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Master Limited Partnerships May Offer Protection from Emerging Market Turmoil

NEW YORK (TheStreet) -- Master Limited Partnerships, low-taxed investment vehicles that trade as stocks and are generally formed around energy-related businesses, may be looking expensive relative to historic levels, but owing to their insulation from emerging market turmoil, they continue to be comparatively safe and attractive investments, say fund managers.

The benchmark Alerian MLP Index soared a whopping 28% last year, just behind the S&P 500's exceptional return of 32% as investors chased yields in these relatively safe and steady, tax-insulated stocks.

Managers at the five-Star, Chicago-based Advisory Research MLP & Energy Income Fund (INFIX) say MLPs are fairly valued and should produce positive annual returns of 6% to 10% over the next five to 10 years. In other words, while MLPs are actually looking expensive compared to their historical prices, as multiples are at levels not seen since Spring 2011, they're still looking cheap relative to investment-grade corporate bonds.

Gains by MLPs are due largely to increased U.S. energy production as well as the uptick in U.S. infrastructure expansion, two trends fueled by low-funding costs amid rock-bottom interest rates. 

"It is hard for investors to find income and growth in today's investment environment," Jim Cunnane, an Advisory research fund manager told TheStreet in a phone interview last week. "MLPs and energy infrastructure companies offer both." Advisory Research manages more than $11 billion in assets, and its MLP and Energy Income Fund oversees $500 million.

Infrastructure assets tend to generate solid and stable levels of cash, allowing such businesses to satisfy the requirement of MLPs that 90% of their net income be generated by a natural resource. MLPs are also not subject to income tax, thereby allowing them to generate exceptionally high yields.

"With today's backdrop of expanding domestic energy production there is also a growth story," Cunnane added. "Growth will be a key investment attribute if and when interest rates rise."

MLPs also offer insulation from emerging market volatility, which has been driven by concerns about a slowdown in China's economy and the country's banking sector, local-specific political issues, and massive investment outflows from EMs amid expectations of shifting central banks policies.

"Energy infrastructure investments, specifically MLPs, derive almost all of their revenues from activities inside of U.S. borders," Cunnane emphasized. "The success of their business is not directly impacted by short-term global disruptions such as the current emerging market turmoil."

The investment manager says that as the Fed continues to taper, higher interest rates in a low interest rate setting should benefit both MLPs and equities, as suggested by historical data.

-- Written by Andrea Tse in New York.

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