Big run and investors are craving income now. People keep asking me how to play them. Are they in a bubble? At the least I think they are unlikely to surprise to the upside, but it’s always tougher to determine when the other investors are going to blink than to buy something that is clearly at a discount. Anybody out there work with them and have an estimate of forward return over the next 5 years? The numbers I hear peple bandy around seem unrealistic (all double digits) but I don’t know a ton about these so there could be something I am missing.
What is “forward return”? What asset class?
Estimated return for MLP securities.
MLPs are not in a bubble, I think that they are now a talked about, once overlooked asset class. We do some MLP business and I have read a good bit of research, spoken with PM’s about these. It seems rational. Keep in mind though that if it sounds too good (double digit “forward return”) that it probably is.
Everything seems to be bubble or crash these days. Can’t things simply be overvalued for a while without being in a bubble??
AM, since you appear to have thought about this a bit would you invest in MLPs now? On what valuation criteria is the decision based? What is a reasonable yield now that these are begining to make it on investors’ radar?
brain_wash_your_face Wrote: ------------------------------------------------------- > AM, since you appear to have thought about this a > bit would you invest in MLPs now? On what > valuation criteria is the decision based? What is > a reasonable yield now that these are begining to > make it on investors’ radar? “reasonable” is completly relative these days. When the 10yr is <2.7% anything looks attractive. The point is, everyone is grasping for Yield, be it longer duration or less conventional (and less liquid) investments. MLPS have been relatively popular for people to have access to limited partnerships through a sort of structured wrapper. MLP’s these days are becoming even more attractive because they are starting to structure them differently so that they do no generate k-1 tax reporting documents (I think because they use 20% equity in the structure). The interesting part of evaluating MLP vehicles is that you really have to look all the way down the “pipe” (pun sort of intended). Looking at these is similar to looking at gold mining companies in the sense that you have to look at a reasonable time frame of productive usage of the partnership assets. The MArcellus shale has been recieving a lot of attention lately, also I was looking at a pipline MLP. It’s really interesting stuff if youre into more sciency reports (for instance, I was LOVING the reports describing the BP wellhead engineering). What in specific are you looking for? We are in a few MLP’s and the average yield we are seeing is around 6.5 to 7%. As far as MLP’s being in a bubble, you will see that they fairly closely tracked the SPX on the way down in 2008. Perhaps now they are returning to “normalized” levels, this is a sheep in wolfs clothing because the yield in 2007 for MLP’s was nothing too exciting, but now people like the yield, however, since people like the yield we are seeing increased buying pressure, thus prompting bubble talk.
I work in a private bank and part of my role involves asset allocation decisions and have been hearing a ton about MLP from various internal and external clients. I have done some calls with MLP managers and operators and have owned MLPs in the past but I am no expert, so I figured I’d send out a post and see if anybody says something different from what I’ve been hearning. Without going into too much detail, I’m working on a new product and am deciding what asset classes to include. I assume the main risks (valuations aside) around MLPs are legislative/regulatory? Literally everybody I talk to about these (even people who have the option to invest outside of MLPs) is super optimistic, which makes me nervous.
brain_wash_your_face Wrote: ------------------------------------------------------- > I work in a private bank and part of my role > involves asset allocation decisions and have been > hearing a ton about MLP from various internal and > external clients. I have done some calls with MLP > managers and operators and have owned MLPs in the > past but I am no expert, so I figured I’d send out > a post and see if anybody says something different > from what I’ve been hearning. Without going into > too much detail, I’m working on a new product and > am deciding what asset classes to include. I > assume the main risks (valuations aside) around > MLPs are legislative/regulatory? Literally > everybody I talk to about these (even people who > have the option to invest outside of MLPs) is > super optimistic, which makes me nervous. Legislative and regulatory. One of the interesting things I find about MLP’s is that they are valued very similar to stocks, except the cash flows are more or less set in stone because of the underlying contracts. If you want to take this discussion to email shoot me one over nicolas . uppal (at) gmale . com I will send you my work email. I have a ton of research and maybe we can swap ideas.
MLPs have to pay out most of their income as distributions every year, so there’s no reason to think they should grow at anything more than inflation. Now, the distribution is fairly safe because of this (and because of the stable assets they own), but long run MLPs should act roughly like REITs and have a total return of 7-8% PA, perhaps slightly better on an after-tax basis. Historically, they’ve done somewhat better than that, mostly due to an historic return of 5-10% on the equity in addition to the yield. I did an analysis of the industry once, and found that on average, the industry raises as much in new equity each year as it pays in distributions each year. So basically, it’s a Ponzi scheme. Now, I’m not suggesting anything untoward is going on, but I don’t believe the historic returns will be replicated.