MLPs and Treasuries - The Only Winners in 2010

 |  Includes: AMJ, MLPL, SPP
by: Avi Morris

The Alerian MLP Index had its greatest year in history in 2009, gaining an amazing 62% (off a depressed low). It started this year strong but sputtered in February, went up in April, was hit with selling in May and has been surging since then for a YTD gain of 14% (what would be a great year ordinarily). Most noteworthy is the advance of 60 points (22%) in the last 2 months (however, it slipped back 8 in the last 2 days) while popular averages made little progress. The yield has been reduced to only 6.7%, low compared with historical standards. MLPs are getting more attention helped by new MLP ETNs and mutual funds which have been buying MLPs, especially in Q2.

Below is the table for the Alerian MLP Index (AMZ) and its comparable index with reinvested income (AMZX) for key dates:

Jul 13, 2007 342.14 750.14---record date
Dec 31, 2008 176.29 428.12
Dec 31, 2009 285.84 755.26
Jul 28, 2010 326.16 896 (est)

While MLPs are having a great year, there is nothing dramatically new in their businesses to justify these gains. The out-performance by the MLPs compared with popular averages is becoming embarrassing. There are only 2 clear investment winners in 2010, MLPs and Treasuries (with their low yields) making for an odd couple.

Fundamentals for long term investors remain in place. America needs more miles of pipelines to move energy and financing is available for capital programs. As was the case 10 years ago, the outlook for MLPs is excellent. But their units may have risen too far, too fast. Believers will recognize setbacks as opportunities to invest and lock onto higher yields.

Additionally more light is being shed on MLPL, the new 2X (doubler) MLP index fund from UBS aimed at doubling market swings of the index and doubling the investment income (over 12%). Beware. Doubler funds have poor track records and carry substantial risks. Investors should understand risk factors because the fund rules (like at other doublers) were written by the fund managers to favor their interests over those of investors. By way of contrast, traditional tracking funds are different. AMJ, for example, is designed to track the MLP index and net investment income is distributed to shareholders. It should do its tracking job well.

One final thought. Constellation Energy Partners (CEP) dropped the distribution in 2009 and has been left behind. The units are floundering around $3. Their main web page has a new fact sheet, their way to reach out and attract investors. Their Q2 report will be released on August 6. If they get their financial house in order, there could be a distribution next year. The units are for those willing to assume substantial risk in pursuit of large rewards.

Disclosure: No positions