My Dream MLP Security: Open Letter To MLPs And MLP Investment Funds

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 |  Includes: EMLP, EPD, KMP, OKS, PAA, WPZ
by: Richard Shaw

MLPs and MLP investment managers: See the need - fill the need. Solve the market's problem and the market will solve yours by showering its money upon you.

Since multi-state tax filing requirements for MLPs are a major drawback for a large part of the investing public, and since open-end funds face low limits on MLP holdings to avoid K-1s, and since C-corporations investing fully or substantially in MLPs can't pass on the tax-sheltered return of capital from MLPs, we need a new idea to make MLP investing more attractive to retail investors.

Here is my dream security that could potentially be issued by MLPs themselves or by pure MLP investment funds.

  • MLPs could issue separate classes of units, each representing only the income and return of capital from a single state
  • Investment funds could do the same, doing the income allocation from among the multiple MLPs in the portfolio

I contend that such an MLP or investment fund would immediately attract large inflows from both new investors and away from existing MLPs or investment funds that did not offer the same single state series.

The idea may have current regulatory obstacles, but so too have most new security formats. This one I feel would be worth the battle with the regulators, should one be required.

Even if there were an extra expense charge for accounting by the MLP or investment fund, that fee would be worth the benefit.

This is an open letter to leading MLPs:

And, is an open letter to MLP oriented fund sponsors:

  • Kayne Anderson: KYN
  • Clearbridge (Legg Mason): CEM
  • Steelpath (Oppenheimer) MLPFX
  • Tortoise: TYG
  • First Trust: EMLP
  • Nuveen: JMF

Create the securities and you will be swamped with money.

The coming year will probably see dividend oriented investors searching for ways to shelter income. MLPs are great shelters, but with inconvenience and tax filing costs for direct MLP investors, and unappealing limits on MLP allocations within investment funds that pass through return of capital with a 1099 instead of a K-1.

See the need - fill the need. Figure out a way to do it. Build it and we will come. Create the first mover advantage for yourself. Solve our problem and we will solve yours.

Disclosure: QVM has positions in EMLP as of the creation date of this article (July 24, 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.