Closed End Fund of MLPs

Last night Claymore Securities priced a new CEF called Fiduciary/Claymore MLP Opportunity Fund (FMO) and raised $330 million to invest. Claymore has come on the CEF scene in the last couple of years offering some very innovative products. Regular readers will know I own one of their other CEFs personally and for clients.

MLP stands for Master Limited Partnership. My first exposure to MLPs was in 1990 when I was working at Lehman and our office was "pitching" a couple of them. MLPs typically pay a very high yield from some sort of reserve of natural gas or oil, these are referred to as royalty payments. American MLPs have to be structured in such a way that the asset is depleting. Canadian MLPs are allowed to raise more capital and replace depleting assets.

As a group MLPs have had a fantastic run. I used to own three of them for clients. One of them was taken over and another one went up 2 1/2 times so I sold both of those and I continue to own one for clients that has a 6.3% yield.

There are two things that concern me about the FMO fund. CEFs can trade at either a premium or discount to NAV. This can change at any time based on sentiment. I can envision that when something bad happens to energy prices, causing MLP prices to drop, FMO's price will drop far more than the actual NAV. I see this happen all the time with Nuveen Quality Preferred Income (JTP). A great thing about CEFs is they can be less volatile than an individual holding. JTP is clearly more volatile. I believe FMO will be the same.

The other thing is the timing. As I mentioned, MLPs have had a great run and many investors have missed out. I have written before about new products coming closer to a top than a bottom. We saw this in wild excess in the internet bubble. I have been writing about this for China products for the last few months. I am not saying China and MLPs are like internet stocks but as I often write, too much supply in the form of new products is not a good thing.