Roger Nusbaum submits: I had a reader ask what I think about individual MLPs (master limited partnerships). This was in response to my negative comments about MLP CEFs. The reader also mentioned that last June I wrote about reducing exposure, but he did not follow my logic.
I think MLPs make a lot of sense when used properly. The risk to them is that you should expect them to get hit hard if oil and or natural gas drop in price. If a particular MLP is up a lot, relatively, you should expect it has the capacity to go down a lot, if energy prices fall.
I don't think energy prices will fall but that does not mean you are not taking the risk. I know that a lot of people have too many of these because of the yield and they are up a lot too. The answer I get when I ask is that they don't mind if they drop because they are still getting the yield.
I have to confess I do not understand the logic at all. Here I am talking about people that are very overweight not people that have 4% or 5% of their portfolio in them.
I think owning them is more work than a lot of people realize. US based MLPs pay royalties on depleting assets. US law prohibits MLPs from purchasing other assets to replace what is being depleted. Canadian trusts have no such restrictions. An investor that owns 20 MLPs should understand the depleting asset aspect of this which is a lot of work.
Further, if a ten year bond yields four point whatever percent and you are getting 11% in some sort of MLP, how much risk do you think you are taking? This is, of course, subjective and some elevated risk is appropriate but too much of anything is a bad idea.
Last June I reduced exposure to this part of the energy world because they had become so faddish and the one I sold had gone up a lot more than I ever expected it to when I bought it. Most clients have a little exposure but I think too many of these is a very aggressive stance, more so than I want to be.