Can investors outside the US own MLPs?
Yep. Foreign investors are welcome to be unitholders, but they can expect a pretty heavy hit from Uncle Sam. While I’m not a tax expert, my research has taught me that US tax law requires MLPs to withhold taxes from quarterly distributions to foreign unitholders at the highest income tax rate. This means that foreign investors may receive distributions that are substantially less than the actual distributions paid to US unitholders. (If you’re interested in more specifics, this Latham + Watkins presentation offers greater detail).
Now, given the tax consequences, you might think foreign ownership in MLPs is virtually non-existent. And, while it isn’t a big chunk of the total pie, industry sources tell us foreign ownership is up about 300% since 2005. The overarching reason for this comes down to yield. As of October 31, the Alerian MLP Index (AMZ) was yielding a little over 7%. Even with the tax hit, foreign investment can still make sense. Think about it: the highest income tax rate in 2016 is 39.6%. If you deduct a foreign investor’s taxes off the 7% yield, the unitholder is still receiving a 4% return on their money.
After the US, Japan, the UK, and Canada are the three countries with the largest portions of MLP ownership. In Japan, interest rates are negative. This means people must pay to save their money! Clearly, an investment in MLPs makes much more sense than losing money by keeping it in the bank. Investors in the UK and throughout Europe also face negative interest rates. In Canada, investors are typically very familiar with the energy sector. Because of this, it’s common to see portfolios heavily weighted toward energy investments. The opportunity to invest in MLPs allows Canadian unitholders to have exposure to an industry they are well acquainted with, but that isn’t so tightly tied to oil prices. Many Canadians own large amounts of TransCanada (TRP) and Enbridge Inc (ENB). MLP investment allows them to diversify away from those single companies and own pipelines as they cross the border. A great example of this comes in the form of Enbridge Energy Partners (EEP) that owns liquids and natural gas systems that run into the US from Canada.
Also, investing in MLPs is a USD investment. Unitholders get exposure to the strong US dollar as an added benefit. Further, MLPs own real assets with an inflation hedge built in.
I’ll leave you with a chart that breaks out MLP unit ownership. As I mentioned, foreign ownership is one of the smaller slices of the investor pie, but certainly worth keeping an eye on as the MLP space grows.