MLP Strategy

Portfolio Highlights
  • High and Rising Income
    MLPs have generally produced high current income relative to other asset classes and have the ability to increase distributions. Most MLPs generate cash flows from the transportation and storage of crude oil, natural gas, and refined products.
  • Unique Business Model
    Most MLPs own assets that generate cash flows from the transportation and storage of crude oil, natural gas, and refined products. These cash flows generally do not have direct commodity price exposure, but can have indirect exposure through volumetric changes.
  • Tax-Deferred Income
    MLPs can generally be more tax advantaged than qualified dividends. Deductions to income for MLPs flow through to unit holders. Cash distributions are generally classified as return of capital.
Portfolio Overview

MLP Strategy is a high-yielding portfolio (with tax-deferred income) composed of US exchange-traded Master Limited Partnerships (high-quality pipelines and energy facilities), with high current income and strong prospects for growth of distributions. One can think of Master Limited Partnerships (MLPs) as “utilities without walls” — that is, they are utility-like companies with fewer restraints on their ability to grow than conventional utilities. They evolved as a tax-efficient way for large energy companies to operate their infrastructure assets. MLPs generate stable and consistent cash flow from long-term contracts for the transportation, processing, and storage of natural gas and oil products, thus providing “quality income.”

Our portfolio invests in midstream energy infrastructure pipelines that generate cash flows from the transportation, processing, and storage of natural gas, crude oil, and refined petroleum products (jet fuel, gasoline, or fuel oil).

Investment Philosophy

The MLP Strategy is a fine example of our firm’s basic investment philosophy: high-quality stocks plus high yield plus growth of yield result in high total return. Many studies, including our own, show that financially strong stocks with rising distributions offer the most consistent performance, as well as the highest added value. Over time, increases in distributions tend to induce increases in the price of the equity producing those distributions. This internal compounding is a powerful component of the long-term returns from stocks, as evidenced in the work of Ibbotson and others. In addition, dividend growth provides other benefits to investors: inflation hedge, ability to meet annual expenses from income alone, and positive signal from management about future prospects for a company, to name a few.

Portfolio Objective

Our objective is to provide high, stable current income, growth of income, and growth of the underlying principal from a portfolio of high-quality companies with real assets involved in reliable, repeatable businesses that will likely benefit from the global infrastructure build-out. This strategy seeks to exceed the total returns available from fixed income of intermediate or long-term duration without increased volatility, and to provide an alternative that’s not correlated to the broad equity markets.

Portfolio Strategy

The portfolio invests in midstream energy infrastructure pipelines that generate cash flows from the transportation, processing, and storage of natural gas, crude oil, and refined petroleum products (jet fuel, gasoline, or fuel oil). Holdings have long-life assets and long-term transport contracts. We favor MLPs with strong general partners that hold a meaningful ownership interest, and companies that have fee/contract-based revenues as opposed to commodity-based. We also favor strong MLPs that do not have general partners. We focus on companies with internal and external growth opportunities that are able to sell bonds and equity, and/or attract non-public financing.

Strategy Inception Date: December 2008
Portfolio Manager: MHI Investment Team

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