When things get bad, whether an investor fancies herself unlucky, contrarian, thoughtful or simply interested in doing the least amount of work, the questions she asks are the same: How bad is it? What will things look like in five years?
The chart below looks like MLPs have never performed worse, but they have. The maximum drawdown was 50.6% during 2008-2009, compared to the most recent peak to trough of 45%.
Crude also has not fallen as sharply as it did during the financial crisis. That said, we are likely to be lower for longer this time around, and the S&P 500 is instead near all-time highs, making the energy sector’s performance look that much worse, relatively speaking. On a positive note, MLPs had already bounced 19.3% as November began.
And in the past 20 years, there have only been 11 times that MLPs experienced drawdowns greater than 10%. The average loss was just over 20%, and MLPs recovered to previous levels within an average of six months.
What will MLPs look like in five years? While history is not guaranteed to repeat itself, MLPs have survived drawdowns 100% of the time. Some individual MLPs have not. Then again, even when MLPs as a whole are healthy, some have not survived. No one at Alerian has any reason to believe that current performance will lead to dissolution of the structure.
Most investors look at MLPs as a long-term investment, because fundamentally, infrastructure assets simply take time to construct. A typical pipeline, from ideation to in-service date, takes two to three years to build, assuming no delays.
Historically, the unlucky-but-patient investor who had bought at every single peak, but held on for the following five years, despite the drawdown, would have made an average of 85.7%. Admittedly, the investor with the brass and crystal balls to invest at the trough would have made an average of 167.8%.
A thoughtful investor might realize she is unlikely to be either of the above and decides to invest on the day MLPs have fully recovered. On average, that strategy returns 115.4% over five years. The lazy investor, who simply invested on a random day in the past 20 years, but held for five years, would have made 122.6%.
If you’re concerned about MLP drawdowns, historically it didn’t really matter if you were unlucky, brassy, thoughtful, or just lazy, you still made money. History, however, is not guaranteed to repeat.

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