Reviewing CEFs That Focus On MLPs: Avoiding The Dreaded K-1

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Includes: AMZA, CBA, CEM, CTR, FIF, MIE, NDP, NTG, TPZ, TTP, TYG
by: Henry Nyce

Summary

Legg Mason needs to prove it can manage its MLP CEFs profitably.

MIE, the offering from Cohen and Steers, has too short a history to ascertain its profitability.

Tortoise Capital Advisors offers CEFs that are useful for speculating on specific areas of the energy industry.

Following my article on 2 CEF funds that concentrate on MLPs, one comment suggested that other MLP CEFs should be reviewed; the comment suggested Clearbridge American Energy MLP Fund Inc. (NYSE:CBA), Cohen & Steers MLP Income and Energy Opportunity Fund (NYSE:MIE), and Tortoise Pipeline & Energy Fund, Inc. (NYSE: TTP). Researching CBA, I found Legg Mason has 2 other funds focusing on MLPs: they are ClearBridge Energy MLP Fund Inc (NYSE:CEM) and ClearBridge Energy MLP Total Return Fund Inc. (NYSE:CTR). Researching TTP, I found Tortoise Capital Advisors also has other energy funds: Tortoise Energy Infrastructure Corp. (NYSE: TYG, Tortoise MLP Fund, Inc. (NYSE: NTG), Tortoise Energy Independence Fund, Inc. (NYSE: NDP) and Tortoise Power and Energy Infrastructure Fund, Inc. (NYSE: TPZ). All of these funds offer a 1099 rather than a K-1.

This article covers each of these other MLP CEFs.

ClearBridge Energy MLP Fund Inc.

CEM was started in June 2010 and has the longest history of the 3 funds from Legg Mason. It had a closing price of $17.24 on 2/14/2017, selling at a 3.93% discount to NAV at $18.31. Since inception, CEM has had an average annual return of 3.28%; for the last 5 years, it had a loss of 0.16%, and for the last year, it had an average annual return of 12.77%. Expenses run 4.23% of assets, with about half for management and the other half for interest for leverage. A chart displaying its market price and dividends is below:

(Source: Interactive Brokers)

Its top 10 holdings and asset allocations as of 12/31/16 are shown below:

(Source: Legg Mason Web Site)

(Source: Legg Mason Web Site)

CEM is currently paying a quarterly dividend of $0.355 per share for a yield of 8.1%.

ClearBridge Energy MLP Total Return Fund Inc.

The inception date for CTR was 6/27/12, so the fund will have a 5-year history in June of this year. It is currently selling at an 8.16% discount from its NAV of $15.32 on 2/14/17 with a market price of $14.07. The annual average total return from inception is -2.52%. It is -9.72% for the last 3 years and a positive 14.83% over the past year. CTR offers an 8.28% yield by paying $0.29 per quarter. Expenses for the fund run at 3.94%, with 2.08% for interest for its leverage. The chart showing dividends and market price since inception is below:

(Source: Interactive Brokers)

CTR's top 10 holdings and asset allocations as of 12/31/16 are displayed below:

(Source: Legg Mason Web Site)

(Source: Legg Mason Web Site)

Clearbridge American Energy MLP Fund Inc.

CBA is the latest MLP CEF offered by Legg Mason and was initiated on 6/26/13. As of 2/14/17, it was selling at an 8.20% discount with NAV at $11.46 and the market price at $10.52. The graph showing market prices and dividends since inception is below:

(Source: Interactive Brokers)

Its top 10 holdings and asset allocation are listed below:

(Source: Legg Mason Web Site)

(Source: Legg Mason Web Site)

CBA yields 7.71% by paying $0.20 quarterly. Expenses at the fund run pretty high at 4.73% of assets, with half of these expenses spent on interest for leverage. It is currently using about 37% leverage.

All of the Legg Mason CEFs covered above are managed by the same 4 men. These funds have had relatively poor results, and all 3 are run the same way with many of the same investments. My advice is to avoid these CEFs until they prove they are generating profits and better returns for investors.

Energy Opportunity Fund

MIE, a latecomer to the MLP CEF party, was started in 3/26/13 and has an expense ratio of 2.47% and a 7.87% yield that is paid monthly. A graph showing its price and dividends since inception is below:

(Source: Interactive Brokers)

The top 10 holdings and sector diversification are shown below:

(Source: Cohen & Steers Web Site)

(Source: Cohen & Steers Web Site)

MIE uses leverage, and the current leverage ratio is around 24%. Average annual returns since inception are -7.77%; for 3 years it is -8.56%, and for the last year it was 14.44%.

Even though this CEF is selling at significant discount to NAV at over 10%, avoid this fund until it proves to be a sound investment over a longer period of time.

Tortoise Pipeline & Energy Fund, Inc.

TTP was started on 10/26/2011 as a CEF that focuses on North American pipeline MLPs. It currently yields 7.6%, which it pays quarterly at $0.4075 per share. The NAV as of 2/14/17 was $24.83, with a selling price of $21.89 and a discount of 11.8%. A graph showing performance and dividends over the past 5 years is displayed below:

(Source: Interactive Brokers)

The top 10 holdings and asset allocation are displayed below:

(Source: Tortoise Capital Advisors Web Site)

(Source: Tortoise Capital Advisors Web Site)

TTP, like all the other CEFs covered in this article, also uses leverage; it is currently at the 21% level, which costs 3.33% of assets. With management costs at 1.05%, all-in costs are nearly 4.4% of assets. TPP has returned 3.92% since inception, 4.27% over the past 5 years and 78% over the past year. If one could time this CEF correctly, one could profit very well. It does not look like a fund that one buys and holds.

Tortoise Energy Infrastructure Corp.

TYG is the grandfather of the MLP CEFs in that it was introduced in 2004. It has returned 8.98% on an annualized basis since inception. However, the fund's 10-year return of 6.17% and 5-year return of 2.72% are much closer to the returns offered by the other CEFs covered here. A graph of its market price and dividends is displayed below:

(Source: Interactive Brokers)

TYG's top 10 holdings and portfolio allocation are shown below:

(Source: Tortoise Capital Advisors Web Site)

(Source: Tortoise Capital Advisors Web Site)

This is the most concentrated CEF covered in this article in that almost 2/3rd of the investments are in 10 issues. It uses about 25% leverage costing about 3.37% of assets with a management fee of 0.95%, totaling about 4.3%. As of 2/14/2017, TYG was selling at an 8.1% premium with NAV at $33.41 and the market price at $36.13. The fund currently yields 7.3% with a quarterly dividend of $0.655 per share. While TYG's history looks OK, it is not a buy while selling at an 8% premium. It may be a worthwhile purchase when it sells at a 5% or greater discount to NAV.

Tortoise MLP Fund, Inc.

NTG focuses largely on natural gas infrastructure MLPs and was started on 7/27/10. It currently yields 8.5%, which is paid quarterly at $0.4335 per share. As of 2/14/2017, the fund was selling at a 1.3% discount to its NAV of $21.87 per share. NTG has generated a 3.35% annualized return since inception and 1.57% for the last 5 years. Management fees are 0.95%, and here again, costs are high for margin interest at 3.62% of assets for 26% leverage. A graph showing prices and dividends is offered below:

(Source: Interactive Brokers)

NTG's top 10 holdings and asset allocation are displayed below:

(Source: Tortoise Capital Advisors Web Site)

(Source: Tortoise Capital Advisors Web Site)

If anyone wants to make a play on the price of natural gas, here is a CEF that may fill the bill. NTG also has its investments concentrated on its top 10 issues - a point to consider if one is going to buy this fund.

Tortoise Energy Independence Fund, Inc.

NDP is a relatively new CEF with its IPO on 7/26/2012. With a market price of $16.99 as of 2/14/2017, it currently sells at a 2.4% discount to its NAV of $17.40. NDP focuses on upstream energy companies - those that do the drilling for oil and natural gas. It currently offers a 10.3% yield that is paid quarterly. Management costs are 1% and its 20% leverage cost is 1.57%, for a total of 2.57%. Since inception, the fund has a negative 0.3% return, while it has a 3-year negative return of 2.24% and an 82% positive return last year. A graph showing market price and dividends is displayed below:

(Source: Interactive Brokers)

The top 10 holdings and asset allocation graph is shown below:

(Source: Tortoise Capital Advisors Web Site)

(Source: Tortoise Advisors Web Site)

If you are convinced the price of oil and gas is about to rise, this is an excellent CEF to place that bet. NDP could really soar if oil were to go to $100 a barrel and gas to $6.00/MMBtu. If one wishes to avoid the vagaries of these commodity prices, one should stick with the pipeline CEFs.

Tortoise Power and Energy Infrastructure Fund, Inc.

TPZ has been around since 7/28/2009 and currently sells for a 10% discount to NAV. Its market price closed at $22.63 on 2/14/2017 with an NAV of $25.14. It yields 6.6%, which is paid monthly at $0.125 per share. On an annualized basis, TPZ has returned 5.41% over 5 years and 5.72% over 3 years. The fund uses about 23% leverage, which is costing about 1.89% of assets. The graph showing prices and dividends over the past 5 years is below:

(Source: Interactive Brokers)

The top 10 holdings and asset allocation are shown below:

(Source: Tortoise Capital Advisors Web Site)

(Source: Tortoise Advisors Web Site)

The graph above shows that this CEF is quite different from the others covered in this article. About 50% of the investments are fixed-income instruments such as bonds and trusts. The company states, "TPZ seeks to invest in fixed-income and dividend-paying equity securities of power and energy infrastructure companies that provide stable and defensive characteristics throughout economic cycles." Therefore, the yield is lower, but with a certain amount of stability.

Tortoise Capital Advisors says this about itself: "Tortoise Capital Advisors is an investment manager specializing in listed energy investments. Tortoise is considered a pioneer in managing portfolios of MLP securities and other energy companies for individual, institutional and closed-end fund investors." It is a specialized firm interested only in energy issues. Unlike the Legg Mason funds, Tortoise Capital Advisors CEFs differ in their holdings and concentrations. These funds allow one to make bets on various sectors of the oil & gas industry.

Conclusion

After reviewing all of these energy CEFs, I am still convinced the First Trust Energy Infrastructure Fund (NYSE:FIF) and the InfraCap MLP ETF (NYSEARCA:AMZA) are the MLP CEFs that fit my comfort zone for current returns. (Read my article on them here.) Tortoise Capital Advisors certainly has expertise in MLP investments and offers CEFs that cover specific areas of the MLP world. If one has the confidence to predict prices of oil and gas, Tortoise offers CEFs that allow one to make investments in those specific areas and to profit accordingly.

Disclosure: I am/we are long AMZA, FIF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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