Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

As the month of April came to a close, 1Q earnings offered the first indications of the impact of inflation on company earnings. As 2022 started, global inflation started to increase, with many developed markets exceeding 5% Year-over-Year (YoY) CPI growth. In February, Russia’s invasion of Ukraine further disrupted supply chains and escalated inflationary pressures; by the end of the first calendar quarter YoY CPI accelerated to 7% as measured in the Bloomberg World Economic Inflation Measure (WOININFL).

With inflation reaching multi-decade highs, the question of company earnings comes into focus. From an earnings surprise perspective, natural resources companies are generally beneficiaries of increased commodity prices. Through May 7th, the results are strongly confirming the perspective that energy and materials companies are positively correlated to inflationary environments. In the chart below, we look at the dispersion of 1Q earnings surprises across the Vanguard Total World Stock ETF’s sectors. With more than 50% of companies having reported, energy and materials stocks show the strongest earnings surprises, while in aggregate global financials, consumer staples and utilities sectors missed earnings 1Q estimates.

1Q 2022’s earnings surprises were the largest in years, and relative to market cap were equally as large during the depths of COVID, with one major difference for shareholders today…

Earnings for bellwether natural resources companies beat expectations by significantly more than any time in the last few years. Additionally, the right axis shows the percent of market capitalization represented by the earnings beats. Only in the immediate aftermath of COVID, when earnings estimates initially plummeted as COVID spread, did companies beat earnings estimates by as much, when measured as a percent of market cap.

Capital discipline has led to healthy balance sheets; companies are returning capital to shareholders

In the middle of 2020, companies’ earnings beat overly pessimistic sell side expectations, However, because companies were dealing with significant operational uncertainty, any excess earnings were used to pay down debt, and were not available to equity holders. Today the situation is notably different than the depths of COVID, where profitability is high and debt levels have been reduced. Importantly, due to continued capital discipline, an increasing amount of free cash flow is being returned to shareholders. In just the 1Q earnings period, portfolio companies accounting for approximately 58% of the Global Natural Resources portfolio have announced new share buybacks or dividend increases.

Fund

In the month of April 2022, the Alma Recurrent Global Natural Resources Fund fell by -3.75% net of fees, outpacing the S&P Global Natural Resources Index’s -4.38% return. Stock selection in the integrated oil sector significantly added to portfolio performance, with Cenovus Energy and Suncor Energy rising 11.38% and 10.28%, respectively. Alcoa Corp detracted from performance, falling -24.69% in the month, as the implications of COVID on Chinese demand raised short term concerns.