The Alerian Problem

If all these funds sold 75% of their MLPs they could even claim to be RIC-compliant and no longer subject to the drag of corporate taxes. Unfortunately, that would require selling $BNs of MLPs, and the reason MLPs are converting to corporations is because MLP prices are depressed.

MLP-dedicated funds face an unenviable business decision, and they’re clearly best served by the status quo. Their best outcome is to delay changing their benchmark indefinitely, and hope to convince their retail investors that MLP-only funds remain a viable proposition. The risk for current and future holders is that the shrinking Alerian Index eventually forces them to change, which could be tumultuous. It might be one reason why net inflows to MLP-dedicated funds are flat since last Summer. In addition to the headwinds of corporate taxes (see AMLP’s Tax Bondage), you can add index uncertainty. It’s The Alerian Problem.

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Disclosure: We are short AMLP

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