The New Buzz Word – Alternative Yield

I happen to be hypersensitive to the coming and going of investment fads, themes and trends because

a) I deal with the public and this is the type of stuff they want to be kept up to speed on

b) I consume and create a ton of media on the subject

Right now I’m hearing and seeing a new investment trend developing in a major way, let’s call it Alternative Yield.

Alternative Yield is the answer to terminally low interest rates for those who are tired of being punished for high cash balances and risk aversion.  It is meant to be an antidote for what most perceive as a landscape of diminishing returns (or outright high risk) in traditional fixed income products like munis, high-grade corporates and of course, bubblicious treasuries.

The first time I had picked up on the premise of alternative yield as an investor trend was last December when Bank of America/ Merrill Lynch mentioned “Alternative Yield Strategies” in their top ten themes for 2010.  They had this to say in their report:

#3) Alternative yield strategies

Next, Bank of America-Merrill Lynch’s focus turns to the possibility of higher taxes chasing people out of typical dividend plays and it sees tax deferred strategies benefiting here.

Investment ideas: Tax advantaged strategies and also large cap plays such as KMP, EPD, PAA, and ETP.

Avoid: Stocks with rising yields due to their decreasing stock price. Be wary of high yield ‘traps.’

You’ll notice that those ticker symbols belong to Master Limited Partnerships.  These are typically tollbooth-like businesses involved in pipelines and other dependable-but-mundane infrastructure assets.  They are prized for their consistent stream of earnings and dividend payouts to investors and, as Abnormal Returns points out, MLP’s have now been “discovered by the crowd”…

Every so often you see a handful of news items that adds up to an interesting anecdote.  Whether it becomes something bigger down the road remains to be seen.  In the past few weeks there has been a handful of fund launches in the energy master limited partnership (or MLP) space…The case for energy MLPs is pretty simple:  yield.  MLPs have it in abundance, especially compared to traditional areas of fixed income.

The alternative yield fever has been caught, it would appear, and the public’s hunger for Master Limited Partnerships is just one such manifestation.

In addition to calls I’ve been getting from underwriters of MLP funds, I’ve also been inundated from other purveyors of so-called alternative yield strategies.  These include royalty trusts, enhanced (leveraged) dividend funds and buy/write funds, in which covered calls are sold against a portfolio to bring in income from the option premiums themselves.

The pitch is always the same – “If you’ve got clients with cash on the sidelines, this is the perfect product to sweep that cash up, Mr. Brown.”  Yeah, thanks kid.  Go get me a cup of coffee.

Within a Wall Street Journal piece yesterday about where investors should be positioned given the coming austerity, even some notable bears were of the mindset that we should be looking for high quality equity dividend yields as an alternative to bonds…

Some economists, like David Rosenberg at Gluskin Sheff and Albert Edwards at Societe Generale, are out and out equity bears. But within that, they and other bears favor shares with strong dividends–with bond yields being pushed down, anything that produces income will be attractive.

The fact remains that these products and strategies are being developed to meet a need, and they are being very well-received.

The cover of Barron’s this weekend features a picture of an investor with a ball-and-chain attached to his ankle with the common refrain that his bond funds are about to crush him.  As most investment pros with more than one cycle under their belts know, bond funds are notoriously scary investments going into a higher interest rate environment.  This type of cover story in the preeminent weekly investment journal only serves to scare even more money into the alternative yield space.

Sources:

The Crowd Has Discovered Energy MLPs (Abnormal Returns)

BofA/Merrill’s 10 Investment Themes for 2010 (Market Folly)

Where to Invest Under Austerity  (WSJ)

Break Free of Your Bonds (Barron’s)