MLPs Offer Low Risk With Healthy Growth Prospects

The search for yield has attracted many investors to master limited partnerships, known as MLPs, because they offer a number of very low-risk businesses with healthy growth prospects, Brian Watson, director of research at SteelPath, an investment manager of master limited partnership energy portfolios that specialize in US energy infrastructure assets, told CNBC on Friday.

MLPs are limited partnerships that are publicly-traded, tax-advantaged investment vehicles, commonly used in the energy industry. To qualify as an MLP, a firm must earn 90 percent of its income through activities or interest and dividend payments relating to natural resources, commodities or real estate.

"Over the last 10 years, you've seen about seven percent annual distribution growth, we think it's going to be 6- to- 7 percent going forward—driven by the new assets to provide shale players access to markets, driven by acquisitions, driven by volume growth," Watson said.

"The oil and gas shale boom is resulting in the need for a lot of new infrastructure," he added. "We think the group will also make maybe $15, $20 billion dollars in acquisitions this year."

In addition, there is little incentive for tax treatments of MLPs, as estimates of the incremental taxes to be gained are very small. The reason for the structure in the first place is to encourage investment in domestic natural resource development and that remains incredibly important, Watson went on to say.

Although MLPs are not completely immune to a rising interest rate environment, history has shown that a gradual and generally expected rise in rates has little impact on the sector, he concluded.

  • Mutual Fund Manager's Favorite MLPs

Follow Strategy Session on Twitter: @CNBCStrategy

Watch CNBC's "The Strategy Session" weekdays at Noon ET