The opportunity to create alpha in one's MLP portfolio was clearly present in 2011. While the MLP sector overall generated an attractive total return of 14.5% in 2011 (as measured by the Wells Fargo Securities MLP Index), MLPs involved in NGL and crude oil markets, and MLPs with above-average growth prospects significantly outperformed the MLP index. Conversely, MLPs in subsectors with weaker fundamentals including natural gas pipeline and storage, and retail propane underperformed. Finally, midstream companies (MLPs and C-corps) with general partner (GP) ownership interests posted strong results, driven by mergers and acquisitions (M&A) and a growing recognition of the value of GP incentive distribution rights (IDR). The best-performing subsectors in the Wells Fargo Securities MLP Index were gathering, processing, and natural gas liquids (NGL), refined products, and crude oil, which posted total returns of 26.0%, 19.4%, and 19.0%, respectively. The worst-performing subsectors in the index were propane, marine transportation, and natural gas pipelines, which posted total returns of negative 18.7%, negative 6.2% and positive 1.8%, respectively.

Eoin Treacy's view Master Limited Partnerships enjoy favourable tax treatment in the USA and as such offer an attractive high yield investment opportunity. The Alerian MLP has a P/E of 24.26 and yields 5.63%. It experienced its largest decline since 2008 between May and August. However, the Index has since held a progression of higher reaction lows and posted a new high this month. A sustained move below 365 would be required to question medium-term scope for additional upside. The JP Morgan Alerian MLP ETN yields 4.79% and has a similar chart pattern.

This additional report from Wunderlich Securities may also be of interest.