Most advisors, however, limit MLP exposure to mid-single digits. Mostly focused on portfolio diversification, Weiner of RDM Financial says his limit "comes under the basic belief: You never know."
Kaufman is mindful of industry risks. Even transport-focused MLPs have direct commodity exposure that could account for up to 20% of their cash flow. While this can be hedged, he agrees there's no getting around the effects that a slowdown in energy demand could have on performance. He advises investors to identify an MLP's precise asset exposure before investing.
He also sees pipeline maintenance as an under-recognized issue. "Investors should check an MLP's 10Qs and annual reports to discern a partnership's commitment to this maintenance," cautions Kaufman. The cost of overseeing expanding networks rises over time, as does capital maintenance.
Chris Cordaro, CIO of asset manager RegentAtlantic, is also concerned about the eventual risk of rising inflation and interest rates. "Both rates will eventually rise," says Cordaro, "and this will compress yield spreads over Treasurys, which would typically push down the value of MLPs."
Increased borrowing costs would also cut into the bottom line. Save for another credit crisis, Cordaro believes the industry should be able to access debt at affordable rates for at least the near to medium term.
MLPs' favorable tax status could be at risk if Congress attempts to close certain loopholes to deal with the country's budgetary crisis. But Kaufman believes, "since the country still needs to improve its energy infrastructure, it's not likely that Congress would target this advantage."
Weiner thinks there's a decent chance that by 2013 the country could revert to the Clinton era's higher tax rates. This would likely benefit MLPs by making their special tax treatment that much more valuable to investors, leading to higher valuations.
Weiner is also concerned about the "fracking" debate. If the government decides to even temporarily suspend such excavation practices, he feels it would have a direct negative impact on MLPs, at least over the short run.
Until a systemic risk to the industry appears to threaten the status quo, including the possibility of too many MLPs eventually chasing not enough infrastructure, these alternative investments should remain a source of reliable income and asset price stability that's hard to match by most other asset classes.