White Paper: Taking the Passive Versus Active Debate to MLPs

07/21/15 | Emily Hsieh

Decisions, decisions. Figuring out the best way to access MLPs for your portfolio is a multi-step process that involves iteratively narrowing down your choices, a process similar to buying a car.

Step 1.
You decide you want an SUV. Easy.

Step 2.
Buy new or used?

Step 3.
Which make do you want to go with? Compare prices, safety track records, warranties, and the social implications.

Step 4.
Which model do you want to go with? Compare prices, size, power, and additional features.

...and the steps continue.

For MLP investing, say you’ve gotten comfortable with the benefits of MLPs and have decided to make an allocation. This is Step 1. Next, for Step 2, you’ll have to decide if you prefer to own MLPs directly or through an investment product. If you choose the latter, Step 3 is to determine if you prefer passive or active investing.

Alerian’s passive versus active white paper is the first comprehensive study comparing actively managed MLP funds against the Alerian MLP Index (AMZ), the leading gauge of energy MLPs. The study assesses return, distribution growth, closet indexing, risk trade-off, and alpha generation.

Study takeaways include:

• Over the long term, actively managed MLP funds underperform the AMZ
• MLP distribution growth outpaces that of actively managed MLP funds
• MLP mutual funds display a strong case of closet indexing
• MLP mutual funds have not generated strong alpha over the long term