“Inflation-plus” revenue arrangements for a number of energy and infrastructure projects have helped spark interest in MLPs “as a component of an inflation-protection strategy,” Mr. Junkin said in a recent interview.
Neil Rue, a Portland, Ore.-based managing director with Pension Consulting Alliance Inc., said MLPs can play a role in diversifying an inflation hedge, especially if a client's investment policy includes limits on private equity investments.
Meanwhile, the requirement that MLPs distribute the bulk of their earnings to investors is another attraction, which has become more prominent as fixed-income yields have sunk to historic lows.
That fact that defined benefit plans are “starved for yield” has focused attention on the relatively high cash distributions by MLPs, even as their properties as an inflation hedge have continued to drive the trend of increasing institutional allocations, said Mark Andersen, a senior vice president with the independent adviser group of Callan Associates Inc., San Francisco.
Alan Kosan, a Darien, Conn.-based managing director and head of alpha investment research with investment consultant Segal Rogerscasey, said in an interview that year-to-date, annualized cash distributions by MLPs have come to 7%, lifting the total returns on investments in those vehicles to around 11%.
In an environment where institutional investors have struggled to achieve return targets of 8% to 9%, returns such as those have provided a tail wind as investors look to diversify exposure to upstream energy sectors, such as oil production, with midstream exposure to parts of the market such as pipelines, Mr. Kosan said.
While the inflation-hedging charms of MLPs are a main draw, the fact that investors get paid while they wait for inflation is an added attraction, noted the chief investment officer of one multibillion-dollar public pension system with allocations to MLPs, who declined to be named.
MLP allocations by high-net-worth investors have increased more dramatically over the past year or two, attracted by the tax-advantaged structure of the investment vehicle, but conversations with Segal Rogerscasey's institutional clients are picking up as well, Mr. Kosan said.
If interest is picking up, investment consultants see limits to how quickly institutional investors can, or should, allocate to what consultants say is the $300 billion MLP market.