Alma Recurrent Energy Infrastructure Income Fund

Market Review and Outlook

In an echo of the 1970s, Fed independence is under attack and “term premiums” are expanding as short-term rates are expected to fall as long-term rates rise. The Trump Administration’s campaign to pressure the interest rate-setting Federal Open Market Committee (FOMC) are certainly aggressive, but they are not unprecedented. We’ve written extensively of the economic parallels between the 1970s and 2020s in our white paper, “The Great Inflation Misdiagnosis”. Below, we see the parallels extend from the economic to the political realm. President Nixon, facing slowing economic growth and elevated inflation, orchestrated an extensive pressure campaign on the Arthur Burns-led FOMC in 1971 and 1972 (prior to the 1972 election):

“The Nixon administration kept up a steady stream of anonymous leaks to pressure Burns, including floating one proposal to expand the size of the Federal Reserve (so that Nixon could
appoint a majority of the new members) and another proposal to give the White House more control over the Fed, while planting a false story that Burns was requesting a large pay raise, when in fact Burns had suggested taking a pay cut.”
Source: “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” by Burton Abrams. The Journal of Economic Perspectives, Volume 20, No. 4. Fall 2006.

In the early 1970s, Arthur Burns pushed back on Nixon in private, but nevertheless cut rates in 1971 and again in the mid-1970s despite elevated inflation. Under pressure, Burns fulfilled one
half of the Fed’s “dual mandate”, focusing on GDP growth and full employment, while ignoring inflation. This led to diminished credibility for Burns and the Fed, causing long-term rates to rise even as short-term rates stayed low. This is reflected in the steady rise of the “term premium” – a measure of how much additional yield investors require to hold longer-term debt securities – throughout the 1970s. Below, we can see that the “term premium” is yet another area where the 1970s and 2020s exhibit clear parallels.

50 years later, the Fed is again expected to embark on a rate-cutting cycle beginning in September 2025, despite the fact that September 2024’s surprise 50 bps rate cut was followed by an
increase in inflation expectations and a rise in long-term interest rates. Faced with the prospects of falling short-term rates (and an accompanying decline in income from money markets and
floating rate debt), and rising long-term rates (which typically cause income investments to lose value), what can income investors do?

The majority of a typical “income” portfolio performance is dependent on Fed policy. While markets are unanimous in their expectation of Fed cuts in late 2025, political pressure and elevated inflation expectations makes it difficult to rely on consistent Fed policy. As shown below, midstream allows investors to generate income without betting heavily on the Fed. Including a midstream allocation in an “income portfolio” allows investors to generally enhance their current income, while reducing correlation to Fed policy.

If increasing term premia push long-term rates higher, are midstream assets at risk? While many income investors are betting on the beneficial impacts of Fed cuts today, the future path of Fed policy remains uncertain. Near-term Fed rate cuts may drive short-term rates lower, but based on the example of the 1970s, the impact of elevated inflation and lower Fed credibility may expand the term premium, and ultimately send long-term rates higher even as short-term rates fall.

Most income investments are somewhat sensitive to short-term rates, but those same investments are heavily dependent on changes in long-term rates. Below, we see a chart measuring the
R-squared between the income-generative asset classes shown above and changes in the 10-year US Treasury yield. For most bonds, changes in the 10-year yield explain between 70 and
100% of total return performance! For income-oriented equities like utilities and REITs, 10-year rates explain between 30% and 65%. For midstream, the 10-year yield environment has explained less than 20% of total return performance. So while midstream returns have shown almost zero Fed dependence in the last 3 years, they have also shown some of the lowest sensitivity to longer-term rates.

Surprisingly, the asset least sensitive to future rates is also the least-owned Midstream provides a unique exposure for income portfolios. Not only are midstream returns relatively independent of the overall rate environment, but correlation studies show a negative correlation between midstream and investment-grade fixed income over time. Beyond bonds, which are clearly subject to the overall rate environment, many investors opt for REITs, utilities, or “global infrastructure” (which is not an economic sector, but a catch-all invented by fund managers to include a grab-bag of utilities, industrials, REITs, and midstream) instead of midstream. In doing so, many investors are inadvertently increasing rate risk, while adding less yield than a midstream allocation would provide. We believe investors should consider including midstream before, not after the next interest rate cycle.

Fund

During the month of August 2025, the Fund generated net returns of +3.01%.