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There are currently 25 closed-end funds with a combined $19.6 billion in assets under management that focus on master limited partnership (MLP) investing in a US listed closed-end fund structure. This equals about 8% of the $250 billion in total assets in the CEF structure.

Avg. CEF MLP Fund

Discount

Tot Yield

% RoC (30Day)

Net Assets

Leverage

1 Yr NAV TR

1 Year Mkt Pr TR

Avg CEF MLP Fund

-0.43%

6.6%

58%

$784MM

23%

+20.1%

+14.1%

Source: CEFA's Closed-End Fund Universe November 1, 2013

However, if we break out the MLP CEFs that are C-Corps which can have 100% true MLP exposure vs. the RICs MLP funds which can only have 25% true MLP exposure, we see some differences. The RIC MLP funds retain tax benefits from being a regulated investment company, and therefore have a slightly different structure. There are a few key differences in how they are priced by investors in the secondary market.

A Regulated Investment Company is an open-end or closed-end fund, real estate investment trust (REIT) or unit investment trust (UIT) that is eligible to pass through the taxes on capital gains, dividends or interest earned on fund investments which they pay directly to shareholders. A regulated investment company is qualified under Regulation M. of the Internal Revenue Service (IRS) to pass taxes onto investors to be taxed at the individual level. Regulated investment companies are required to distribute 98% of net investment income to avoid paying a 4% excise tax.

In looking at the RIC MLP CEFs vs. the C-Corp MLP CEFs we see the following differences. The key differences we want to point out is that with a RIC MLP CEF, you can buy a MLP fund at more of an absolute discount, with essentially the same indicated distribution yield and historically a slightly better 1 year NAV performance. We believe this is because more of the RIC MLPS funds have larger deferred tax liability (DTL) write downs helping increase comparable NAV performance.

Dedicated MLP funds do not qualify for pass-through treatment as RICs. A fund may qualify as a RIC only if less than 25% of its portfolio is invested in MLPs. A dedicated MLP fund typically exceeds this 25% threshold and by default has no choice but to be treated as a taxable C-corp.

Disc

Tot Yield

Avg Lev

30 Day RoC

Avg Net Assets

1 Yr NAV TR

1 Yr Mkt Pr TR

C-Corp MLP CEF

+1.4%

6.6%

22%

58%

$784M

19.5%

14.1%

RIC MLP CEF

-6.1%

6.5%

26%

61%

$533M

22.0%

13.9%

Source: CEFA's Closed-End Fund Universe November 1, 2013

The deferred tax liability generally reflects taxes on net unrealized gains, which are attributable to the difference between fair market value and tax basis of the portfolio and the net tax benefit of accumulated capital or net operating losses. The return of capital portion of the distribution reduces the tax basis of the asset, creating additional deferred taxes.

We believe that an undiscounted deferred write down is overstated in a fund's NAV, and the NAV should be higher. This means that you can buy more real MLP assets, in our opinion, by looking at this date point from the balance sheet of the fund.

If you look at the MLP closed-end fund that have a DTL vs. those that do not, we see a adjusted average discount of -9.33% for the write downs being fully added back to the NAV. The average fund without a DTL is trading at a premium to NAV.

In a sector looking to meet about a 6% yield expectation and modest capital appreciation, we feel that such a large difference is important to understand when selecting funds to make-up part of your diversified portfolio. The key risk you will want to avoid is that MLP funds regularly offer secondary offerings when the premium goes over 4%-5% of NAV.

This will usually knock the market prices closer to NAV in a short and dramatic fashion. In this case, we would look to own MLP funds with good NAV performance, a good adjusted discount due to the DTL and yet no more than a 4% actual premium. We tell investors that to be successful in CEFs you need to be patient and diligent; they are a special part of the capital markets where the smaller investors can add tremendous value to their portfolios by holding to some simple rules and watching for key information on an ongoing basis.

Source: What Is The Deal With Premiums In MLP CEFs?