Managed MLP Portfolios Mostly Fail To Outperform MLP Index, Or Are Unproven

by: Richard Shaw

Today we looked at 38 MLP or MLP heavy energy or infrastructure investment funds, and found that none consistently outperformed AMJ (the ETN indexed to the Alerian MLP index).

The best of the lot, and that outperformed AMJ for 1 month, 1 year and 3 years (but not 3 months) was the CEF, Kayne Anderson Energy Development (KED) (factsheet pdf). According to Morningstar, it generated a 1-year 26.78% total return versus 10.04% for AMJ, and a 3-year total return of 30.30% versus 27.20% for AMJ. The KED distribution yield is 6.49% versus the AMJ yield of 5.21%. KED is 18% leveraged.

The higher expense ratio and the leverage at KED creates a level of portfolio risk that is greater than the comparable risk in the AMJ, however as an ETN, AMJ poses credit risk associated with its issuer, JP Morgan (factsheet pdf).

Both AMJ and KED are suitable for tax-deferred accounts, because they generate 1099 reports, not K-1 reports. There is no Unrelated Business Taxable Income to create problems for tax-deferred accounts. AMJ is a bond (1099-INT) and KED is a C-corporation (1099-DIV).

There are 8 funds with a 5 year performance history, but
AMJ isn't that old yet, so a comparison is not possible. As an alternative control, we looked at the 5-year performance of each of EPD, KMR and PAA, the three largest allocations in the Alerian index.

No fund outperformed either EPD or KMR for 5 years. One fund, First Trust Energy and Growth Fund (FEN) edged out PAA 10.51% to 10.45% for 5 years. FEN (factsheet pdf) underperformed AMJ by a few points for 3 years, but clobbered AMJ for 1-month, 3-months, and 1-year. FEN is also a C-corporation which is good for tax deferred accounts.

Three other funds outperformed AMJ for 1-month, 3-months, and 12-months: CEM (ClearBridge Energy MLP), KMF (Kayne Anderson Midstream/Energy Fund), and JMF (Nuveen Energy MLP Total Return).

Salient MLP & Energy Infrastructure (NYSE:SMF) outperformed for 3-months and 1-year, but like CEM, KMF and JMF does not have a 3-year record. Not being in a short-term game, it's no big deal to underperform over 1 month, so long as it was not a wipe-out of some sort.

So there are some funds out there that beat the index, but like wit stocks in general, most do not, or they have not been around long enough to say with certainty that they can over the long-term.

New funds can frequently outperform older funds because of their smaller size and agility, which diminishes as they grow in size and have to take large positions in larger market-cap securities for either risk management or regulator reasons.

Our list of 38 funds does not include the ETN just released by ETRACS (AMU). It has no real data other than an 80 basis point fee, and is indexed to the Alerian MLP index. Except for the 5 basis point difference in fees, the results should be the same as for AMJ.

UBS issues AMU. The credit risk of a bond from UBS may be different than for AMJ from JPM. The UBS credit ratings from Moody's and S&P are: A2 stable / A negative. The ratings for JPM are: A2 negative / A negative.

Figure 1: List of 38 Funds With Size

Figure 2: With Total Return

Figure 3: Leverage, Yield, Prem/Disc, Expense, and Inception

See our other recent articles about MLPs: active vs passive, and pipelines vs equity REITs.

Disclosure: QVM has positions in AMJ as of the creation date of this article (July 19, 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.

Disclosure: QVM has positions in AMJ as of the creation date of this article (July 19, 2012).