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Master Limited Partnerships (MLP)

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billyfreezer
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Master Limited Partnerships (MLP)

#56455

Postby billyfreezer » May 28th, 2017, 1:35 pm

Anyone have any experience investing in MLPs?

They offer tax-shelters in the form of tax deferrals for US tax payers, but what happens when you invest from the UK?
Is it just not worth even considering?

Been trying to google it but all that comes up is advice for US citizens, or investing in Europe-based ETFs that buy MLPs in the states.

Cheers

Lootman
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Re: Master Limited Partnerships (MLP)

#56475

Postby Lootman » May 28th, 2017, 5:16 pm

Be careful. MLP's do have certain tax advantages because the distributions are only partly taxable, because they are only partly income, which may be either dividends, interest, gains (or losses) etc. Other parts of the distributions may be a return of capital or a variety of other payments. The reason for this is that you are literally a partner of the entity and so receive a mini version of a set of corporate accounts (called a K-1 statement) which is different for every partner.

So whilst you may save some tax, it comes at the cost of extra complexity. You will receive annually these K-1 statements that break down the distributions into different categories, which then drives the way you declare those distributions for tax purposes. Here is one analysis of that process (albeit written for a US taxpayer):

http://www.investopedia.com/terms/s/schedule-k-1.asp

Worse, there is no timetable or set deadline for a MLP to issue these K-1 statements. It is typically months after when you would get other tax documents sent to you, and that has implications for when you are able to prepare your tax return. Moreover they sometimes send out amended K-1's months after that.

For these reasons, somewhat paradoxically, I believe they are best held in a tax shelter. But be careful whether they are allowed in an ISA - their special tax status and structure may invalidate some or all of them.

taken2often
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Re: Master Limited Partnerships (MLP)

#56580

Postby taken2often » May 29th, 2017, 1:51 pm

I had some energy related ended up paying 39.6% withholding tax even in a pension. Had to sell, moved to a range of CEF (Closed End Funds)
similar to our Investment Trusts. Have to watch some of them pay out a return of capital. Getting between 6 and 9% some pay monthly.

Now bought enough and will now try out Canadian CEFs with the same dividend rates.

Bob

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Re: Master Limited Partnerships (MLP)

#56597

Postby Lootman » May 29th, 2017, 4:47 pm

taken2often wrote:Imoved to a range of CEF (Closed End Funds) similar to our Investment Trusts. Have to watch some of them pay out a return of capital.

It's not so much that some CEF's pay out a return of capital, but rather that by law they are required to annually distribute realised capital gains as well as dividends. So when you get distributions you have to report them differently for tax purposes depending on whether they are dividends or gains. Usually they are distributed separately so it's easy to see but, even so, it's messy for tax reporting and affects your utilisation of the 0% CGT allowance.

That also explains why the yields look high. They include those gains so it's not a true yield in the sense usually meant.

An important difference between a US CEF and a UK IT is that the latter have a corporate structure but the former do not - they are simply considered to be another kind of fund, and are therefore subject to the tax rules of funds. They lack the IT's ability to not be taxed on internal gains, hence the distributions of gains.

billyfreezer
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Re: Master Limited Partnerships (MLP)

#57191

Postby billyfreezer » June 1st, 2017, 6:37 pm

Okay thanks guys.

Just seems not worth the hassle.
Was looking at Blackstone and wanted to invest in it. But without the advantage of deferred taxes and with all the extra paperwork hassle, I think I'll look elsewhere.

Should probably start looking at more UK based dividend companies to take advantage of the 5k allowance.

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Re: Master Limited Partnerships (MLP)

#57202

Postby SalvorHardin » June 1st, 2017, 7:33 pm

A similar-ish investment to Blackstone that you might want to be aware of (private equity, infrastructure fund manager) is Brookfield Asset Management (BAM).

BAM is a Canadian company, not an MLP, though it is perhaps best known for its separately quoted funds which are MLPs. It has an excellent long-term record.

I've owned BAM shares for many years, outside and inside an ISA (BAM is my 5th largest holding).

The only problem is that BAM occasionally spins off a small quoted MLP (they are currently doing this with Trisura) - I sell the MLP immediately. I've never had any serious tax complications from this; the broker deducts US/Canadian withholding tax on the MLP proceeds and that keeps the authorities happy.

BAM is fairly well covered on Seeking Alpha and there's a good message board on TMF USA (which looks just like the old TMF UK boards).

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Re: Master Limited Partnerships (MLP)

#57290

Postby flyer61 » June 2nd, 2017, 11:29 am

Salvor Hardin

completely off thread but would you care to share your portfolio constituents? (please). I would PM you but there is no link for this.

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Re: Master Limited Partnerships (MLP)

#57338

Postby SalvorHardin » June 2nd, 2017, 2:08 pm

flyer61 wrote:completely off thread but would you care to share your portfolio constituents? (please).

No problem. I'll give you the twenty largest holdings which represent about 70% of my portfolio (I live off the dividends). Many of these have been held for more than ten years. It's very international and is highly overweight in Central London and Manhattan Island.

1 to 10: Berkshire Hathaway. Madison Square Garden (owns the famous building of the same name, plus the New York Knicks and the New York Rangers sports teams). Union Pacific Railroad (super Buffett-style moat). Unilever. Brookfield Asset Management.

Diageo. Finsbury Growth & Income Investment Trust. JP Morgan Indian Investment Trust (India is my country pick for the next twenty years). Shaftesbury (London West End commercial property). Empire State Realty Trust (Manhattan Island commercial property, owns a big piece of the Empire State Building).

11 to 20 is mostly investment trusts. Bankers, Caledonia Investments, European Assets, Law Debenture, Murray International, RIT Capital Partners and Witan.

Operating companies are Great Portland Estates (central London commercial property), Canadian Pacific Railroad and Hasbro (the toymaker).

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Re: Master Limited Partnerships (MLP)

#57382

Postby LongbeardRanger » June 2nd, 2017, 7:11 pm

SalvorHardin,

Thanks. Very interesting.

I too hold Brookfield (which I first became aware of thanks to one of your posts). Not too long ago I looked at most of the big quoted private equity firms (Blackstone, Apollo, KKR, and Oaktree, as well as Brookfield) and following that I thought it fairly clear that Brookfield was the best bet. It really is a very strong company. The corporate structure is appears somewhat byzantine, so it can be a bit hard to get your head around at first. But once you understand Brookfield it becomes clear how intelligently structured it is.

Is there any particular reason you hold Union Pacific and Canadian Pacific? I too like both those stocks but don't hold them. However, I do own shares in the Canadian National which I think is clearly the strongest of the Class I railroads. I'd be interested in your reasons for owning the two that you mentioned.

(Incidentally, I also hold Diageo, Finsbury and RIT Capital so there's more than a little overlap between our portfolios.)

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Re: Master Limited Partnerships (MLP)

#57429

Postby SalvorHardin » June 3rd, 2017, 7:20 am

Hi LongbeardRanger,

Yes, Brookfield can be a bit of a head scratcher. Fortunately it provides a colossal amount of information in its annual and quarterly reports (Brookfield's quarterly reports are more comprehensive than most companies' annual reports). There are several people on the US Fool Brookfield Board who really know their stuff, just as on the Berkshire Hathaway board, so in part I've delegated the more detailed analysis to reading through their stuff (Manlobbi is the expert, so much so that he's written a book on investment). I don’t know how the situation is for people who aren’t already registered with TMF USA but here’s the link to the Brookfield board in order of recommended posts.

http://boards.fool.com/brookfield-asset ... mendations

Seeking Alpha is also excellent for its coverage of Brookfield.

https://seekingalpha.com/symbol/BAM

Regarding the railroads I also own Canadian National; it’s just not in my twenty largest holdings. I’ve owned Canadian Pacific and Union Pacific for a lot longer. I’m not inclined to sell either to reinvest in Canadian National - for one thing I prefer the West Coast Railroads as they are more exposed to Pacific trade. Canadian National’s business is more broadly spread since it has direct access to America’s East Coast and Gulf Coast (which CP doesn't).

Also I freely admit to preferring to own Canadian Pacific in part because the railroad is a stunning piece of engineering, the best in North America, as well as being a key piece of Canadian history. Sure, it's a bit irrational and definitely not utility maximising but my portfolio is large enough to allow me a few indulgences which are not held purely for investment reasons, such as Juventus and Manchester United.

Getting me to part with my Canadian Pacific shares would be like trying to get my Formula One superfan friend to sell his shares in Ferrari and Williams Grand Prix Holdings. It ain’t going to happen :D Though Canadian Pacific is a much better long-term investment IMHO than anything to do with Formula One.

Whilst Canadian National gets all the plaudits from analysts, it turns out that Canadian Pacific has outperformed Canadian National over the last five years. Or rather ever since October 2011 when activist hedge fund manager Bill Ackman bought a big stake and replaced the existing management with Hunter Harrison (who has since moved to CSX Corporation).

Tax also plays a part in my decision, I have a lot of unrealised capital gains in Canadian Pacific and Union Pacific, far more than in Canadian National.

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Re: Master Limited Partnerships (MLP)

#57457

Postby flyer61 » June 3rd, 2017, 10:37 am

Thanks Salvor Hardin (and Longbeardranger).

Plenty of food for thought. Like you I will have to live off the income from my investments eventually. I have been attempting to replicate Terry Smiths portfolio on the basis he is a better stock picker than me. It should also provide a rising income over time. Recent purchases have included Smucker and Estee Lauder, I note with the takover of CR Bard he has started building a stake in another company as yet unannounced.....my guess.... LUXXOTICA

Checked out your previous mention of Lexington Property Trust (LXP) and managed to get in recently at a prospective yield of 7.5%. I like the fact that it is offices and industrial and not retail. Listened to the last earnings call and they seem a sensible lot.

Bought Disney on the recent dip and will keep adding as believe all that content has real long term value.

Will have a read up on Canadian railways and BAM.

Thanks again.

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Re: Master Limited Partnerships (MLP)

#57464

Postby flyer61 » June 3rd, 2017, 11:03 am

On the Indian theme I have gone with Mr Smith (FEET) 31% of his (expensive) IT is invested there. The discount on JII is enticing!

Does anyone know of or hold a debt fund that invests in India???

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Re: Master Limited Partnerships (MLP)

#57809

Postby LongbeardRanger » June 4th, 2017, 9:29 pm

SalvorHardin,

Thanks, that was very interesting. I won't continue the discussion on the North American railroads here, as it's somewhat off topic, but, I understand your reasoning. And I too love the history of the CP.

Thanks for the link to the US Fool boards on Brookfield. Very interesting. I think Brookfield is a very attractive investment right now. It should be able to compound intrinsic value at low double digit rates and there's a good possibility it will rerate upwards in terms of valuation too. So, not coincidentally, it's one of my biggest holdings.

Rgds
Phil

billyfreezer
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Re: Master Limited Partnerships (MLP)

#58078

Postby billyfreezer » June 6th, 2017, 11:21 am

If you hold BAM in an ISA, will any proceeds from selling off spin-offs be tax-exempt as well?

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Re: Master Limited Partnerships (MLP)

#58085

Postby SalvorHardin » June 6th, 2017, 11:51 am

billyfreezer wrote:If you hold BAM in an ISA, will any proceeds from selling off spin-offs be tax-exempt as well?

I can only speak as a UK taxpayer who has completed the W-8 BEN form and who does not pay American tax or Canadian tax. BAM shares and dividends in an ISA are tax-exempt for the purposes of UK taxes. BAM dividends in an ISA have 15% withholding tax deducted, as is standard procedure for NYSE listed shares (my BAM shares are the NYSE-listed ones, not the Toronto listed ones).

The sale proceeds from the spin-offs from BAM are not tax exempt for the purposes of US withholding tax. Whenever I have sold a BAM spinoff the brokers have made a 15% deduction from the net sale proceeds in respect of US withholding tax. Normally there is no withholding tax levied upon the sale proceeds of American shares; as far as I am aware this deduction is made because the spinoffs are limited liability partnerships. I should point out that I haven't bothered to look into this in any great detail because the amounts deducted are tiny in comparison with the value of the Brookfield shares.

For example, last year when Brookfield Business Partners (BBP) was spun off the value of the BBP shares was approximately 1.25% of the BAM shares pre-spinoff. 15% of the sale proceeds of BBP were then clawed back (standard withholding tax). So the overall tax charge was a mere 0.1875% of the value of my BAM shares - I can live with that given BAM's performance over the years.

The current spinoff of Trisura (1 Trisura for every 170 BAM shares) is even smaller. Based on the current price of Trisura the value of the Trisura shares is about 0.25% of the value of the pre-spinoff BAM shares.


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