Wednesday afternoon on CNBC, I saw an interview of bond fund manager Jeffrey Gundlach where he stated that he did not see much value in US Treasuries. He also did not see much value in risk-on assets such as equities at these price levels. In the short run, he was not very positive, but in the longer term he said an investor would want to be involved in "real businesses and real assets that have the power to preserve purchasing power".
While I am not sure I agree with Gundlach's precise timing, I think he makes a good point that in the longer term we will likely see higher inflation, and at least a portion of a diversified portfolio should contain investments that will do well under that scenario.
Master Limited Partnerships ( or MLPs) have been one of the best performing asset classes over the last decade, especially on a risk-adjusted basis. There are a lot of energy related closed-end funds that specialize in this area.
Tax considerations should be taken into account when you purchase energy related MLPs. I generally recommend that high net worth investors own individual MLP's in taxable accounts to get the tax benefits.
But in tax deferred retirement accounts, I generally prefer to own MLP closed-end funds. If you directly purchase an MLP, you will receive a K-1, and may be subject to unrelated business taxable income (UBTI). You may also need to file tax returns in several states.
Here are some of the key characteristics of closed-end funds that own MLP's:
1) You will receive one Form 1099 per shareholder instead of multiple K-1 forms.
2) Nearly all MLP closed-end funds are organized using a C-corp structure, not the usual registered investment company (RIC). CEFs are not structured as RICs because no more than 25% of an RIC can be invested in MLP securities (American Job Creation Act of 2004).
3) MLP CEF dividends are considered qualified dividend income (QDI) and a portion of the dividends are normally classified as return-of-capital.
4) MLP CEF shares do not generate unrelated business taxable income (UBTI) or state taxes in IRAs.
5) MLP CEF's normally use leverage.
Nuveen Energy MLP Total Return (JMF) is a closed-end fund designed to provide an efficient vehicle to invest in a portfolio of publicly-traded master limited partnerships. It seeks to provide a high level of tax-advantaged total return.
The fund believes that MLPs represent a timely investment opportunity since MLPs typically generate a high level of tax-deferred income and offer the potential for increased distributions and capital appreciation over time.
To implement its strategy, the fund combines its top-down strategic investment style with a rigorous, bottom-up investment process. They look for MLPs with the most attractive current yields and total return potential. The fund may also use various hedging techniques with the goal of enhancing its risk-adjusted total return over the longer term. The fund uses leverage.
I originally acquired JMF as part of a closed-end fund merger. JMF recently merged with MTP. Because MTP was available at a bigger relative discount, it made sense to buy MTP first and hold through the merger as a way to acquire JMF for a cheaper price. The merger should also provide increased scale, reduced operating expenses and greater leverage.
Here are a few reasons I like JMF:
1) The current yield of 6.77% is higher than most of its peers and higher than the 6.10% yield of the Alerian MLP Index.
2) JMF has significantly lower cost of leverage (1.32%) than its MLP CEF peers. This is because JMF uses a revolving line of credit while its peers generally use fixed rate debt (e.g.. preferred stock or bonds). In the longer term (>2015), if the Fed starts to rapidly increase short-term interest rates, JMF may be negatively impacted, but they should have a relative advantage over peers for the next few years.
3) JMF has a large concentration in midstream MLPs. This sector should benefit from increased infrastructure needs related to emerging domestic production of crude oil and liquid natural gas. Many of their holdings are involved in lower risk fee-oriented services such as pipeline transportation and storage.
JMF- Top Five Industries (as of 7/31/2012)
Oil and Gas Storage
Oil and Gas Exploration
Energy Equipment & Services
Integrated Oil & Gas
JMF has an inception date in February, 2011. It does not have a long performance record. Here are some shorter-term total return performance figures for JMF based on net asset value and market price:
JMF- Top 10 Holdings (as of July 31, 2012)
Here is some summary information on JMF:
Nuveen Energy MLP Total Return
- Total Assets: 938.3 Million Total Common assets: 713.3 Million
- Inception Date: Feb. 24, 2011
- Annual Distribution (Market) Rate= 6.77%
- Last Regular Quarterly Distribution= $0.316 (Annual= $1.264)
- Fund Expense ratio: 1.78% (Management fees 1.10%)
- Premium over NAV= +2.70%
- Effective Leverage: 24%
- Leverage Type: Debt
- Average Cost of Leverage(13 weeks)= 1.32% (as of 8/31/2012)
- Asset Coverage for Debt: 412%
- Average Daily Volume (shares)= 88,000
- Average Dollar Volume = $1.54 Million
JMF is reasonably liquid for medium size investments, but care must be used for very large purchases. The official NAV for JMF is updated daily under the ticker XJMFX.
JMF is currently trading at a small premium over NAV of about 2.7%. Partially because of the merger, the fund has been somewhat volatile lately. The premium went as high as 10% a few months ago, but JMF briefly traded at a slight discount a few days ago. I think it is a decent buy at current levels, but shorter term traders may want to wait for a discount to develop again before purchasing.
Disclosure: I am long JMF.