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A New MLP Fund With A New Approach

http://www.infracapmlp.com/about/fund-profile.html - Master limited partnership (MLP) units are one of the most attractive investment categories available to income focused stock investors.

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A New MLP Fund With A New Approach

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  1. A NewMLPFundWith A NewApproach Master limited partnership(MLP) units are one of the most attractive investment categories availabletoincomefocusedstockinvestors.FromthelistofMLPsandrelatedcompaniesyoucan • findawiderangeofattractivecurrentyields,withmanyofthecompaniesdedicatedtoincreasing their distributionratesona regular basis. However, in somecircumstancesaninvestor wouldliketo ownabasketofMLPsinasinglefund-typeproduct.Thefinancialservicesindustryhasdeveloped and offers MLP focused exchange traded funds (ETFs), closed-end funds (CEFs), exchange traded notes(ETNs)andmutualfunds.However,thereisasignificantissuewithMLPfundsvs.fundsthat ownregular, corporatestockshares. • Funds that focus on MLPs also must deal with additional tax issues. If an MLP focused fund has morethan25%of itsassetsin partnershipunits, thefundcannot qualifyasa non-taxable,regulated investmentcompany(RIC).ThetaxrulesforceanyfundwithahigherpercentageofMLPassetsto beorganized asa corporation andtopaycorporatetaxesonitsprofits. • InpracticeanMLPfundtrackstheaccruedincometaxesonthegainsinitsportfolioandsubtracts thefuturetaxliabilityfromthefund’snetassetvalue(NAV).Theresultofa35%to40%corporate income tax bill is that the NAV of a fund will lag the gains in the portfolio by the tax rate. For example, the Alerian MLPInfrastructure Index (NYSE: AMZI) is one of the most widely followed indicatorsofMLPsectorreturns.TheindexismirroredbytheALPSAlerianMLPETF(NYSE:AMLP). Over the three years that ended on December, 2014 the index had recorded an average annual returnof13.24%.Forthesameperiod,theAMLPETFproducedaveragereturnsof8.18%peryear, a 38% per year under-performance compared to the index. For this reason I have not recommended MLPETFsasaninvestmentoption fortheMLPsector. • IntroducingInfraCapMLPETF • Launched inOctober2014, theInfraCap MLPETF(NYSE:AMZA)is just nowgetting its position in the market solidified. AMZA was established as one of a new breed of ETFs. Traditional ETFs automaticallybuyandholdsecuritiestomatchthesecuritiestrackedbyaspecificindex.Overthe lastyear,fundcompanieshavestartedtocomeupwithactivelymanagementETFs,whichmixthe characteristics of an index fund with additional investment criteria from an investment advisor. AMZAisthefirstactivelymanagedETFinMLP-focusedfundsspace.HereishowtheInfraCapMLP ETF is designed tooperate: • The fundwill ownthesameMLPsastheonestracked bytheAlerianMLPInfrastructureIndex, with thefollowing possibleenhancementstotheindex: • The fundmanagercanweight individual MLPsholdingsdifferentthantheindex. TheAMZI isstrictly marketcapweighted, tracking the25largestmidstreamMLPs,withbiggerMLPshaving a greater weight onfund performance. AMZAwillweight thesesameMLPsbased onthereturn potential fromthemanagementteam’sproprietaryalgorithm. • The fundcanownthepublicly traded general partner companiesof theindexcomponentMLPs. • The general partner of anMLPcangenerateanacceleratedlevelofcashflowgrowthcompared to thelimited partnershipit manages. The GPcompaniescan produceextra capital gainsforthefund • anda faster growing distribution cashflowstream.

  2. The fundcansellcalloptions(covered callstrategy) togenerateextracashincomefromthe portfolio. • Fundmanagerscan useamoderate amount of leverage (upto33%of theportfolio). Leverage inan MLPfund helpsoffset aportion of thecorporate incometaxdrag. • These strategies are in wide-spread usage by the MLP-focused closed-end funds. When I was providedtheopportunitytointerviewtheInfraCapfundmanagers,myfirstquestionwaswhythey hadselectedtogowiththeETFstructureratherthanasaCEF.Theanswerwasthemanagement teamwantedtoprovideahigherlevelofvisibilityonwhatishappeningintheportfolio.Theyare anditisagoodthing.Also,theETFstructureallowsthefundsponsortousesomeadditionaltools tokeepthemarket sharepriceinlinewiththefund’snetassetvalue(NAV).Closed-endfundshares oftentradeatsignificantdiscountsorpremiumstotheirNAVs.AnETFshouldhaveamarketshare pricethat iswithina fewcentsof theNAV. • Attheendoftheinvestmentresearch,AMZAprovidesanMLPETFwithahighlevelofvisibilityon howitoperates.Overtime,investmentresultscanbedirectlycomparedtotheAMLPETF,which owns the same MLPs totrack the AMZI index. This allows us to directly track whether InfraCaps enhancementstrategiesareworking toproducea betterreturn. • InvestmentPotential • Beforethepricesofcrudeoilandnaturalgasstartedtheirsteepdeclinesinthelastthirdof2014, theMLPsectorhadbeenproducingoutstandingreturnsforinvestors.ThischartshowstheAMZI total returnresultsforthelast10years.

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