Interesting discussion on MLP board of i-village--
the entire thread on diversification is worth reading but here is one post in the topic:
Diversification - My Take
I am not totally in disagreement with Jim Rogers on this one. However, I am also not as extreme. I personally have over 60% of my investable assets in the MLP space (my only real equity exposure is in my company 401K and in stock awards from my company). I feel that inside the MLP space there is a diverse cross section to invest in. As such, I am allocated in many areas that have wildly varying business models and risks. I own midstream oils, midstream gas, gathering and processing, propane, coal, asphalt, gas storage, oil storage, etc..... Some have commodity exposure, some don't. Some are regulated monopolies, some aren't. As you can see they are very different and by investing in a wide variety and monitoring closely, things have worked out very well indeed. I view the MLP space as hybrid investments that behave similar to a basket of several asset classes rolled into one. I would consider MLP weighting to be comprised of some from all catagories instead of looking at MLPs as one class. MLPs are part bond like, part utility, part value stock, part growth stock, part tax free like, part commodity like. A unique king of all investments IMHO.
To summarize:
PROS
1) MLPs have tax advantage. Has a "muni" like advantage to some.
2) MLPs frequently are monopolies and have some degree of Federal regulation. This structure makes them very insensative to economic trends. Always has been the way it was and last year proved it once again. Lack of competition makes for predictable repeatable results.
3) MLPs frequently raise their distributions. This makes them somewhat of an inflation hedge. CPI tariff adjustments is a beautifulo thing.
4) Existance of super relative distribution levels makes them very easy to evaluate for relative valuation. Yield is one of the best metrics to determine value. Assuming one looks at DCF, etc etc..... Which I do.
5) Energy is one area that is always in demand and for the forseeable future is going to continue to be in demand. These companies deal in a hot commodity. Unless Dr. Octavius puts his fusion generator into service, these guys will continue thriving.
6) Utility type businesses are among the easiest and most predictable to analyze. Real business models, real meat and potato stuff.
7) Strong historical low correlation to equity markets 8) Congressional backing of the structure with no talk of any changes.
Here are my CONS (assuming one does a modicum of homework on their picks)
1) Congressional backing of structure with no talk of any changes - at this moment. Clearly this could change, but there is not even a gurgle of talk at this point in time.
2) Dr. Octavius puts his fusion generator into service. Oh wait, that was in one of the Spiderman movies!
3) Super dooper hyper inflation with yields going double digit. This will hurt most other equities as well. MLPs may fare better in any event.
4) Company is a fraud, like Enron. Diversifying in the space alleviates this risk (which is prevalent in any sector).
5) Isolated risk due to bad hedges or hedge fraud. See #4 above.
In a nutshell, I have put my neck on the block for close to 20 years as a big MLP advocate. Being invested non stop in the space since 1992. I can't complain, nor do those that have followed the advice. For the record, I do not advocate any investment in regular equities at all. Only equities and fixed income that have big yields and/or distributions. Once in a while, something like a VZ yielding over 6% may appeal, but for the most part, no stocks. This has fueled better returns and lower risk than any asset allocation strategy I have ever seen. And we have a 20 year track record to back it up.
Remember, the quote from Jerry Maguire... "Show me the money" Well, this is what it is about for us. Show me the healthy cash flow. Once in my pocket, you can't lose it. I'll take that over Apple any day, no matter how much Apple may go up. That is real risk there...... Hope this helps!! |
