Your investment opportunities in a stock exchange are not limited to only stocks and ETF’s. There are several investment options out there and an important one to know is Master Limited Partnerships (MLP). A MLP is a publicly traded limited partnership, which combines the tax benefits of a limited partnership with the liquidity of a stock or bond. For income-seeking investors with a high-risk tolerance, this form of investment can be attractive due to its regular payouts.
MLPs are common amongst oil and gas companies as they help reduce the cost of capital. Within a MLP, there are two types of partners: General partners and Limited partners. The general partners are the managers of the day to day operations, while the limited partners are the investors who provide the capital to fund operations. Investors are only taxed on the distributions they receive and their partnership stake can easily be sold on a stock exchange.
Under the right circumstances, MLPs can be a lucrative investment, but there are important risks to be mindful of. There are two major macroeconomic themes that can affect the price of MLPs: oil prices and interest rates. Generally, lower oil prices will decrease the price of MLPs since there is less potential for the MLPs to make distributions to its limited partners. In addition, the prices of MLPs will also decrease if long-term interest rates rise because other investments will pay more interest, meaning less demand for MLPs which ultimately lowers their share price.
In 2014, MLPs were all the rage as oil soared up to $115/barrel. As oil prices continued rising, investors became exuberant about MLPs, causing the distribution rate on the MLPs to suddenly drop to a low percentage as demand reached a high. Before MLPs were being bought heavily, we at Fogel Capital Management already had a large position in MLPs as part of our portfolio. After seeing the MLP prices escalating so hastily, we felt as though we were not being compensated for the risks posed by being a limited partner in the MLPs. Therefore, we sold off all our positions in MLPs. Oil then started dropping promptly, and by 2016, oil was at $29/barrel. MLPs were losing money and the limited partners who invested near the peak of 2014 got crushed. We were able to make a gain in this investment because we were aware of the risks involved, while also being attentive to the rewards of investing before the MLPs got too expensive.
At Fogel Capital Management, we are as mindful with our portfolio management as we were mindful of our investments in the MLPs. For over 20 years, we have been able to mitigate risks for our clients as we did when we successfully exited our MLP investments. If you would like to further discuss this article or receive a free portfolio consultation, feel free to call us at (772) 223-9686.