Weekly Review: Master Limited Partnership CEFs - First Signs Of 'Life' In The Sector

Includes: KMF, NDP, TYG
by: Arbitrage Trader


Review of where Master Limited Partnership closed-end funds and their benchmarks ended last week.

Recap of news related to the group, if any.

Comparison of the funds using several important metrics.


Over the past few months, most of you have noticed increased activity in closed-end funds as the inflow of volatility finally shook them up and created various arbitrage and directional opportunities for active traders such as us.

Master Limited Partnerships, or MLPs, have had a couple of rough years, and we have been exposing ourselves to them through the related CEFs every now and then, as avid followers would have noticed from our articles. This group has now become part of our Weekly Reviews, so we can keep an eye on them in a more consistent manner and share our thoughts with you.

The News

Source: Author's Software

Over the past week, there were no important news that could affect the sector's performance.

The Benchmark

Over the past week, the ALPS Alerian MLP ETF (AMLP) broke through its resistance line of $10.77 per share and went all the way down to its weekly low of $10.49 per share. Luckily, the ETF bounced back by the end of the week and closed at a price of $10.72 per share. On a weekly basis, the fund slipped $0.19.

Source: Tradingview.com - AMLP Daily Chart (6 months)

The U.S Oil Fund (USO) skyrocketed to a new high of $15.52 per share. The fund bottomed in late June and, since then, we observe an uptrend with little corrections. On a weekly basis, the ETF has added $0.30.

Source: Tradingview.com - USO Daily Chart (6 months)

1. Highest Z-Score

Source: CEFConnect.com

With a tiny but still positive Z-score, the Tortoise Energy Independence Fund (NDP) is again the undisputed leader in the MLP sector. The CEF's score shrank week after week during the past month, and there is a chance that in our next review, NDP might be underpriced from a statistical perspective. The sector still continues to be quite undervalued with an average Z-score of -1.01. However, the result from this week beats the -1.37 average Z-score from our last article.

2. Lowest Z-Score

Source: CEFConnect.com

It is hard to pick a "Buy" candidate when we have so many undervalued closed-end funds. From the above table, we can see the sector's top 10 undervalued funds from statistical perspective as we look at the Z-scores of the different CEFs. But if I have to choose a fund, I would probably look at the Tortoise Energy Infrastructure Fund (TYG) as a probable "Buy" candidate. The fund distributes a quarterly dividend of $0.65 per share:

Source: CEFConnect.com

This is how the fund has been trading lately on the exchange:

Source: Barchart.com - TYG Daily chart (6 months)

The chart looks good, and since it bottomed in the middle of the previous week, TYG closed a couple of positive days. The other thing that I like about this fund is its high liquidity:

Source: CEFConnect.com

3. 5-year Annualized Return On NAV

Source: CEFConnect.com

In the table above, you can see the funds from the sector sorted by their "highest" return on net asset value for the past five years. Currently, the average return for the past five years is -5.08% for the sector. Usually, I try to combine the return with the discount and the Z-score in order find a fundamental and statistical reason to review the candidate.

4. Highest Premium

Source: CEFConnect.com

Still trading at a premium of 2.59%, the Tortoise Energy Independence Fund is again the "lonely wolf" in the group. It seems that the fund is returning to its regular levels of trading:

Source: CEFConnect.com

Source: CEFConnect.com

On a regular basis, as we can see from the table above, the CEF is in a tight spread between its price and net asset value.

5. Biggest Discount

Source: CEFConnect.com

The Kayne Anderson Midstream Energy Fund (KMF) is the one fund that I would choose as a probable "Buy". Frankly speaking, I "nominate" this CEF only because of its wider discount which almost is at its lowest and the negative Z-score that it currently has, -1.60:

Source: CEFConnect.com

On the chart, things once again look alright:

Source: Barchart.com KMF Daily Chart (6 months)

However, one should keep in mind that this MLP closed-end fund recently suffered a dividend cut:

Source: CEFConnect.com

We should be very careful with the volatility of these products.

6. Highest Effective Leverage

Source: CEFConnect.com

From a leverage perspective, we have six closed-end funds whose effective leverage is equal to zero. The average effective leverage of the sector is 28.50%. Do not underestimate the effect of the leverage, and be sure it is included in your analysis.

7. Lowest Effective Leverage

Source: CEFConnect.com

Of course, leverage is a double-edged sword because it might look great when the company is achieving great results and distributing big returns, but when it starts to sink, things start to get a little bit gloomy, I would say. What I mean is that the higher debt brings a bigger risk.

8. Highest Distribution Rate

Source: CEFConnect.com

The table shows the funds with the highest distribution rate on price. Additionally, we have included here the distribution rate based on the net asset value. Most of the market participants find the second metric to be more important.

9. Lowest Distribution Rate

Source: CEFConnect.com

For me, the distribution rate of a fund is not the most important metric to look at. I think that everybody has a clear vision of what is more important to seek before we enter a trade. Of course, the return on net asset value is what we should look at when we decide to invest


The main reason of these weekly reviews is to track how the sector and its instruments are performing and eventually to find an opportunity where we can make some fresh money. Unfortunately, here in the MLP sector, we observe quite a rapid slip between the different funds. However, there are positive signs for the sector if the leading benchmarks of the sector continue with their positive performance.

Note: This article was originally published for our subscribers on 9/30/2018 and some figures and charts may not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.