Key investment strategies and expenses behind the new JMLP fund

Market Realist

An Investor's guide to closed-end MLP funds like FPL and JMLP (Part 3 of 5)

(Continued from Part 2)

On March 27, 2014, the Nuveen All Cap Energy MLP Opportunities Fund (JMLP) executed its IPO of 12.8 million shares priced at $20.00 per share, raising $255.0 million of gross proceeds, excluding the over-allotment option. In an overallotment option, the underwriters are able to buy back all oversold shares at or below the offering price. This is a closed-end fund. JMLP is structured as a C-Corp and plans to invest at least 80% of managed assets in master limited partnerships (or MLPs).

JMLP would invest at least 80% of its asset under management in MLPs engaged in business of exploring, developing, producing, transporting, gathering and processing, storing, refining, distributing, mining, or marketing natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, or coal. Its investment would focus on small and mid-cap Energy MLPs (at least 60% of assets). The fund may invest up to 20% of its assets in the equity securities of non-MLP issuers, including those in energy, transportation, or infrastructure businesses. JMLP has disclosed that it would also invest up to 30% of assets in restricted securities (securities that are unregistered or subject to contractual or other legal restrictions on resale). The fund can also invest up to 20% of assets in debt securities issued by energy MLPs. It may also invest in derivative instruments to seek to hedge some of the risk of the fund’s investments or its leverage or to enhance returns. The total borrowing limit is 22% of managed assets.

In order to understand the effective return from investing in JMLP, we’ve considered expenses on account of the sales load and management fees. The sales load in the offering is 4.50%—meaning proceeds from the sale of common shares will be reduced by 4.50%. Additionally, in association with the IPO, there are offering expenses of 0.2%. Plus, JMLP charges a 1.47% management fee based on NAV. This is a charge levied by an investment manager for managing an investment fund. Other annual expenses include interest and other expenses of 0.42% and 0.09%, respectively.

Now let’s assume an investor would receive a return of 5% each year on his investment in JMLP. The table below also assumes a 4.5% sales load fee, offering expenses of 0.2%, and annual fees of 1.98% and calculates yearly after-fee returns.

From the table above, we can estimate how expenses affect total returns. After one year, a 5% return on the investment in the ETF would reduce to an effective return of 0% if the annual fee were 1.98%. For a longer period of three years, the after-expense returns would decrease to $1,040 from a pre-expense return of $1,061. After five years, pre-expense returns of $1,125 would come down to $1,103, and for ten years, a $1,303 pre-tax return would come down to $1,278. Please note that these costs are indicative, and actual values may be higher or lower.

The Nuveen All Cap Energy MLP Opportunities Fund (JMLP) and the First Trust New Opportunities MLP & Energy Fund (FPL) are newly issued closed-end funds (CEFs). CEFs are an alternate way to gain MLP exposure besides ETFs. Popular ETFs include the Alerian MLP ETF (AMLP), Yorkville High Income MLP ETF (YMLP), and MLP ETF (MLPA).

Continue to Part 4

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