Yield-hungry investors see something nasty coming down the pipe in the form of higher taxes. The Alerian Master Limited Partnership index has dropped 6% since election night, double the loss of the S&P 500.
MLPs mostly operate energy infrastructure like pipelines, pay out most of their income to investors and don't pay corporate tax. Besides a general concern about scheduled increases in dividend and capital-gains taxes, with MLPs there is also the fear that politicians will remove their special tax treatment.
In the battle over the "fiscal cliff," nothing is sacred. But with MLPs, why bother? In January, Congress's Joint Committee on Taxation estimated the average annual cost to the federal government of MLP tax breaks at just $300 million. In the fiscal year just gone, that would have offset less than 2.5 hours of the deficit buildup.
Meanwhile, the U.S. energy sector is a rare, unqualified economic and employment success right now. Washington is unlikely to mess with anything that might curb investment in it.
That vague fears of tax reform have hit MLP stocks speaks more to valuation. High-yield securities have been in demand amid ultralow interest rates, and the Alerian MLP index hit an all-time high last month. The difference between the dividend yield and 10-year Treasurys fell to 4.3 percentage points, below the five-year average. Other signs of excess, such as high acquisition multiples and a rash of new investor funds, have also appeared. And Raymond James analyst Darren Horowitz points to a high degree of retail investor ownership of MLPs.
All in all, the sector was due a fall. The spread to Treasurys has now widened to five percentage points. Given the likelihood that fundamental tax reform remains a ways off while low-interest rates will persist, MLPs are actually starting to look more attractive.