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From MoneyBeat:
Among the hottest corners of the stock market in recent years have been energy focused master limited partnerships. But amid the recent tumult, MLPs have been one of the hardest hit corners of the market and it’s not entirely clear why.
One MLP specialist guesses that “newbie” investors in these complicated stocks are to blame.
MLP’s have had two major appeals for investors: high, tax-favored yields and a play on the U.S. energy boom.
But lately MLP shares have been getting absolutely crushed. Prior to a small bounce Tuesday, the $8.8 billion Alerian MLP exchange traded fund lost 4.5% on Monday and is down 8.7% over the past month.
On the surface it might seem simple: MLPs are primarily in the business of building and operating natural gas and oil pipelines and storage. And oil prices have collapsed. Ergo, some might think, sell MLPs.
That line of thinking is wrong, notes Miller Howard, an $8.5 billion money manager that specializes in income-producing stocks. Most energy MLP companies don’t make their money based on the price of oil or gas. Instead, they act more like toll-takers. But that mistaken perception could be driving the sell-off, they said.
“Why so wild in MLP-land?” Miller Howard wrote in a client note this week. “There are many novice investors in MLPs that don’t really know what they are, what they do, or what the long-term story is. They’re just in it for the yield, or following the “hot dot” of excellent performance for the past decade.”
Miller Howard notes that in the past four years, money in MLP mutual funds rose from $3 billion to $32 billion. “That’s a lot of inexperienced investors,” they wrote.
When it comes to the sharp drop in oil prices, here’s what Miller Howard has to say about how MLPs make money:
“Most contracts are very long term, in any event; a temporary change in oil price—or even gas price—has no effect on these sources of revenue.”...MORE
