A decade ago, the universe of master limited partnerships (MLP) sported an aggregate market value of less than $30 billion. Institutional participation was virtually nonexistent, in part because of tax complications.
Today, the total market capitalization of the ever-expanding list of publicly traded partnerships has climbed to more than $420 billion, reflecting the security class’ increasing popularity among investors. With some of the restrictions on institutional ownership loosened, the number of fund products that allocate significant amounts of capital to MLPs has surged to 61 offerings since the first closed-end fund launched in 2004.
Source: Bloomberg, Morningstar, Fund Filings
Against this backdrop, institutional ownership of the five largest MLPs has increased to 7 percent of the group’s total market capitalization, with much of these investment dollars concentrated among the five largest names. Despite this influx of institutional cash, the level of institutional investment still lags the universe of real estate investment trusts (REIT), suggesting that this trend could continue.
Those who speak for institutions frequently tout the greater efficiency of adding exposure to this security class through one of the many fund products. And several spokesmen at the National Association of Publicly Traded Partnerships’ (NAPTP) annual investor conference in Stamford, Conn., asserted that the markets for these securities had already become more “rational” as a result. Commentators on an MLP-focused panel at the Las Vegas MoneyShow made similar points.
Increased institutional investment has changed trading patterns within the sector, a trend that has critical implications for individual investors.
Although professional asset managers’ motivations and strategies often differ from those of individuals, their approach isn’t inherently more rational or efficient. In fact, the most salient ramification of rising institutional ownership will almost surely be an increase in volatility.
Why will there be more fluctuations in MLP’s unit prices? Institutional money managers’ performance is evaluated on a quarterly or annual basis. What a particular MLP’s stock trades for on Dec. 31, for example, is paramount for determining the annual returns on which salaries, bonuses and even job extensions are based.
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Elliott and Roger on Dec. 21, 2017
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