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Pipeline master limited partnerships are a useful component in dividend oriented portfolios.

In the past two articles (Part 10 and Part 9), we presented operating data, yield and market performance data for the 20 largest dividend paying pipeline master limited partnerships in the Alerian MLP index.

Older articles on MLP's (Parts 1-8) are accessible from Part 8.

In this article, we add some volatility data and worst period performance data; then review the 10-year backtest performance of an equal weighted, monthly rebalanced portfolio of 6 selected MLPs from that list of the top 20.

The list of six are not a recommendation to buy, but we think represent a reasonable selection. We will backtest a different set selected on other criteria in another article.

The top 20 MLPs:

Enterprise Products Partners LP EPD
Kinder Morgan Energy Partners LP KMP
Plains All American Pipeline LP PAA
Energy Transfer Partners LP ETP
Magellan Midstream Partners LP MMP
ONEOK Partners LP OKS
Energy Transfer Equity LP ETE
Enbridge Energy Partners LP EEP
MarkWest Energy Partners LP MWE
Williams Partners LP WPZ
Buckeye Partners LP BPL
El Paso Pipeline Partners LP EPB
NuStar Energy LP NS
Regency Energy Partners LP RGP
Targa Resources Partners LP NGLS
Sunoco Logistics Partners LP SXL
Copano Energy LLC CPNO
Boardwalk Pipeline Partners LP BWP
Western Gas Partners LP WES
Genesis Energy LP GEL

You can read a summary business description for each at our blog, which also provides a link to the MLP websites.

Figure 1: Selected Data for Top 20 Alerian MLP Index Positions

Figure 1 presents the top 20 MLP's in alphabetical order by symbol, and includes March 30, 2012 data for the 5-year growth rate of dividends, the worst 3-month total return in the past 10 years, the 3-year total return, the 3-year standard deviation (volatility), and the ratio of the total return to standard deviation for 3 years.

We color coded the data with a graduated set of colors from green through yellow through red, for best to worst.

There are certainly other perspectives to take on MLPs, such as what they do and where they do it, as well as their leverage and distribution coverage. This particular exercise, however, is based on distribution growth, return, volatility, and worst short-term drawdown.


(Click to enlarge)

There are 54 pipeline MLP's in the Principia database. An Excel file (XLSX format) providing this and some additional information for all 54 MLP's is available for download by registered users at our RationalRisk website.

Based solely on the data in Figure 1 (and we repeat you should examine more factors), these 6 MLP's look most attractive to us (alpha order):

  • BPL
  • EPD
  • KMP
  • MMP
  • OKS
  • SXL

Let's put them into an equal weighted, monthly rebalanced portfolio an backtest it for 10 years to see how it looks.

Figure 2: Rolling Returns Per MLP for Various Time Periods

This data compares the equal weighted portfolio to the S&P 500, and also presents the individual MLP rolling total returns. You can see the portfolio beat the pants off of the S&P 500, until just recently when it significantly underperformed the S&P 500 for 3 months through March 30.

The benchmark here and throughout this exercise is the S&P 500.

Figure 3: Multi-Period Volatility, Total Return and Sharpe Ratio

This figure presents the 3-year, 5-year, and 10-year rolling standard deviation, mean return and Sharpe Ratio (total return in excess of "risk free return of short-term Treasuries divided by the standard deviation).

This 6 MLP portfolio was superior to the S&P 500 in all periods by all three dimensions.

Figure 4: Relative Cumulative Portfolio Growth

This chart visually compares the outcome of equal amounts initially invested in the S&P 500 10 years ago versus the 6 equal weighted MLPs. The message is the same as from Figures 2 and 3. The MLP's outperformed.

Figure 5: Quarter-by-Quarter Relative Performance

Even though the MLP's outperformed over long periods, they did not outperform over all short periods (that is the case with virtually any portfolio).

The chart shows the total return for the quarter for the MLP portfolio minus the S&P 500 total return for the quarter.

In this case, the MLP portfolio underperformed in 14 of 40 quarters, but no more than 2 quarters back-to-back.

The worst 3 months in the last 10-years for the MLP portfolio was negative 20.36%. That compares to negative 25.96% for the S&P 500. The drawdown was not as bad, but still significant, and still enough to freak out and shake out many investors.

The good thing for those who hypothetically would have stuck with their positions, was the high yield that kept money flowing in. For retirees or foundations or pensions with current payout requirements, that cash flow is important.

The 3-year Beta for the 6 MLP portfolio was 0.49. That means the day-to-day price movement for the portfolio is comparatively non-reactive to movements in the price of the S&P 500.

There is not enough historical data to say how the AMJ (JP Morgan Alerian MLP Index ETN) would have done over 10 years.

Over its lifetime, AMJ has a correlation of 0.70 to the several broad US stock indexes. It is probably reasonable to assume that this 6 MLP portfolio would have a similar correlation.

Disclosure: QVM has positions in AMJ as of the creation date of this article (May 2, 2012).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.

Source: MLPs -- Part 11: Review Portfolio Of 6 Selected MLPs From Top 20 In Alerian MLP Index