Pipelines Beat Equity REITs On Yield, Risk-Adjusted Return And Equity Diversification

 |  Includes: AMJ, BND, GLD, SPY, VNQ
by: Richard Shaw

In our last article on pipeline MLPs, we pointed out that over the long-term pipelines have hugely outperformed equity REITs as well as broad equities. As part of our continuing series on pipeline MLPs, we examine correlation, risk adjusted returns and yield for broad US large-cap stocks, equity REITs, and pipeline MLPs, as well as gold and bonds.

This chart shows the correlations over one year and three years for the S&P 500 (NYSEARCA:SPY), equity REITs (NYSEARCA:VNQ), the Alerian MLP index (NYSEARCA:AMJ), gold bullion (NYSEARCA:GLD) and aggregate US bonds (NYSEARCA:BND). It shows that AMJ has a lower correlation with SPY than VNQ, making it a better diversifier.

We acknowledge that the Alerian index includes some non-pipeline MLPs, but the overwhelming weight of the index is pipelines, and as the most popular pipeline vehicle with the longest history, we use it in this review.

This chart presents the yield, and 3-year data for standard deviation, mean total return, Sharpe Ratio and Sortino Ratio. It shows AMJ with a higher yield than VNQ, lower volatility, an approximately equal total return, a higher Sharpe Ratio and a much higher Sortino Ratio.

The yield, standard deviation (volatility) and mean return are self-explanatory. The Sharpe and Sortino ratios are measures of risk adjusted return.

The Sharpe Ratio is the mean return in excess of the risk-free return (basically the very short-term Treasury rate), that difference divided by the standard deviation -- the risk return obtained for the risk taken. The Sharpe considers all volatility, which includes positive as well as negative deviation from the mean.

The Sortino Ratio is the same as the Sharpe, except that it measures return against only negative deviation from the mean.

Both real estate and pipelines are real property. Both have a role in portfolios. However, we favor pipelines over equity real estate because of their more strategic, infrastructure character. Individual real estate properties can come and go without national significance, whereas pipelines are critical to the way our entire transportation, electricity, heating, and industrial base operates -- by moving crude oil, natural gas, refined products, ammonia and some other fluids necessary to the working of our economy.

On top of those thematic issues, the data shows that, at least over the past few years, pipelines have performed very well in absolute terms and relative to equity real estate.

Disclosure: QVM has positions in SPY, VNQ, AMJ and GLD in some accounts as of the creation date of this article (May 29, 2012).

General 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.