Billionaire 'Bond King' Bill Gross explains why oil and gas pipelines are his top investment even as AI fervor swirls

• Bill Gross told Barron's that oil and gas pipelines are a top investment of his as he seeks alternatives to a tapped-out bond market.
• He says these publicly-traded multiple limited partnerships offer strong returns with additional tax advantages.
• Gross has been investing in "conservative" AI names like Microsoft and IBM, but has never owned Nvidia.

"Bond King" Bill Gross' favorite investment right now is probably not what you think. Rather than seeking opportunity in the bond market, the legendary billionaire is investing in oil and gas pipelines.

Gross notes that the pipelines — which trade as master limited partnerships — possess many of the yield attributes of bonds. He likes them right now because they offer limited risk, good tax benefits, and also the liquidity afforded by the stock market.

In a podcast interview with At Barron's, Gross outlined why that these partnerships are so attractive:

"First of all, their dividends by law are deferred until sold," he said. "And second of all, mutual funds for the most part can't buy a partnership. So you have this huge base of potential buyers that have been cut out of the market because of regulatory law."

That translates into 8% to 9% tax-deferred yield, Gross cited, adding that the MLPs have climbed as much as 35% in the last 12 to 18 months.

"It's been wonderful — it's been almost as good as AI," he said. 

In some form, Gross' fresh focus on MLPs is a rejection of US Treasurys, which the bond king no longer sees as a fruitful trade. Speaking to Barron's, he explained that bond traders shouldn't expect the same total returns seen in the past, with yields likely to breach 5% in the future.

"But to find bond equivalents where the return is relatively steady, the risk is relatively low, the tax benefits are very high, and so that's been a master limited partnership, pipelines," he said. "There's only six or seven of these things left."

Gross acknowledged that MLP price appreciation has likely peaked, but investors could still take advantage of the tax-deferred yields. He offered two companies worth paying attention to: Energy Transfer and Western Pipeline, which recently raised dividends by 30%-40%, he said.

When it comes to more popular market trends, Gross has remained conservative about pushing into artificial intelligence. He told Barron's he holds Microsoft and IBM, but will never own Nvidia. Though markets have cheered the AI chipmaker for its price momentum, it's too volatile for Gross.

Previously, he attempted to trade Broadcom on AI hopes, but was "whipped back and forth," Gross shared in March commentary.

However, he did cite interest in the utilities sector, as AI developments boost energy demand. Though there's some bubble potential among these stocks, benefactors include Con Edison and Dominion, Gross said.