that while the universe of [MLP] closed end funds has expanded significantly, some of the ones that I have followed in the recent past were now selling at, or reasonably close to a discount to [NAV].
In this article I wish to provide a profile of four [MLP] closed end funds that are fairly attractive at this point in time.
Closed End Fund VS. Individual MLP Ownership
Many articles addressing the pluses and minuses of owning [MLPs] individually, or owning their closed end fund counterparts have appeared on SA. Briefly, here are some of the more salient points and issues:
- MLPs generally issue K-1's, which many investors see as complicated when it comes to preparing income taxes.
- Due to tax treatment, many believe that individual MLPs should only be held in taxable accounts.
- Individual MLPs held in non-taxable accounts could generate enough unrelated business taxable income [UBTI], resulting in potential tax liabilities.
Let's look at some of the advantages of owning [MLP] closed end funds:
- The closed end fund shares do not generate [UBTI].
- You will not receive any K-1's, only a single 1099 form each year.
- Just about all of the [MLP] closed end funds are "C" corporations as opposed to Registered Investment Companies.
- [MLP] closed end fund dividends are classified as qualified dividend income (a portion of which could be return of capital).
- Closed end fund can use leverage (both good or bad, depending on market performance).
Let's take a closer look at four potential [MLP] closed end fund portfolio candidates.
Kayne Anderson Energy Fund (KYE)
KYE has as its objective generating a high total return plus current income. It invests in midstream (pipelines and infrastructure) MLPs, general partners, and shipping partnerships.
It presently sells at a 1.70 percent premium to [NAV], and as recently as last week traded at a slight discount. The current yield is 6.42%, with a $.48 quarterly dividend , which for the past two quarters is reported as income.
Fees are rather high at 4.38 percent (management fee is 1.83 percent). The fund uses leverage of 31.1 percent.
Year to date, KYE's price has returned 25.9 percent while its [NAV] has increased by 24.7 percent.
Approximately 89 percent of its holdings are in midstream and transportation assets, and the remaining 21 percent are in debt instruments.
Eighty-five percent of investments are in North America and 15 percent in Canada.
Cohen & Steers MLP Income & Energy (MIE)
The investment objective of MIE is total return. It is a relatively new fund, having traded since March of this year. It is invested in some of the largest midstream MLPs and shipping and offshore partnerships.
MIE presently sells at a 0.52 percent premium to [NAV], and pays a quarterly dividend of $.315 for a current yield of 6.46%.
The expense ratio is 1.88 percent and leverage is at 31 percent.
Since inception, MIE has returned -.3 percent and the [NAV] has increased by .92 percent.
For a more complete overview of its holdings and a new factsheet click on the Fund Sponsor Website link at cefconnect.com.
Tortoise Energy Independance (NDP)
NDP seeks high total return by investing in companies involved in oil and gas production. It is invested in a few MLPs (29 percent), but mostly focused on mid to large exploration companies.
NDP sells at a 7.8 percent discount to [NAV], and is paying a quarterly dividend of $.4375 for a present yield of 7.22%.
Its management fee is 0.95 percent and leverage is just 11.7 percent.
Year to date NDPs price has increased by 16.5 percent, while its [NAV] has increased by 18.9 percent.
NDPs investments are classified as "global" (71 percent), with the remaining 29 percent in the U.S.
Cushing Royalty & Income (SRF)
SRF seeks high total return and income by investing in both U.S. and Canadian royalty trusts and MLPs. SRF has been off of my viewscreen for several months, until just recently when the gap between a premium and discount closed significantly.
SRF presently sells at a 0.27 premium to [NAV], pays a quarterly dividend of $.50 for an annual yield of 10.68% at today's prices.
Total annual fees are 2.22 percent, and effective leverage is low, at 9.48 percent.
Year to date, SDF has returned only 3.8 percent, while its [NAV] has increased by 3.7 percent. I believe the low return is due to its heavy weighting in exploration and production MLPs (about 71 percent) and royalty trusts (12 percent). However, its royalty trust investments are in those trusts with perpetual, and not finite lives.
All of SDFs investments are in the U.S.
Each of these four closed end funds are of interest from the point of potential inclusion in the Protected Principal Retirement Strategy portfolio at some point in the near future. Each is a bit different insofar as stock holdings go. KYE's and MIE's predominant focus is on the midstream assets, NDP affords exposure to both MLPs and oil and natural gas producers worldwide, and SRF affords exposure to upstream MLPs and royalty trusts.
Both NDP and SRF offer yields that are attractive from our portfolio's standpoint (but carry a higher risk), while KYE and MIE afford a slightly lower (but yet attractive) yield while exposing investors to more stable midstream assets.
My strategy is to continue to watch all of these near term. Our portfolio presently contains two finite life U.S. royalty trusts and two perpetual life Canadian royalty trusts. I would like at some point to exit the two U.S. trusts and replace them possibly with a position in SRF.
Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the closed end funds mentioned.