Three Reasons for GUNR

 

Three reasons to consider a strategic allocation to natural resources as a defense against inflation

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INFLATION SHIELD

Strategic exposure to upstream natural resource equities may provide a buffer against the risk of elevated intermediate-term inflation.

Companies may operate with a business focus on the upstream or downstream portion of the supply chain. Upstream companies sit at the start of the supply chain and produce or develop resources that are then transported to processors. Downstream companies process natural resources into consumer goods.

Downstream companies may face complexities and costs related to packaging, distribution, marketing, branding, and other factors that can affect profitability and cash flow. By contrast, upstream companies can be less complex because their costs lie primarily in resource extraction, with minimal processing and delivery to downstream companies. Upstream companies also may benefit from raw material price increases, while downstream companies, which must pay those higher prices for their input materials, may experience negative impacts.

EFFICIENCY IN AN EQUITY- BASED STRATEGY

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As compared to commodity futures investment vehicles, an equities-based strategy allows for greater transparency, potentially more tax-efficient structure, and unique exposure to sectors not available through futures such as water resources, timber, dairy and poultry/fish protein.

Global equities can provide distinct advantages including long term capital appreciation and the ability to generate income. Natural resource equity prices generally move independent of short-term stock market trends, with a particularly low correlation to the financial sector. An equity-based strategy that invests in companies that own, harvest, or extract natural resources provides exposure to assets that aren’t widely traded — or aren’t available at all — on the commodity futures markets. Additionally, this strategy can provide many of the benefits of a futures-based approach — but without the structural headwinds, such as negative roll yield. This approach also avoids the complex and volatile nature of investing in futures contracts, which requires strategies to continually replace expiring contracts with new ones at potentially higher costs. Overall, an equity-based approach has consistently outperformed the futures-based approach over longer periods.

BROAD, BALANCED APPROACH WITH GLOBAL DIVERSIFICATION

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With growing populations and increasing per-capita income, global markets are in the early stages of what is expected to be an extended period of demand expansion for energy, food products, metals and other natural resources such as paper and water. In 2022, the United Nations forecasted that global population is expected to grow from 7.9 billion in 2021 to 8.5 billion in 2030, 9.7 billion in 2050 and 10.9 billion in 2100. Adding exposure to global natural resources investments provides an opportunity to capitalize on the potential benefit of rising natural resource product prices. Focus on the upstream portion of the supply chain may help to increase investors’ exposure to the positive impact of rising prices. At the same time, diversification across sectors and regions may help mitigate the risk of skewed concentrations in sectors with a greater economic footprint. We believe this approach offers investors an opportunity to participate in the rising global demand for natural resources while maintaining a balanced position across emerging and established regions.


DEFINITIONS

Cash flow is the amount of cash that comes in and goes out of a company. Businesses take in money from sales as revenues and spend money on expenses.

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