Master Limited Partnerships (MLP’s) are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. They combine the tax advantages of a partnership and higher dividend yields with the day to day tradability of common stocks.
MLP’s consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLP’s are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.
MLP’s mail individualized K-1 tax forms to each unit holder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Further, most MLP’s enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings.
The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.
Thus MLP’s typically enjoy toll-road business models. Thus:
● They do not take title to the commodities transported
● Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
● They do not have significant credit risk as commodity prices balloon.
● MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines
Other qualities that enable these stable enterprises to keep increasing their dividends over time include:
● Long Useful Lives of their assets
● Fees are indexed to inflation, which provides an inflation hedge
● Most MLP’s have a near monopoly in their area
● There is a high cost of entry and thus there is virtually no competition
● Most MLP’s have the ability to grow their cash flow base, so they could relatively outperform in a rising interest rate environment.
The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLP’s enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions.
L&S Advisors has a particular expertise with regards to MLP’s and is just one example of the strategies and tactics that we share with our clients specific to risk management.
Due to the legal structure, tax implications, and tax filings, Master Limited Partnerships (MLP’s), may not be suitable for certain types of accounts.
Thursday, October 22, 2009
Monday, October 19, 2009
L&S Advisors Outlook:Summer/Fall
Acorn Fund founder, Ralph Wanger has thoughtful words on the subject of RISK which bear repeating:
“Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike, and stick close together.
If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best for there the grass is fresh while the middle sees only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand -- or other hoof -- there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”
That said, from a tactical standpoint, risk-control can be almost as important as being positioned properly when it comes to seeking superior investment returns. If one has not lost too much capital, even if wrongly positioned, an investment manager can be well-positioned when he gets back in sync with the markets.
When the history of our time is written many will disagree about this “Great Recession’s” place but everyone will agree that it has deeply shattered long held beliefs about the functioning of the stock and bond markets. It has been one year since the weekend that shook the foundations of Wall Street and of the global financial system – when Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity and AIG was taken over by the U.S. government.
In light of that, we believe it is important to briefly summarize where we’ve been this year, where we are today and our investment philosophy for the period ahead.
Where have we been?
Six months ago, in early March, it truly did feel like the world might be coming to an end – talk of a return to a Great Depression-like economy dominated the media. Understandably, fear was rampant and stocks responded to these nightmarish scenarios by hitting the lowest levels in years with financials especially hard hit.
Although no one knew it at the time, it now appears that turned out to be the bottom. Since then, the financial markets have moved back from the precipice.
Two years ago the market was characterized by rampant optimism. The U.S. market had hit a new high in October of 2007 and any concerns were set aside as minor annoyances.
By contrast, six months ago the market was overwhelmed by absolute pessimism – there was no sign of hope anywhere.
Recently the August Business Week ran a cover story called the “The Case for Optimism.” The premise is that beyond the issues facing the global economy there are many underlying positives that give cause for optimism as we look out two, three years, or beyond.
Where are we going tomorrow?
Today, we see the market as difficult to understand. Many investors can be characterized as extremely nervous. Although the market has been performing well, there are many underlying economic indicators that are extremely negative. One of our favorite economists, David Rosenberg, recently wrote “The current and prospective level of employment and wages suggest that there remains at least $5 trillion more of deleveraging in the consumer sector.” And “although the combination of dramatic fiscal and monetary stimulus and pledges of even more largesse is absolutely generating a high degree of excitement in the stock market, …the question remains one of sustainability and what the economy really looks like without all this medication.”
We are always skeptical of rallies that are purely premised on technicals and liquidity but bereft of a solid economic foundation. The growth we have seen globally, and in the U.S.A. in particular, is because of unprecedented government stimulus. There is little organically in the economy to get us excited. One of our major challenges in managing your portfolio is to make judgments on the controlling of risk and the distinction between the direction of the economy and the direction of the market. A favorite market axiom is “don’t fight the tape” meaning you do not want to be in the way of a market that is going in a different direction than your market call.
One of the critical elements in assessing the markets today is the yin and yang of inflation vs. deflation and the interaction of the dollar. In an inflationary environment, the sectors that we would want to emphasize in our portfolios would be natural resources, commodities, materials, gold, and tech stocks. If the dollar continues to be weak, and it appears that will be the case for the foreseeable future, these sectors along with consumer staples should appreciate. On the other hand, we might not want to hold those sectors in a deflationary environment unless we have a weak dollar along with deflation. A deflationary atmosphere and a strong dollar (flight to safety) would cause us to liquidate our portfolios and have a large cash position, probably invested in treasuries. Again, according to Rosenberg, “The name of the game has been trying to garner solid equity like returns without having to unduly expose ourselves to the vagaries of the stock market, which as we know in the past decades, is highly volatile, vulnerable to sharp and sudden setbacks….” In other words “risk management transcends everything” and we have to apply diversified strategies that involve capital preservation and income orientation.
We are very alert to what Bill Gross of PIMCO calls the “new normal” – which is his term for a sustained period of annual growth of about 2%, much slower than we have been used to, as Americans adjust to a world where credit and jobs are less plentiful.
At L & S our focus continues to be on “Absolute Return”. Absolute return of a portfolio has as its goal the production of returns superior to cash and doing it with as little volatility and general market risk as possible. Yet we try to have no preconceived notions of which asset class to be invested in even if that asset class is cash. While this quarter’s performance was excellent as compared to the general market indices, what we believe to be significant is our risk management controls in order to get those returns.
“Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike, and stick close together.
If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best for there the grass is fresh while the middle sees only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand -- or other hoof -- there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”
That said, from a tactical standpoint, risk-control can be almost as important as being positioned properly when it comes to seeking superior investment returns. If one has not lost too much capital, even if wrongly positioned, an investment manager can be well-positioned when he gets back in sync with the markets.
When the history of our time is written many will disagree about this “Great Recession’s” place but everyone will agree that it has deeply shattered long held beliefs about the functioning of the stock and bond markets. It has been one year since the weekend that shook the foundations of Wall Street and of the global financial system – when Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity and AIG was taken over by the U.S. government.
In light of that, we believe it is important to briefly summarize where we’ve been this year, where we are today and our investment philosophy for the period ahead.
Where have we been?
Six months ago, in early March, it truly did feel like the world might be coming to an end – talk of a return to a Great Depression-like economy dominated the media. Understandably, fear was rampant and stocks responded to these nightmarish scenarios by hitting the lowest levels in years with financials especially hard hit.
Although no one knew it at the time, it now appears that turned out to be the bottom. Since then, the financial markets have moved back from the precipice.
Two years ago the market was characterized by rampant optimism. The U.S. market had hit a new high in October of 2007 and any concerns were set aside as minor annoyances.
By contrast, six months ago the market was overwhelmed by absolute pessimism – there was no sign of hope anywhere.
Recently the August Business Week ran a cover story called the “The Case for Optimism.” The premise is that beyond the issues facing the global economy there are many underlying positives that give cause for optimism as we look out two, three years, or beyond.
Where are we going tomorrow?
Today, we see the market as difficult to understand. Many investors can be characterized as extremely nervous. Although the market has been performing well, there are many underlying economic indicators that are extremely negative. One of our favorite economists, David Rosenberg, recently wrote “The current and prospective level of employment and wages suggest that there remains at least $5 trillion more of deleveraging in the consumer sector.” And “although the combination of dramatic fiscal and monetary stimulus and pledges of even more largesse is absolutely generating a high degree of excitement in the stock market, …the question remains one of sustainability and what the economy really looks like without all this medication.”
We are always skeptical of rallies that are purely premised on technicals and liquidity but bereft of a solid economic foundation. The growth we have seen globally, and in the U.S.A. in particular, is because of unprecedented government stimulus. There is little organically in the economy to get us excited. One of our major challenges in managing your portfolio is to make judgments on the controlling of risk and the distinction between the direction of the economy and the direction of the market. A favorite market axiom is “don’t fight the tape” meaning you do not want to be in the way of a market that is going in a different direction than your market call.
One of the critical elements in assessing the markets today is the yin and yang of inflation vs. deflation and the interaction of the dollar. In an inflationary environment, the sectors that we would want to emphasize in our portfolios would be natural resources, commodities, materials, gold, and tech stocks. If the dollar continues to be weak, and it appears that will be the case for the foreseeable future, these sectors along with consumer staples should appreciate. On the other hand, we might not want to hold those sectors in a deflationary environment unless we have a weak dollar along with deflation. A deflationary atmosphere and a strong dollar (flight to safety) would cause us to liquidate our portfolios and have a large cash position, probably invested in treasuries. Again, according to Rosenberg, “The name of the game has been trying to garner solid equity like returns without having to unduly expose ourselves to the vagaries of the stock market, which as we know in the past decades, is highly volatile, vulnerable to sharp and sudden setbacks….” In other words “risk management transcends everything” and we have to apply diversified strategies that involve capital preservation and income orientation.
We are very alert to what Bill Gross of PIMCO calls the “new normal” – which is his term for a sustained period of annual growth of about 2%, much slower than we have been used to, as Americans adjust to a world where credit and jobs are less plentiful.
At L & S our focus continues to be on “Absolute Return”. Absolute return of a portfolio has as its goal the production of returns superior to cash and doing it with as little volatility and general market risk as possible. Yet we try to have no preconceived notions of which asset class to be invested in even if that asset class is cash. While this quarter’s performance was excellent as compared to the general market indices, what we believe to be significant is our risk management controls in order to get those returns.
Friday, October 9, 2009
An Interview with Sy Lippman & Rick Scott, Co-Founding Partners of L&S Advisors, Inc.
The following is an interview conducted with Sy Lippman & Rick Scott, co-founding partners of L&S Advisors, Inc. Sy & Rick have successfully managed portfolios for high-net-worth clients for over 30 years. In this interview they share some insight as to what distinguishes L&S and the philosophy that sets them apart from other asset managers.
Q: Could you explain why you believe risk management transcends everything?
SL: The impact of a bear market on a stock portfolio can be devastating to individual investors. It can take investors years to recover their losses. We believe preservation of assets during bear markets is the key to maintaining wealth.
When the market goes up, the truth is, just about anybody can make money. Managing prosperity is easy. What clients need is an advisor who can manage adversity, and not just stem losses. To battle adversity, an advisor needs to try to anticipate when things are going to implode.
Q: How do you define "Absolute return" and what impact does this have on an investor?
RS: There are several definitions of absolute return, but first one must understand the definition of relative return, which is simply the return of your portfolio relative to a given index benchmark. Absolute return does not use a specific benchmark. My firm defines absolute return as achieving positive results in absolutely any market condition, using absolutely any investment.
Within a relative return portfolio, if the benchmark index is down 40% and your account is down 35%, you essentially beat your benchmark by 5%, yet at the end of the day, you are still down 35%?
At L&S Advisors, we are obsessed with the pursuit of achieving positive performance for our clients in any given market condition.
Q: What are some of the issues with an over diversified portfolio?
RS: The primary objective at L&S Advisors is to achieve superior investment returns for our clients, not to track certain market indices. We believe that some money managers that fail to beat the performance of the S&P 500 due so because they emphasize diversification in the interest of minimizing risk. As a result investors end up with an over-diversified portfolio, resulting in mediocre performance, as the profitable companies make up too small a portion of the portfolio to have a significant impact. In the end, because clients hold so many positions, they end up with a very expensive exchange traded fund (ETF).
We adjust our portfolio exposure to pursue the best ideas wherever we see them, and limit our portfolios to only those ideas.
Q: How is a Registered Investment Advisor different than a Broker/Dealer?
SL: Does it seem appropriate for a client to be "advised" by someone selling products and earning commissions? No. Therefore, at L&S Advisors, there is no brokerage, no products to sell, no commissions or additional hidden compensation. We would also advise clients to choose advisors free of conflicts of interest, which we avoid. We are fee only. There are no bank, brokerage, insurance or estate plans. It's right there in our ADV-our SEC filing-and we provide it to every client. We focus all of our efforts on providing investment counsel to our clients, which we believe is a full time job.
Q: What effect has the recent market volatility had on investors' decision-making processes?
RS: After realizing the effects of the recent 2008/2009 market turmoil, many investors have taken what we believe are inappropriate actions at an inopportune time, and in hindsight probably wished they had planned accordingly for the global economic downturn we are now faced with. Many investors seem quick to say they have a "trusted advisor" whom they rely on to give them sound financial advice, yet some still found their portfolios decimated at the end of 2008. What we think is worse, is that a number of advisors may have been smart enough to see the turmoil coming, but unfortunately were constrained as to what they could do to try to protect client assets.
Q: How has L&S Advisors navigated the volatile markets of 2008 and 2009?
SL: Towards the end of 2007 we noticed that structural changes within certain sectors of the stock and bond markets were taking place, as well as a weakening credit market. During the summer of 2008, it was obvious to us that the worst had not yet materialized in the markets, and that this bear market was vastly different from recent bear markets. As a result, we prepared our portfolios for deterioration in all forms of credit, as well as the potential negative impacts on the broader economy.
Due to the size of our organization, we were able to be nimble and react quickly to the deteriorating market conditions. As a result, we made the tactical decision to move a significant allocation to cash, and kept it there through the first quarter of 2009.
Q: Is a buy-and-hold strategy still a viable approach to investing?
RS: Looking at the past decade of the Dow Jones Industrial Average, I believe it is clear that the traditional buy-and-hold school of thought is considerably less effective. In short, the game has changed.
The Philosophy of asset allocations and buying companies with stable fundamentals and historic returns has been challenged.
Today's changing environment forces us to modernize our approach and strategies. The market now moves faster than it ever has. Anyone who sits and waits could simply miss the potential opportunities. To outperform the market, an advisor must think tactically.
At the same time that we are actively managing risk within our clients' portfolios, we are seeking investment opportunities across global capital markets.
We respond to market conditions and quickly revise strategies, because one must employ tactical allocations as opposed to the static approaches of the major brokerage and investment houses.
Q: What is tactical diversification and is it just a fancy term for "Market timing"?
SL: This is now the longest recession since the 1930's. We're not overly concerned, however, as a recession doesn't typically end until four to six months after the final bear market low is in place. The point is that it's not our goal to "pick the market bottom," which is obvious only in 20/20 hindsight. We need to recognize good buying opportunities and attractive valuations, and start to adjust allocations according to the level of risk we see going forward.
We define tactical diversification as making swift concentrated purchases when we see an opportunity present itself. Our strategy allows us the flexibility within portfolio construction to consider all sectors globally, and emphasize investments in healthy industries with specific stocks and avoid those where we see trouble on the horizon. Our investment strategies lack any global, sector, or capitalization restrictions, and as a result we believe we can excel in a variety of market conditions without timing the market.
Q: Could you explain why you believe risk management transcends everything?
SL: The impact of a bear market on a stock portfolio can be devastating to individual investors. It can take investors years to recover their losses. We believe preservation of assets during bear markets is the key to maintaining wealth.
When the market goes up, the truth is, just about anybody can make money. Managing prosperity is easy. What clients need is an advisor who can manage adversity, and not just stem losses. To battle adversity, an advisor needs to try to anticipate when things are going to implode.
Q: How do you define "Absolute return" and what impact does this have on an investor?
RS: There are several definitions of absolute return, but first one must understand the definition of relative return, which is simply the return of your portfolio relative to a given index benchmark. Absolute return does not use a specific benchmark. My firm defines absolute return as achieving positive results in absolutely any market condition, using absolutely any investment.
Within a relative return portfolio, if the benchmark index is down 40% and your account is down 35%, you essentially beat your benchmark by 5%, yet at the end of the day, you are still down 35%?
At L&S Advisors, we are obsessed with the pursuit of achieving positive performance for our clients in any given market condition.
Q: What are some of the issues with an over diversified portfolio?
RS: The primary objective at L&S Advisors is to achieve superior investment returns for our clients, not to track certain market indices. We believe that some money managers that fail to beat the performance of the S&P 500 due so because they emphasize diversification in the interest of minimizing risk. As a result investors end up with an over-diversified portfolio, resulting in mediocre performance, as the profitable companies make up too small a portion of the portfolio to have a significant impact. In the end, because clients hold so many positions, they end up with a very expensive exchange traded fund (ETF).
We adjust our portfolio exposure to pursue the best ideas wherever we see them, and limit our portfolios to only those ideas.
Q: How is a Registered Investment Advisor different than a Broker/Dealer?
SL: Does it seem appropriate for a client to be "advised" by someone selling products and earning commissions? No. Therefore, at L&S Advisors, there is no brokerage, no products to sell, no commissions or additional hidden compensation. We would also advise clients to choose advisors free of conflicts of interest, which we avoid. We are fee only. There are no bank, brokerage, insurance or estate plans. It's right there in our ADV-our SEC filing-and we provide it to every client. We focus all of our efforts on providing investment counsel to our clients, which we believe is a full time job.
Q: What effect has the recent market volatility had on investors' decision-making processes?
RS: After realizing the effects of the recent 2008/2009 market turmoil, many investors have taken what we believe are inappropriate actions at an inopportune time, and in hindsight probably wished they had planned accordingly for the global economic downturn we are now faced with. Many investors seem quick to say they have a "trusted advisor" whom they rely on to give them sound financial advice, yet some still found their portfolios decimated at the end of 2008. What we think is worse, is that a number of advisors may have been smart enough to see the turmoil coming, but unfortunately were constrained as to what they could do to try to protect client assets.
Q: How has L&S Advisors navigated the volatile markets of 2008 and 2009?
SL: Towards the end of 2007 we noticed that structural changes within certain sectors of the stock and bond markets were taking place, as well as a weakening credit market. During the summer of 2008, it was obvious to us that the worst had not yet materialized in the markets, and that this bear market was vastly different from recent bear markets. As a result, we prepared our portfolios for deterioration in all forms of credit, as well as the potential negative impacts on the broader economy.
Due to the size of our organization, we were able to be nimble and react quickly to the deteriorating market conditions. As a result, we made the tactical decision to move a significant allocation to cash, and kept it there through the first quarter of 2009.
Q: Is a buy-and-hold strategy still a viable approach to investing?
RS: Looking at the past decade of the Dow Jones Industrial Average, I believe it is clear that the traditional buy-and-hold school of thought is considerably less effective. In short, the game has changed.
The Philosophy of asset allocations and buying companies with stable fundamentals and historic returns has been challenged.
Today's changing environment forces us to modernize our approach and strategies. The market now moves faster than it ever has. Anyone who sits and waits could simply miss the potential opportunities. To outperform the market, an advisor must think tactically.
At the same time that we are actively managing risk within our clients' portfolios, we are seeking investment opportunities across global capital markets.
We respond to market conditions and quickly revise strategies, because one must employ tactical allocations as opposed to the static approaches of the major brokerage and investment houses.
Q: What is tactical diversification and is it just a fancy term for "Market timing"?
SL: This is now the longest recession since the 1930's. We're not overly concerned, however, as a recession doesn't typically end until four to six months after the final bear market low is in place. The point is that it's not our goal to "pick the market bottom," which is obvious only in 20/20 hindsight. We need to recognize good buying opportunities and attractive valuations, and start to adjust allocations according to the level of risk we see going forward.
We define tactical diversification as making swift concentrated purchases when we see an opportunity present itself. Our strategy allows us the flexibility within portfolio construction to consider all sectors globally, and emphasize investments in healthy industries with specific stocks and avoid those where we see trouble on the horizon. Our investment strategies lack any global, sector, or capitalization restrictions, and as a result we believe we can excel in a variety of market conditions without timing the market.
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