View from the Observation Deck

1. Master Limited Partnerships (MLPs) are designed to distribute nearly all of their revenues to shareholders.
2. The vast majority of MLPs are energy-related, with a focus on distribution and storage activities.
3. The Alerian MLP Index is comprised of 50 energy MLPs. Its current distribution rate is around 6.20%.
4. The chart shows the price movement of the Alerian MLP Index relative to the fluctuations in the prices of crude oil and natural gas over the past five years.
5. The takeaway from the snapshot above is that there is not a direct correlation, as evidenced by the period leading up to the date of 5/22/08.
6. Oil and natural gas prices spiked, but MLP prices did not even budge.
7. From 5/22/11-5/22/12, the price of natural gas was cut by half, but the Alerian MLP Index posted gains over the bulk of that 12-month span.
8. MLP prices tend to be driven more by the demand for the commodity, rather than its price. Higher demand can translate into bigger distributions from MLPs.
9. Investors considering MLPs for their portfolio should monitor the strength of the U.S. economy. Stronger economic activity should translate into higher demand for energy resources, and vice versa.

View from the Observation Deck

1. Income-oriented investors have a broad universe of investment-grade debt securities to choose from when the U.S. economy is weak or in recession.
2. Investors naturally tend to gravitate towards investment-grade debt (BBB or higher) in an effort to minimize credit risk.
3. But what about interest rate risk? Where do investors concerned about preserving capital “go to” when rates are rising?
4. Ironically, the universe of debt securities built to perform well when interest rates rise is far less expansive and the choices usually require investors to assume more credit risk.
5. One such option is senior loans. Senior loans, which are issued by corporations and rated speculative-grade in quality (BB and below), are worth consideration, in our opinion.
6. The interest paid by senior loans is not fixed, it floats. The loans are usually indexed to the 3-month LIBOR rate (average rate London banks charge each other for loans).
7. Historically speaking, it tends to track the direction of the federal funds rate in the U.S. These two lending rates have been at historically low levels for the past three years.
8. Senior loans sit at the top of the corporate capital structure, which typically means first claims on the assets of the issuer in bankruptcy proceedings.
9. Again, senior loans are best suited for economic expansions, not times of crisis (see 2008 -2009 in chart). Investors should monitor the economy even after committing their capital.