Where do MLPs fit into your AA

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Where do MLPs fit into your AA

Postby StarbuxInvestor » Fri Jul 26, 2013 3:11 pm

I use and asset allocation model that has domestic stocks, international stocks, emerging markets stocks, bonds, inflation protected bonds and REITS. I would like add add some MLP (the vehicle I use is FEN). Where would they fit? Whose percentage do I reduce? I assume it would be either REITs, Bonds or Inflation Protected Bonds. Thanks in advance for your insight.
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Re: Where do MLPs fit into your AA

Postby CaliJim » Fri Jul 26, 2013 9:07 pm

Hi,

There are some bogleheads who use MLPs but not many.

In general I would think they are a SCV play, so... US Stocks.

My question is ..... why even dabble in MLPs?
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Re: Where do MLPs fit into your AA

Postby gkaplan » Fri Jul 26, 2013 9:15 pm

They don't.
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Re: Where do MLPs fit into your AA

Postby Grt2bOutdoors » Fri Jul 26, 2013 9:30 pm

Don't waste your time, they will just complicate your tax filing each year. And, just wait until you start selling - then it gets real interesting. Buy the indexes, many of the general partners who have controlling managerial interest in the MLP's are in it. Where do you think the assets placed in the MLP come from? - they come from the general partner, only a few buy assets through outright purchase or merger.
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Re: Where do MLPs fit into your AA

Postby G-Money » Fri Jul 26, 2013 9:32 pm

gkaplan wrote:They don't.

+1
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Re: Where do MLPs fit into your AA

Postby Rainier » Fri Jul 26, 2013 9:38 pm

G-Money wrote:
gkaplan wrote:They don't.

+1


+2
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Re: Where do MLPs fit into your AA

Postby pshonore » Fri Jul 26, 2013 9:54 pm

Actually, the fund that OP wants to invest in (FEN) appears to be a closed-end fund that holds MLPs. They probably report tax info on a 1099 and a large portion of the distributions may even be ROC. Unlike a conventional MLP, the ROC from a CEF becomes LTCG (assume 1 yr holding).They do use leverage however.
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Re: Where do MLPs fit into your AA

Postby LadyGeek » Fri Jul 26, 2013 10:05 pm

Master Limited Partnerships are investment securities (not funds) which have a very complex tax reporting structure. You can pick up some tutorials here: Presentations and Primers Taxation is here: Tax Guide To Master Limited Partnerships, a general primer is here: Master Limited Partnerships - 101.

MLPs are appropriate for high net worth individuals, and only then under limited circumstances. Long-story short, they don't have a place in a Bogleheads portfolio.

Your holding of First Trust Energy Income And Growth Fund (FEN), inception date of 6/24/2004, should be reconsidered, as I found a comment on Seeking Alpha (search for FEN) which basically says to avoid it. The full article is here: Energy Income and Growth Fund: Long Term Qualitative Observations of C-Corporation MLP Vehicle Suggests 'Dip' Perception Is Illusory (Nov 2010)
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Re: Where do MLPs fit into your AA

Postby pshonore » Fri Jul 26, 2013 10:31 pm

I have not yet read the article but will add that Seeking Alpha does not have a great reputation for objective reporting. I did read that FEN has an average annual return of 13.44% since inception; of course we all know that past performance is not a predictor of future performance
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Re: Where do MLPs fit into your AA

Postby LadyGeek » Fri Jul 26, 2013 10:47 pm

Thanks for the perspective, also note that the article is from 2010. What caught my eye is finding someone who says to avoid a security, which is unusual. Usually, they're trying to promote it.

My intent was to show the complexities of owning an MLP compared to the usual stock and bond funds.
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Re: Where do MLPs fit into your AA

Postby StarbuxInvestor » Fri Jul 26, 2013 11:29 pm

Look I am not trying to promote any fund here I just mentioned FEN because by using CEF I avoid K-1s. When I started investing in MLPs in 2008 the only way to avoid K-1s were CEFs. Today there are a couple mutual fund and ETF options also (there are also 2 stocks you can own that found a way around K-1s). As far as why, it has to do with a macro belief I have in energy development in North America. MLPs typical are partnerships that own pipelines and storage facilities. They mainly operate like tollroads so not really subject to the price of the commodity they are moving but its consumption. When I first invested in FEN it was paying a quarterly dividend of $0.465 this quarter it will be $0.52. The price has also appreciated, I bought in late 2008 so anyone really curious can go look for a chart. Point is to me they resemble REITs but seem to be acting for many people as Bond equivelents. I am not trying to recommend an investment to anyone just trying to figure out how I can work them into the asset allocation model I am using derived from David Swensen's Lazy Portfolio. I truly appreciate everyone's feedback.
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Re: Where do MLPs fit into your AA

Postby stlutz » Sat Jul 27, 2013 12:30 am

The fund dropped in value by 50% between May and December of 2008. Doesn't mean it's a bad investment; it does mean that it is in no way bond-like.
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Re: Where do MLPs fit into your AA

Postby StarbuxInvestor » Sat Jul 27, 2013 12:51 am

stlutz wrote:The fund dropped in value by 50% between May and December of 2008. Doesn't mean it's a bad investment; it does mean that it is in no way bond-like.


Sounds similar but not quite as bad as VNQ for the same general period. From my understanding Bond Equivelents is usually a term related to investments because of their income generation. But I may have misused the term.
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Re: Where do MLPs fit into your AA

Postby manwithnoname » Sat Jul 27, 2013 2:29 pm

Grt2bOutdoors wrote:Don't waste your time, they will just complicate your tax filing each year. And, just wait until you start selling - then it gets real interesting. Buy the indexes, many of the general partners who have controlling managerial interest in the MLP's are in it. Where do you think the assets placed in the MLP come from? - they come from the general partner, only a few buy assets through outright purchase or merger.



The taxation of MLPs is exaggerated because 95% of the financial writers and analysts don't understand the tax code sections that mitigate taxation. All they talk about is state taxes, UBIT and deprecation recapture without discussing why these provisions have minimal impact. State taxes and UBIT are non existant for most investors because most MLP generate only negative income and UBIT and there is a $1000 UBIT exemption per IRA in the case of taxable income. Upon death of the investor the MLP basis is stepped up to the FMV at death even for both Cap gains and depreciation recapture even if if the adjusted basis before death was 0.

Those taxpayers who are unwilling learn the complex tax provisions governing MLPs should invest in the C corps, ETFs, ETN, the CEF versions which will eliminate the partnership tax pass through complications but at a cost of lower distribution payouts (-.80%+ for taxes plus -1.00%+ for advisory services).

Only accurate source of taxation of MLPs are IRS materials, specifically the audit Technique guide and regulations.
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Re: Where do MLPs fit into your AA

Postby Sidney » Sat Jul 27, 2013 2:33 pm

The actuaries would suggest that I will check out before spouse does. My strategy is to continue to simplify as much as possible and avoid anything that smacks of complicated tax reporting.
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Re: Where do MLPs fit into your AA

Postby nisiprius » Sat Jul 27, 2013 2:35 pm

What does John C. Bogle say about the importance of master limited partnerships? Not that I necessarily do everything he says to do, but I take him as a touchstone of common sense.
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Re: Where do MLPs fit into your AA

Postby statsguy » Sat Jul 27, 2013 2:53 pm

StarbuxInvestor wrote:I use and asset allocation model that has domestic stocks, international stocks, emerging markets stocks, bonds, inflation protected bonds and REITS. I would like add add some MLP (the vehicle I use is FEN). Where would they fit? Whose percentage do I reduce? I assume it would be either REITs, Bonds or Inflation Protected Bonds. Thanks in advance for your insight.


First, since the income for MLPs and CEFs is mostly return of capital holding either in a tax-advantaged account (IRA, 401k, etc) sidesteps the major tax advantages of holding MLPs. For example, the return of capital in a taxable account adjusts the share price and is treated as a capital gain, while in an IRA the same return of capital will be considered ordinary income on withdrawal. I suppose that if you don't plan to withdraw from your IRA for many years then this consideration might not matter.

Personally, we own MLPs and hold them in our taxable account. For the most part they are midcap stocks, so I would classify them as part of your midcap or small cap allocation.

FEN ix not a particularly interest CEF to me based almost solely on the 2.25% expense ratio.

I think but do not know that you will not get a K-1 from FEN which for someone who is afraid of the complications of schedule K-1 might find a positive. The return of capital received from individual MLPs held in a taxable account are taxed as capital gains.

Finally, I think MLPs have had a great run and that because of their high yield their share prices will be hurt by increasing interest rates (whenever that happens). Just look at how how FEN dropped about 10% when Bernanke suggested that quantitative easing might be ending. FEN and other MLPs have quickly recovered but when interest rates really do rise you will see some losses.

Best of luck
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Re: Where do MLPs fit into your AA

Postby StarbuxInvestor » Sat Jul 27, 2013 4:23 pm

statsguy wrote:
StarbuxInvestor wrote:I use and asset allocation model that has domestic stocks, international stocks, emerging markets stocks, bonds, inflation protected bonds and REITS. I would like add add some MLP (the vehicle I use is FEN). Where would they fit? Whose percentage do I reduce? I assume it would be either REITs, Bonds or Inflation Protected Bonds. Thanks in advance for your insight.


First, since the income for MLPs and CEFs is mostly return of capital holding either in a tax-advantaged account (IRA, 401k, etc) sidesteps the major tax advantages of holding MLPs. For example, the return of capital in a taxable account adjusts the share price and is treated as a capital gain, while in an IRA the same return of capital will be considered ordinary income on withdrawal. I suppose that if you don't plan to withdraw from your IRA for many years then this consideration might not matter.

Personally, we own MLPs and hold them in our taxable account. For the most part they are midcap stocks, so I would classify them as part of your midcap or small cap allocation.

FEN ix not a particularly interest CEF to me based almost solely on the 2.25% expense ratio.

I think but do not know that you will not get a K-1 from FEN which for someone who is afraid of the complications of schedule K-1 might find a positive. The return of capital received from individual MLPs held in a taxable account are taxed as capital gains.

Finally, I think MLPs have had a great run and that because of their high yield their share prices will be hurt by increasing interest rates (whenever that happens). Just look at how how FEN dropped about 10% when Bernanke suggested that quantitative easing might be ending. FEN and other MLPs have quickly recovered but when interest rates really do rise you will see some losses.

Best of luck
Stats


Personally I could only hope with Bond rate rising shares prices would fall. That would lead to what for me would be some very attractive yields. For me FEN has done well, but I am sitting on a cost basis below $14 for shares purchased in 2008. The expense ratio is indeed high but so far it has been worth it. Just trying to figure out if this is an asset class I want as part of my AA portfolio and what classes it moves in coordination with. I can definitely understand why people wouldn't want to get involved with MLP. Also you are correct I do not receive K-1s from FEN.
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