Monday Mailbag: Grab Bag, Plus a Final Note on Kinder Morgan
Everyone seems intent on continuing to ask about the Kinder Morgan transaction. We love that you keep sending in questions, but we said everything we had to say last week. One other interesting point was brought up, which I’ll answer, but then we’re getting back to business as usual.
I’m concerned that, given the Kinder Morgan transaction, the US Treasury and IRS are conducting a more intensive review of MLPs, with a view toward initiating tax reform.
We do not believe that MLPs are being specifically targeted. There’s a lot of buzz around inversions and corporate tax reform right now. When the Treasury and the IRS review their very long list of potential tax reform issues, MLPs will likely be included, as has been the case in the past. The quotes in the article were taken from a Treasury public affairs email response to the reporter’s questions. These answers look like pretty standard PR responses to us. “Instances where the tax base may be eroded” could be referring to quite possibly anything; without much effort, one could argue that mortgage interest deductions and bonus depreciation erode the tax base. If either the Treasury or IRS had something specific to say about MLPs, we doubt their medium of communication would be via a news reporter.
How do people use MLPs in their portfolios? Are they considered to be alternative investments?
Generally, we see people investing in MLPs in one of three ways: for income, for growth, or as part of their exposure to real assets. MLPs have historically been considered an alternative asset class, but with the growth in the space (market capitalization is approaching $600 billion), exposure in the broader media (three Barron’s covers in the past 12 months!), and rising correlations to the broader market, we believe MLPs would more correctly be considered an established asset class, rather than an emerging asset class.
Investors like using MLPs for income, as the average 5%-6% yield is hard to find in other asset classes. Additionally, MLP distributions are generally 70%-90% tax deferred, making them even more attractive.
Other investors are interested in the growth aspect of MLPs, which will build the infrastructure necessary to support the US energy renaissance. A very apt analogy to use here is that were the energy renaissance a gold rush, MLPs would not be the prospectors. Instead, MLPs would sell shovels (gathering and compression), rent houses (storage), and operate railroads (pipelines and other forms of transportation). To quantify this, the Interstate National Gas Association of America (INGAA) estimates that North America will need $641 billion in energy infrastructure through 2035.
Since the traditional MLP business model relies on physical assets like steel pipelines and storage tanks, many investors use MLPs as part of their real asset exposure, which is commonly thought to be a hedge against inflation. Additionally, interstate liquids pipelines are federally regulated to increase their tariffs by PPI + 2.65% every July 1, providing additional protection.
What’s your AUM?
Alerian is purely an indexing company and education provider that seeks to equip investors to make informed decisions about MLPs and energy infrastructure. We do not manage money and as such, have no assets under management. However, we do license our indices to various entities for the creation of publicly traded products, as well as private SMAs. We are very fortunate to work with great partners and are very humbled by the $20 billion linked to our various indices. We work hard every day to provide the most objective, representative, and transparent MLP indices possible.