After a period of sustained growth, master limited partnerships (MLP) have underperformed compared to the Standard & Poor’s (S&P) 500 in the second-half of 2013. The Wells Fargo MLP Index was down 6.2% from July 15 to September 16, compared to a 0.1% gain for the S&P 500 during the same time.

According to Wells Fargo Securities, there are several causes for this underperformance with a primary reason being investor concerns over higher interest rates on MLPs. “In all likelihood, the market has exited an unprecedented period of low interest rates, which we believe has provided an accommodative backdrop for MLP sector growth over the past ten years,” the investment firm said in a recent research note.

The average interest rate is expected to increase from the current 2.9% to 4% in 2016 and 5.1% by 2018. Despite this being a notable headwind for the MLP sector, Wells Fargo anticipates that it should be fairly easy to overcome as long as interest rates increase at a measured pace and distributions grow steadily to maintain investor interest.

While the MLP market is more closely tied to commodity prices and the broader equity market, Wells Fargo noted that when the 10-year treasury rate has risen more than 50 basis points in a month the MLP market has underperformed the S&P 500 by 2%.

“This implies that although MLP performance is not meaningfully impacted by gradual movements in interest rates, sharp changes in interest rates can materially impact MLP performance,” the report said. Even though the industry typically secures debt with fixed-rates, companies in the sector issue large amounts of debt and drastic increases in interest rates would have a negative impact.

According to Wells Fargo Securities, a 1% increase in rates would result in the compound annual growth rate to deteriorate by 80 basis points for upstream and small-cap pipeline MLPs, 60 basis points for gathering and processing MLPs, 40 basis points for propane MLPs, and 40 basis points for large-cap pipeline MLPs.

The report noted that this analysis is largely theoretical since interest rates have trended downwards for much of the past two decades, which is the same time that MLPs have been around. Thus MLPs have not yet operated in an environment with a cycle of increasing interest rates. At the same time, the sector has grown to include companies that have higher risk assets such as E&P, processing and refining rather than just pipelines.

This growing riskiness has seen upstream MLPs underperform in the overall sector. According to a separate research note from Wells Fargo Securities, upstream MLPs underperformed in the overall market by 5.2% in August compared to the full MLP segment being down 3.5% in the same time frame.

Much of the upstream MLP segment’s negative outlook was due to an 11% downturn in the price for Linn Energy, which accounts for 30% of the segment. As demand drivers have been improving throughout the fall for crude oil and natural gas liquid (NGL) prices, upstream MLPs are also gaining strength.