I am often asked why an investor should consider master limited partnerships (MLPs) for a portfolio. Yes, they are tax-advantaged vehicles with attractive yields, but the bottom line for me has always been this: They outperform other asset classes.

Alerian, which equips investors with market information about MLPs and energy infrastructure, has benchmarks that are widely used to analyze the sector’s relative performance. Alerian regularly publishes a Periodic Table of Performance, comparing the returns of different asset classes, with the most recent version published on April 30, 2015:
Consisting primarily of large and mid-cap energy MLPs, the Alerian MLP Index (AMZ) is a composite of the 50 most-prominent energy MLPs, capturing about 75% of the sector’s market capitalization. The index includes MLPs involved in gathering and processing; natural gas transportation; petroleum transportation; exploration and production; coal; compression services; propane; shipping; and refining.

For the past decade through April 30th of this year, the AMZ generated a total return of 249% versus 122% for Standard & Poor’s 500-stock index, 118% for utilities, 117% for real estate investment trusts (REITs), and 59% for bonds. This amounts to an annual return over the decade of 13.3% for MLPs, 8.3% for the S&P 500, 8.1% for utilities, 8.1% for REITs, and 4.7% for bonds. Consequently, an investment of $1,000 in the AMZ a decade ago would have grown to $3,490 as of April 30th (assuming all distributions were reinvested).

During the financial crisis, all sectors represented in the table (except bonds) got hit hard, but MLPs recovered the fastest. MLPs followed up a 36.9% loss in 2008 with a 76.4% gain in 2009 and a 35.9% gain in 2010. If you had invested $1,000 in the AMZ at the beginning of 2008, at year-end you would have had only $631, but by the end of 2010 you were sitting on more than a 50% gain with $1,513. By the end of 2013, your money would have more than doubled to $2,304. Of course, if you had the foresight to invest at the end of 2008 when others were selling, you would have gained 265%.

The AMZ is down 19% year-to-date, a decline that occurred after April 30th. MLPs have since fallen to the bottom of the table in what is shaping up to be their second-worst year of the decade and potentially the first time in a decade that they will end the year in last place. But if history is any guide, the sector won’t stay down for long. The sector is unlikely to recover as strongly and as quickly as it did in 2009 and 2010 because I don’t believe oil prices will bounce back as rapidly this time, but today’s prices will look like a bargain two years from now.

— Robert Rapier

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Note: The table measures each sector’s performance based on a key index:
Utilities — S&P 500 Utilities Index
Small-cap stocks — Russell 2000 Index
REITS — Real Estate 50 Index
Bonds — Barclays U.S. Aggregate Total Return Bond Index
Non-U.S. stocks — MSCI Daily Total Return EAFE Index (NDDUEAFE)
Commodities — Total Return World Commodity Index (SPWCITR)