Both Alerian MLP ETF(AMLP) and First Trust Natural Gas ETF(FCG) have had their glorious heights. AMLP still claim $8.82 Billion Asset under Management (AuM) whereas FCG’s AuM has since dropped from a near $1 Billion to now $151.8 Million as of today (March 31, 2018).
It is not surprising to understand FCG’s demise since it’s peak in 2014s when the global energy bearish market began. What’s triggered my curiosity is that AMLP was issued to the market in August 2010, later than FCG in 2007, what is more, AMLP asks 1.82% of expense ratio, FCG only 0.60%, however, the amount and speed of AuM accumulation under AMLP are much bigger than those of FCG. Why?
The catch is its format of MLP rather than normal energy stock holding structure. MLP, standing for Master Limited Partnership, it is a limited partnership, which is more generally perceived as Private Equity (PE), but publicly traded. The caveat is MLP pass through must generate at least 90% or more of their income from qualifying sources such as from production, processing, storage, and transportation of depletable natural resources and minerals. In addition, real property rents also qualify (wiki).
Regulatory rules greatly favor business establishment, hence permitting tax benefits/deductibles on interest paid for the debt, this tax advantage is fully taken advantage of by PE, similarily by MLP, to reap lucrative profits.
Sounds a great investment vehicle, but most of the individual investors are kept from utilizing it – no matter PE or MLP- because the law requires a net-wealth amount threshold for qualification.
MLP ETF provides a silver line for individual investors who do not reach that qualification bar. Because there is an additional law clause allowing the creation of an ETF holding MLPs, conditioned on their proportion is less than 25% of the whole basket. It’s pretty nice, but only 25%? still bit disappointing for those who eager to share benefits of a true PE/MLP structure. AMLP came into play by structuring itself as a C-Corporation, allowing a full allocation to MLPs by law too. The key advantage of C-Corporation is that the Distribution is tax-deferrable, and there are some special good terms on passing on to the next generations too, hence, AMLP became a massively-embraced fund since its inception. I figured there are so many people who are not ultra-wealthy, but fair wealthy, willing to throw their money into such product.
But I concerned whether their act is doing them much good.
Why? Simply plot the cumulative return chart since the launching in 2010, you see the value of the fund is almost declined to the initial baseline now. If you bet on a dead horse, the benefit of tax-defer is just irrelevant as you have no gain to be taxed in the first place.
I also post here the fund flow chart because I assume the new tax regime imposed by Donal Trump – cutting corporate tax from 35% to 21% – is generally against the interest of PE or MLP forms as their benefits would be deduced from 35% to 21% accordingly. For AMLP holders, this is certainly another thrash, as some of them may hold the hope that years later, the tax basket could be higher than 35%, while in reality, it’s cut down to 2/3, working against them. This might explain why there is a steep precipitation since January 2018.
Even AMLP turns out to be disappointing, I would not say using this structure to obtain exposure to MLPs is a bad practice. The only culprit is the macro-level sluggish energy market. Having a right view of the whole economic landscape is of crucial importance before you decide the micro-level investment vehicle.