Playing Energy Master Limited Partnerships

by Jon Markman | March 12, 2012 2:05 pm

Steady, low-risk dividend-paying securities continue to enjoy high demand this year as U.S. Treasury bond yields bump along at historic lows.

I have been telling you about a lot of individual equities this year. But now I want to tell you about a closed-end fund run by the largest institutional investor in the energy master-limited-partnership class, Kayne Anderson Fund Advisors.

Kayne Anderson’s primary strategy is to identify and exploit investment niches that it believes are less understood and followed by the broader investor community. The firm and its subsidiaries manage assets of $14.5 billion, with nearly $13 billion of that devoted to the midstream energy sector.

Its team consists of 30 investment professionals focused specifically on MLPs and other related energy infrastructure investments. Chief Executive Kevin McCarthy, who’s been with the firm since its inception in 2004, is in charge. He arrived with a plenty of experience in the sector as his previous role was with UBS Securities as global head of energy.

KA Fund Advisors manages four closed-end funds that focus on the energy sector: KA MLP Investment Company (NYSE:KYN[1]), KA Energy Total Return Fund (NYSE:KYE[2]), KA Midstream/Energy Fund (NYSE:KMF[3]), and the fund that I recommend, KA Energy Development (NYSE:KED[4]).

Often the biggest question investors have is this: Why invest in a fund like this instead of investing directly in the MLPs themselves? Well, the biggest benefit is the access to private investment opportunities not available to most retail investors. The performance of KED that you see above — +320% over the past three years — is more than double the return of the Alerian MLP (NYSE:AMJ[5]) fund that my advisory customers have owned successfully over the past three years.

KA’s funds hold both public and private investments, and they have less cumbersome tax treatments than owning MLPs directly. Like most funds or ETFs, these funds offer increased diversification relative to owning a single investment.

KED is a closed-end fund that focuses primarily on debt and equity securities of public and privately held energy MLPs. The fund’s objective is to generate current income and capital appreciation. It has been around since the fall of 2006 and has about $250 million in assets.

About 60% of its current holdings are public investments, while the remaining 40% consist of privately held MLPs or debt investments. KED ended the year with investments in nearly 40 different public MLPs and close to 20 private firms, with the vast majority of these operating in the U.S.

Just this past year, KED saw its most successful investment since its inception, tripling its value in privately held International Resource Partners before selling it for $100 million. The fund has increased its quarterly distributions by 30% during the last fiscal year, to $0.39 per share.

Energy MLP distributions in general grew 6.3% in 2011, compared with just 2.9% in 2009, and according to an analyst who follows the sector closely, 2012 growth should be even stronger as many of the large publicly traded companies have already announced distribution increases for the year.

KED pays out its dividends on a quarterly basis, and the fund is currently yielding about 6.5% annually. In addition to a robust dividend, the shares have appreciated very well of late, gaining over 11% since the start of the year.

Buy KED on dips as a diversified and inexpensive way to take advantage of the growth in energy MLPs.

  1. KYN:
  2. KYE:
  3. KMF:
  4. KED:
  5. AMJ:

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