MLP Basics
Master Limited Partnerships (MLPs) typically engage in the production, transportation, storage, and processing of natural resources, such as oil and natural gas. They are organized as partnerships and trade on stock exchanges. As partnerships, these firms pay no corporate income tax, and are known for generating attractive distribution yields. Many operate with “toll road” business models in which they “rent” capacity of pipelines and storage and are therefore less tied to changes in oil and natural gas prices. MLPs are often purchased for high current income and have historically provided attractive yields. For diversification purposes within portfolios MLPs are less correlated to the equity market than typical equities and have a low correlation to bonds.
MLP Features & Benefits
Organized as partnerships
Pay no corporate income tax
“Toll road” business models
Less tied to changes in oil and natural gas prices
Known for income generation and high yields
Attractive distributions
Lower correlation to equity markets
Portfolio diversification
trueMLP
The trueMLP approach from Liberty Cove strives to provide investors with exposure to MLPs without the burdens often associated with MLP investing. trueMLP offers these benefits:
MLP exposure.
Not limited to 25%, as is generally the case with existing Registered Investment Companies (RICs).
No fund-level corporate income tax.
Shareholders of MLP funds organized as C-Corporations are double-taxed because such funds pay fund-level corporate tax. Patent-pending trueMLP technology enables an ETF or mutual fund to retain its RIC status while maintaining full investment exposure to the MLP asset class.
Form 1099 tax reporting.
Direct investment in MLPs leads to K-1 reporting for each individual MLP. In addition, direct investment may also potentially require investors to file state tax returns for each state in which the MLPs operate. trueMLP funds, like other RICs, generate one Form 1099 for each investor.
No Unrelated Business Taxable Income (UBTI).
Direct investment in MLPs can generate UBTI for tax-exempt entities and retirement accounts.
No single-issuer principal counterparty risk.
Exchange-traded notes (ETNs) and other index-linked notes are general debt obligations of the issuer, thus subjecting the noteholder to principal counterparty risk of that issuer. trueMLP portfolios are not exposed to such single-issuer principal counterparty risk.
trueMLP Comparison Chart
| trueMLP | Direct MLP Investment | C-Corp Funds | Non-Pure Funds | ETN | |
|---|---|---|---|---|---|
| Tax Reporting | Form 1099 ✔ |
K-1 and State (for each MLP) × |
Form 1099 ✔ |
Form 1099 ✔ |
Form 1099 ✔ |
| Unrelated Business Taxable Income (UBTI) | No ✔ |
Yes × |
No ✔ |
No ✔ |
No ✔ |
| Fund-Level Corporate Tax | No ✔ |
No ✔ |
Yes × |
No ✔ |
No ✔ |
| Full MLP Exposure | Yes ✔ |
Yes ✔ |
Yes ✔ |
<=25% × |
Yes ✔ |
| Single-Issuer Principal Counter-Party Credit Risk | No ✔ |
No ✔ |
No ✔ |
No ✔ |
Yes × |
trueMLP versus MLP mutual funds and ETFs organized as Regulated Investment Companies (RICs)
Strategies or funds owning less than 25% in MLPs typically have significant tracking errors versus the MLP benchmarks. As a passive strategy, trueMLP's tracking error will be minimal.
trueMLP versus mutual funds and ETFs organized as C-Corporations
Funds organized as C-Corporations own more than 25% in MLPs, this creates significant tax drag versus the index. The trueMLP strategy is managed to avoid this.