Darren Schuringa of Yorkville Capital explains the benefits of MLPs for growth and income investors, highlighting several diversified MLP funds as well as a trio of favorite master limited partnerships.
Steve Halpern: We're here with Darren Schuringa, Managing Partner at Yorkville Capital. Thanks for joining us today, Darren.
Darren Schuringa: Steve, it's my pleasure. Thank you for having me.
Steve Halpern: Today, we're going to discuss Yorkville Capital's MLP core income strategy, which generated a 58% return in 2013. First, for our listeners who may be unfamiliar with MLPs, could you briefly explain what these investment vehicles are and your outlook for the MLP sector, looking out through this year and beyond?
Darren Schuringa: That would be my pleasure. Master Limited Partnerships, the acronym MLPs, which is, they are often, in essence, a pure way to invest in the US energy revolution.
From a structural standpoint, they're very similar to REITs in that they are pass-through vehicles, which means they don't pay any corporate income taxes, which means, too, from an investor standpoint, there's more cash flow to distribute, which generally means higher income and higher yields from the investment.
What they invest in, primarily 80% of all MLPs invest in essential US energy infrastructure like pipelines, so now—oh, sorry, Steve.
Steve Halpern: I'm sorry, and your outlook for that sector, when you look out over the coming year?
Darren Schuringa: Absolutely, the outlook looks very bright for MLPs going forward and the macro driver behind it, and why we see continued growth going forward is, really, the US energy revolution.
That will drive future distribution growth, or future cash flow growth, because of our need for further investment in pipelines to move gas from the North Dakota—which is also known as the Bakken—to the Gulf Coast or to the east coast.
Unlike most bonds, MLP payouts are not fixed, but they offer income growth opportunities and this is, again, part of an explanation. This means MLP distributions share the characteristics of both fixed income and equities, which makes growth metrics vital in evaluating them, and understanding distribution growth is critical to projecting the future total return potential of MLPs.
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It's really similar to traditional equity metrics, like earnings, or cash flow, in terms of importance in looking at growth and valuation, but more importantly to an investor, this growth is cash that you're receiving in your pocket.
It's not money that's being reinvested in the business; it's money that you can spend, and from this standpoint, MLP fundamentals remain excellent for both current income, the money you're receiving each year, and the potential for capital gains, the growth and income, which ultimately drives capital appreciation of the underlying or the value of the underlying asset.
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