Revisiting the MLP meme

• abnormalreturns
• August 25th, 2010

A few weeks ago we noted that the “crowd had discovered MLPs.”  By that we meant that a cluster of fund launches in and around the MLP space made it clear that investor interest in the area was pretty high.  What has happened since then?  As seen below MLPs, as represented by the JP Morgan Alexian MLP ETN (AMJ) have continued to outperform the market as a whole.

Source:  StockCharts.com

In the intervening month the MLP meme has gone big time with prominent articles in both the WSJ and Bloomberg.  From these articles we learned that a $1.1 billion closed-end fund, the Tortoise MLP Fund (NTG) has launched in addition to the the E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index (MLPL).

Today we learned that a fund that was on the drawing board, the Alerian MLP ETF (AMLP), has launched.*  This is the first MLP fund in the form of an ETF.  From the WSJ we learn that all of this activity is taking place in an increasingly crowded arena:

MLPs are a relatively small sector, with just 74 issues and around $200 billion in market capitalization, Mr. Feng says. Even before the launch of the ETF, there has been a number of closed and open-end fund launches this year.

“We’re seeing more fund-flow-driven activity and movements that may be completely unrelated to fundamentals,” Mr. Feng says.

Despite what some investors think MLPs are not risk-free.  In an era of government austerity the tax-deferred nature of MLPs could come under fire.  In addition the sector itself is somewhat concentrated.  This has an effect on how portfolio managers go to assemble portfolios.  From the earlier WSJ piece we learn that:

“Everybody’s buying the same top 10,” says Jason Stevens, who follows MLP stocks for Morningstar.

Don’t be surprised if Wall Street bankers don’t fire up their spreadsheets in search of additional assets that could be put into an MLP format.  In short, if the ducks are quacking, feed them.  On that note we don’t have much more to add to what we said in the conclusion of our earlier post.

So what’s the bottom line?  The point is not that MLPs are necessarily poised for a fall.  (Although that is always a possibility.)  This cluster of activity does indicate that interest in MLPs is pretty high.  You don’t launch a $1+ billion closed-end fund without a healthy bit of froth.  What it means is that you should be more discerning in your approach to MLPs now that they have been discovered by the crowd.

Being discovered by the crowd is great for those investors who we early to the party, but the latecomers should keep their eyes on the nearest possible exit.

Update:  IndexUniverse has a good write-up on the Alerian MLP ETF.

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