Another month, another master limited partnership closed-end fund.
Closed-end funds welcomed their latest addition Tuesday, with the initial public offering of Tortoise MLP
The new issuance market for CEFs has been heating up in 2010, after two lackluster years. So far, we have seen 10 new CEFs, with aggregate net proceeds of $4.2 billion. However, it will be difficult to outpace the torrid IPO market of 2007, which successfully brought 41 deals to market and raised $26.5 billion in net proceeds (three of those funds have already been shuttered).
It was only one month ago that ClearBridge Energy MLP
Demand for MLP funds has been high recently, as their higher, tax-efficient distributions appeal to investors who are searching high and low for sources of sufficient income. In the month since the ClearBridge MLP launch, UBS has brought forth two MLP-focused exchange-traded notes (UBS E-TRACS Alerian Natural Gas MLP Index ETN
Let's take a closer look at Tortoise MLP.
Tortoise MLP plans to invest at least 80% of the total fund assets in a portfolio of energy infrastructure MLPs, with 70% of total assets invested specifically in natural gas infrastructure MLPs. We believe this fund is suitable for investors seeking exposure to the buildout of the U.S. natural gas infrastructure and for those seeking access to the strong cash-flow generation of MLPs.
Tortoise Capital Advisors is acting as the investment advisor. Tortoise has five other funds, including four CEFs and one business development company. Total assets managed in those five funds at the end of June were $3.6 billion. Tortoise MLP adds nearly a third more assets to the advisor's asset base. Tortoise also manages assets in accounts other than funds. It is one of the largest investors in U.S. energy infrastructure MLPs and, as such, is well-suited to make MLP investing decisions for you.
The portfolio will be managed by the same investment committee that oversees the other Tortoise funds. The committee is composed of David Schulte, Kevin Birzer, Zachary Hamel, Kenneth Malvey, and Terry Matlack. They are part of a 20-member investment team that looks exclusively at the energy sector. The firm is specialized, focused on the energy sector and MLPs in particular.
The board of directors has authorized the fund to issue debt, up to a leverage ratio of 1.25 (total assets/net assets). This is the average leverage ratio for the MLP CEF group. Leverage can mean higher returns, but it also breeds volatility in both NAV and share price performance. Investors should bear this in mind.
It is expected that all assets will be fully invested within three to six months. Reflecting Tortoise's expertise investing in MLPs, the managers are seeking direct placements and follow-on offerings from MLPs, wherein the MLP issues new equity at a discount to the market price. Since 2002, Tortoise has participated in about 110 direct placements worth $1.5 billion. If the fund is successful with the direct placements or follow-on purchases, investors will benefit because their collective funds will have purchased underlying MLPs at a discount.
Because underwriting fees and offering costs immediately whittle away a CEF's net asset value, investors should be aware that, while the fund priced its shares at $25.00, the underlying NAV (after fees) was $23.88. The fund started life trading at a 4.7% premium.
Ongoing expenses are another matter. The fund estimates that annual expenses will run to approximately 2.36% of net assets. The management fee is expected to be 1.27% of net assets, and interest expense will add another 1.22%. Other expenses are expected to run 0.20%. The advisor has agreed to a fee waiver of 0.25% in the first year, which is typical with newly minted funds. There is also another fee waiver of 0.08%. The total expected expense ratio of 2.36% is in line with the MLP CEF group average.
Investors have been flocking to MLP CEFs because of their high distribution rates. The irony is that, because this fund is not yet invested, there is no way to know how much it will pay out quarterly as a distribution amount, let alone what its distribution rate will be. The board of directors does expect the fund to distribute 95% of its distributable cash flow on an annual basis, although the actual distributions will be made quarterly and based on estimates of the annual amount.
Mike Taggart, CFA, is the closed-end fund strategist for Morningstar.
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