SUNDAY, OCTOBER 17, 2010 PERSONAL FINANCE
Promise and peril in master limited partnerships
BY JEFFREY R. KOSNETT M
aster limited partnerships—relatively obscure, high-yielding investments that flourished over the past decade while the
rest of the stock market stagnated—are attracting a lot of attention.Maybe too much, in the viewof some of their fans. Reports of double-digit total returns and 6 percent-plus current yields are all over the investing blogs, and a flurry of newMLPs are on the way. The first mutual funds—and an exchange-traded fund —focusing on MLPs launched this year, and an increasing number of institutional investors are getting into the game. Longtime MLP watchers wonder whether the category is destined to crumble beneath a landslide of greed. Their concerns are valid. The situation reminds
me of how real estate investment trusts and cargo- shipping stocks, two other high-yielding niche categories, busted after their booms attracted a rush of capital. And MLPs have indeed boomed. Over the past 10 years, through Sept. 3, the Alerian MLP index, which tracks 50 energy MLPs (a fewMLPs are not related to energy), returned a stunning 18.5 percent annualized. Over the same period, Standard & Poor’s 500-stock index lost 1.3 percent percent a year. The Alerian index currently yields 6.7 percent. MLPs are publicly traded limited partnerships.
Like other limited partnerships, MLPs pay no taxes on their earnings.However, investors (called unit holders) must pay taxes on the distributions they receive and often have to contend with complex K-1 forms.Most MLPs collect fees for the transport or storage of various forms of energy. Energy companies are gaga over the potential gas
output from shale formations in Texas, Louisiana, the Rockies and the Appalachians. If producers succeed in extracting gas from shale, they will need pipelines, processing plants and storage facilities. That will mean the creation of newMLPs. Kenny Feng, head of Alerian, a research firm that specializes in MLPs, figures that the sector can efficiently absorb an additional $150 billion worth of investment. That’s nearly three-fourths of the current market value of all energy MLPs.However, our energy use won’t increase by as much anytime soon, so a glut of newMLPs may weigh on the sector. And the increased attention makes some advisers
nervous. “Once you get noticed in the press, too much money floods in,” saysMickey Cargile ofWNB Private Client Services inMidland, Tex.He recommends that MLPs be no more than 20 percent of clients’ income-generating investments, with no more than 5 percent in a single issue. The newMLP funds appear unappealing. Alerian
MLP ETF (symbol AMLP) has a serious tax flaw: Because investment companies may not hold more than 25 percent of their assets in partnerships, the ETF is not legally a mutual fund but rather a
Lessons fromthe cheapskate next door
BY ANNE KATES SMITH T
o research his book “The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their
Means,” Jeff Yeagermet hundreds of like- minded skinflints. Some of the insight he gathered: What did you learn bymeeting other
cheapskates across the country? They fly in the face of the stereotype. They’re not penny pinchers, and they don’t spend every waking hour trying to figure how to save a nickel. Being a cheapskate sometimes isn’t about money at all.Many cheapskates have strong religious beliefs, and some embrace environmentalismas the underpinning for a decision to live frugally. What’s the common thread? Cheapskates
run the range of lifestyles and economic profiles. Some aremultimillionaires, and others have such limited income they could qualify for public assistance if they chose to. The commonality, regardless of income level, is living on less than theymake—sometimes substantially less. They’re largely living debt- free. Only 5 percent had any consumer debt other than theirmortgage, and among those who had amortgage, 85 percent said they were working to pay it off early. The vast majority have been living this way a long time, pre-recession. They’re not nouveau cheap. Do they ever splurge? Everyone I asked
said, yes, of course. But they do it selectively, and theymake certain they want something before they buy it. They splurged on an activity rather than a possession. There’s quite a bit of social science that shows possessions disappoint over time,but experiences appreciate in value, in ourmemories. What can we learn fromcheapskates?
ILLUSTRATION BY TIM GRAJEK FOR THE WASHINGTON POST
corporation. That makes the MLPs earnings taxable at a corporate rate of up to 35 percent. That will be a serious drag on performance. Three MLP mutual funds started inMarch by SteelPath, an Alerian spinoff, have the same tax problem. Plus, they levy sales charges and charge high ongoing fees. The funds’ main selling point is that they relieve
you of the burden of dealing with pesky K-1 forms when you do your taxes. You also avoid the mess that arises if you earn more than $1,000 of unrelated business taxable income inside an IRA. You’re better off buying MLPs directly and using an accountant if
necessary.My top picks for conservative investors areMagellanMidstream Partners (MMP), which, at a Sept. 10 closing price of $50, yielded 5.9 percent, and Plains All-American Pipeline (PAA), which at $62 yielded 6.1 percent. A sleeper is Enbridge Energy Partners (EEP), a leading carrier of crude oil from western Canada to the United States. It has less debt than most MLPs and so far has raised dividends twice in 2010. At $54, it yields 7.6 percent.
Jeff Kosnett is a senior editor at Kiplinger’s Personal Finance.
Practical advice on how to stretch your money, ranging fromsmall tips to larger lifestyle choices. For instance, cheapskates don’t shop yard sales because you often buy things you didn’t set out to. They do like thrift stores, which they see as department stores of usedmerchandise. Cheapskates barter and negotiate for goods and services. Theymight use an old-fashioned food dehydrator, yet they’re tuned in to the latest cyber tips for savingmoney, including checking
freecycle.org for giveaways and
accidentalwine.comfor wine that’s discounted when the label is damaged. Some tips are truly bizarre.More than one cheapskate told me that underwear was an optional extravagance.
— Kiplinger’s Personal Finance 6
More from Kiplinger Go to
www.kiplinger.com for more
analysis.
Obama could use some advisers like these — and a political scientist, too EZRA KLEIN
ezra from G1
with any of them. This is about their ideas, not their personali- ties.) 1) Karen Kornbluh: In a pre-
vious life, Kornbluh was Sen. Obama’s policy director. Now, she’s serving as our ambassador to the Organization for Econom- ic Cooperation and Develop- ment. It’s not exactly hard labor. She gets a house in Paris. But it’s time Obama called her back. With health-care reformand
the expansion of the Children’s Health Insurance Program, the Obama administration has done important work expanding and strengthening the safety net. Now officials need to turn their attention to the focus of Korn- bluh’s work:modernizing it. These programs were developed in an age whenmen were the breadwinners, women stayed home to raise children, single- parent families were rare, and workers tended to stick with a single employer for decades. All of that has changed, but our so- cial supports haven’t. Kornbluh’s vision is to refocus
our entitlements on “juggler families”: income-insecure fami- lies “juggling tomake endsmeet and so dependent on themoth- er’s income [that] time off to care for a sick child or a new baby can result in devastating income interruptions and even job loss.” Her proposals include updating Social Security so it counts time spent parenting and establishing a family-insurance programthat would help earn- ers who have to take time off to care for a child or parents. This sort of thinking is overdue, and you could even imagine it ap- pealing to conservatives inter- ested in supporting families. 2)MarkMcClellan:McClel-
lan led the Center forMedicare andMedicaid Services under GeorgeW. Bush. He was instru- mental in implementing the Medicare prescription drug ben- efit. That gives himtwo things the Obama administration defi- nitely needs: credibility with Re- publicans on health care and ex- periencemaking amajor health- care initiative work. McClellan has been a cautious
KarenKornbluh could help modernize the safety net.
friend and frequent critic of the Obama administration’s health- care reforms. He complimented the legislation formaking im- portant progress on coverage and payment reforms while crit- icizing it for falling short on medicalmalpractice and con- sumer-driven policies. He de- serves to be heard out on both points, and if Republicans fail in their efforts to repeal the legisla- tion—and they probably will— somemight be interested in having a sympathetic voice on the inside. 3) Dean Baker: Think the ad-
ministration’s economic teamis too insular? Baker, a contrarian economist who was among the first to spot the housing bubble and who’s been a vocal critic of the administration’s economic policies (and TheWashington Post’s economic coverage), will fix that. Baker can be counted on for
innovative policy thinking. (For instance: How about doing away with pharmaceutical patents? Or letting foreclosed homeown- ers rent their homes? Or slap- ping a transaction tax onWall Street to slow things down and reduce our deficit?) And, per- hapsmore important, he is un- interested in currying favor with those in power. It’s hard to imagine himplaying well with others in theWhite House, but then, that’s the point. He’ll say things they don’t want to hear, but should. 4) Christina Romer: Romer,
who just left theWhite House, won’t exactly bring a new per- spective. But she brings the
MarkMcClellan has a track record on health care.
right perspective. In her final speech as chairman of the Coun- cil of Economic Advisers, she of- fered the full-throated call for more fiscal stimulus, which the administration has largely aban- doned. “Concern about the defi- cit cannot be an excuse for leav- ing unemployed workers to suf- fer,” she said. “We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wis- domto use them.” She’s right. The stimulusmay
not poll well, but it worked. Un- employment would’ve been much higher without it.Was it too small? It was. But Romer knew that at the time. She calcu- lated that we needed $1.2 tril- lion.We got a bitmore than half that, and then the economic cri- sis proved worse than it seemed when Romer was running the numbers. Unemployment is now at 10
percent, and though the stimu- lus probably kept it frombrush- ing 12 percent, the economic misery has turned voters against the intervention. The adminis- tration can’t hide fromthis fight, however. The job situation is too grimfor the government to simply leave the unemployed to their fate. Romer, speaking freely in her final days in office, had it right. 5) A political scientist: In
general,Washington is split be- tween people who specialize in governing (most of themecono- mists or lawyers or public policy graduates) and people who spe- cialize in running elections. Po-
Dean Baker is an innovative thinker about policy.
litical scientists, who study the history and run the numbers on both pursuits, are not invited to the table. Adding to the snub, the president has hosted at the White House groups of journal- ists, pundits and historians. Again, no political scientists. That’s a shame, because the
Christina Romer has the right perspective.
White House could use some po- litical science. If the administra- tion wanted out of the 24-hour news cycle that obsesses over who’s up and who’s down, it should’ve grabbed some of the people who’ve studied the wax- ing and waning of the liberal and conservative brands since
the 1930s. (Did you know that on the eve of FDR’s 1936 rout of the Republican Party, amajority of Americans polled by Gallup identified themselves as conser- vative?) TheWhite House, which was shocked by the Re- publican Party’s unwillingness to offer early cooperation, could have benefited fromcongressio- nal scholars who knew that both history and electoral incentives ensured that Republicans would obstruct fromDay One. I could go on. Pick an issue,
or a political quandary, and odds are there’s a wealth of po- litical science literature on the topic. TheWhite House needs someone who can bring the pro- fession’s best insights and evi- dence to the administration’s deliberations. And I hear there are even free desks for themto sit at.
kleine@washpost.com
KLMNO
EZ EE
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