Given the unusual degree of turbulence energy markets have experienced in the last few years, the importance of the reinvestment of distributions (i.e., dividends) by midstream master limited partnerships (MLPs) has been particularly pronounced.
Since 1996, almost 80% of the Alerian MLP Index’s (AMZ) 11.5% annualized total return has been derived from receiving and reinvesting distributions. Even without reinvestment, the AMZ’s annualized total return would have been 9.4% since 1996, with 60% of this return delivered through distributions.
Due to extreme energy-market volatility, the average price performance of even the top 10 performing MLPs in the AMZ has been negative for the period July 2014-April 2018. However, after accounting for distributions – whether reinvested or not – the average performance of these MLPs is positive for the period: 3% total return without reinvestment of dividends, and 7% total return when dividends are reinvested.1
In our view, the distribution capture opportunity for the asset class currently sits materially above the broader market or competing equity-yielding asset classes. The AMZ’s current indicative yield is 8.51%, compared with approximately 1.9% for the S&P 500 Index.
As we have stated previously, while energy market doldrums may linger, we remain confident that a return to a more steady energy market is manifesting itself. We further believe that the energy infrastructure landscape is attractively positioned, with appealing growth potential and even more attractive valuations. As normalcy returns, we believe market participants will return their focus to the power that dividends have on long-term total return.
- ^Source: Alerian MLP Index, April 2018. Includes the top 10 performing companies in the Alerian MLP Index, as of 4/30/18, that were also included in the index in July 2014. Past performance does not guarantee future results.
The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships whose constituents represent approximately 85% of total float-adjusted market capitalization. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Fund. Past performance does not guarantee future results.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the currently effective statutory tax rate as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund’s value. MLP funds may accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability, if applicable, is reflected in the daily NAV and as a result a MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.