The $782 million Omaha School Employees Retirement System has become one of the first pension plans to invest in master limited partnerships, a $44 billion market that is little known in the pension plan universe.
Although master limited partnerships have been around for a couple of decades, there is a tremendous downside for most institutional investors. Corporate pension plans, endowments and foundations that hold master limited partnerships must pay an unrelated business income tax on the reported income that accrues from their units. Public pension plans are exempt from the tax.
What's more, pension plans are little interested in the tax advantages that have attracted individual investors.
Nevertheless, executives at Tortoise Capital Advisors, a Santa Rosa, Calif., subsidiary of money manager Atlantic Asset Management LLC, Boston, are dipping their collective toes in the pool and in September began marketing master limited partnerships to pension plans. In January, school trustees committed an initial $20 million to Tortoise's new investment option. At the same time, Atlantic created the Atlantic Mater Limited Partnership index.
Since 1991, master limited partnerships have returned 22% per year and a 7% income yield, said Scott Lummer, investment strategist with Atlantic Asset Management and member of Tortoise's investment committee. Mr. Lummer first began investigating master limited partnerships while a professor at Texas A&M University, College Station. He left academia to join Ibbotson Associates Inc., Chicago, as managing director in charge of consulting services and then to mPower, as CIO of the San Francisco-based online defined contribution plan investment advice provider.
"All pension plans may be interested because of the high historical returns. They've been highly productive investments and will continue," he said.