Market Sector Update
- Global equity markets posted negative returns on the broad indexes. The energy and materials sectors also posted
negative returns and underperformed the broader equity market. Materials outperformed the energy sector.
- Crude oil prices declined significantly in the quarter with West Texas Intermediate crude oil, the U.S. benchmark,
down about -67% and Brent oil down about -61%. A perfect storm hit the oil market as demand significantly weakened
due to the COVID-19 pandemic, coupled with a policy change from OPEC to supply more oil to the market. This shift in
policy occurred when OPEC and Russia were unable to agree on extending existing production cuts. The result was a
dramatically oversupplied market for oil that is straining inventory storage around the world.
- The severe decline in oil prices in the quarter caused producers around the world, notably in the U.S., to slash capital
expenditures and growth outlooks. The U.S. shifted from growth mode to contraction mode as many domestic
producers announced plans to cut activity from 30-50% for the full year in 2020. With the oil price dropping below the
cash costs of operation in some areas, some producers have elected to completely stop activity in the near term.
- Other commodity prices moved lower in the quarter with iron ore prices down by about 4% and copper prices down
by about 20%. Iron ore prices held up relatively well due to tight controls on supply by the largest suppliers.
- The Fund outperformed the return of its benchmark, the S&P North American Natural Resources Sector Index, but
posted a negative return for the quarter. Outperformance was partially driven by an underweight in the energy sector,
an overweight in materials, and strong stock performance relative to the index in solar, precious metals, other metals
- The five greatest equity contributors to relative performance were overweight positions in Canadian Pacific Railway,
Barrick Gold Corp., Rio Tinto plc, Schlumberger and Occidental Petroleum.
- The five greatest equity detractors to relative performance were TC Energy Corp., Enbridge Inc., Newmont Corp.,
Chevron Corp. and WPX Energy Inc.
- The Fund’s exposure to the energy sector decreased significantly from the prior quarter, ending at about 33% of
equity assets. The decrease was due to reduction in exposure and depreciation of equity. The remaining sector
exposure was composed of materials, solar, industrials, utilities and chemicals. The Fund also increased its cash
position to around 11% given the significant uptick in market volatility and unprecedented market conditions.
- In general, we seek to own companies in the Fund with low-cost positions, strong balance sheets and the ability to
grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their
respective commodities and sub-sectors.
- Due to the open-ended nature of the COVID-19 pandemic, it is unclear when exactly demand for oil and other
commodities will return to previous levels. With large parts of the world economy grinding to a standstill, demand is
expected to be significantly below trend until businesses begin to increase operations.
- In order to match lower demand conditions, supply of oil and other commodities is expected to be drastically cut
also. However, the supply cuts are likely to be slower than the demand reduction, which should result in increasing
inventories for much of the remaining year. Persistent oversupply will likely continue to keep commodity prices near
cash costs of operation or the marginal cost of new supply until more supply growth is needed to meet demand.
- After several years of expansion in the U.S. energy industry, we are likely headed for a contraction that could last for
many months. Much higher oil prices will be needed for the industry to return to growth. It is expected that this will not
occur until demand recovers to a level where more supply from U.S. producers is needed. If OPEC continues its
increasing market share strategy, U.S. oil supply growth will likely not be needed until 2021.
The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.
Top 10 equity holdings as a percent of net assets (%) as of 03/31/2020: Barrick Gold Corp. 5.9, Phillips 66 3.9, Canadian Pacific Railway Ltd. 3.6, Union Pacific Corp. 3.3, Rio Tinto plc 3.3, Valero Energy Corp. 3.2, Galp
Energia SGPS S.A., Class B 2.7, Marathon Petroleum Corp. 2.6, Air Products and Chemicals, Inc. 2.6, and BHP Group plc 2.6.
The S&P North American Natural Resources Sector Index represents U.S.-traded securities in the energy and materials sectors, excluding the chemicals industry, and steel sub-industry. It is not possible to invest
directly in an index. All information is based on Class I shares.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined
Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing
involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in
emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and
political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Fund to other risk
considerations such as potentially severe price fluctuations over short periods of time. The Fund may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to
specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate
perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the prospectus. Not all funds or fund classes
may be offered at all broker/ dealers.