Doug Daly, Core Commodity

That we're going to talk about, CCNR, with SS&C Alps. So can you kind of talk about that partnership as well? Absolutely. Absolutely. So core commodity, as the name kind of implies, is an asset management firm focused and dedicated on commodities asset management, whether that is commodity futures or natural resource equities. All we do is commodities. It's what we live and breathe. And we were founded by some of the most senior longstanding commodities futures innovators out there, many of whom date back to sort of the inception of commodities as an asset class.

Our CIO was the creator, one of the creators of the Bloomberg Commodity Index. Back then it was the Dow Jones AIG Commodity Index. We've also reconstituted the CRB Index. So really, commodities indexing was our core back when we first were getting started. And then we introduced natural resource equities into our strategies back in 2010 or so. The firm goes back to 2003. And we really began integrating those natural resource equities along with commodity futures in some of our strategies back in 2010, including our flagship mutual fund product, JCRIX, which is the Complete Commodity Strategy Fund, which is where we first partnered with SS&C Alps. So they serve as the advisor on that fund. We are the sub-advisor. And that fund has been around again since 2010 and combines

Natural resource equities with commodity futures. It's roughly a third equities, two-thirds futures. I'm also a portfolio manager on that fund as well. And then back in 2012, we kind of launched our flagship natural resource equity product, which is what is in the CCNR ETF today. So even though the ETF was launched in 2024, it's a strategy we've been running since 2012 on a standalone basis and something we think is really different because, again, the firm comes at commodities from that lens, like from that deep specialization in commodities. So as we talk more about CCNR, I think we'll get into how it really is under the hood very different from some of the other things out there.

Well, that's exactly where we're going. So let's get into CCNR. It's the Alps Core Commodity Natural Resources ETF. As you said, it launched in 2024. It's actively managed. So at a high level, before we go deeper, what is this fund and what's the problem that it's solving? Absolutely. So what it is, is trying to provide investors with exposure to upstream commodity producing companies to better deliver the underlying natural resources or commodity price exposure of the things those companies produce. So, and why would you want to own that? Generally, what we see these products used for is diversification. Inflation protection is obviously the biggest thing in commodities and certainly relevant these days, but also access to growth and growth opportunities as well. So it's really trying to fit into an investor's portfolio to cover some of those

Diversification and inflation sensitivity needs, but to do so in a way that we think sort of maximizes those impacts. So when you look at CCNR, it is much more upstream generally than some of the passive indices out there. We're really focused on, within energy, we're focused on upstream oil and gas E&P companies, the companies that are going out, drilling wells and extracting oil and gas out of the ground, as opposed to purely focusing on large integrated energy companies like your Exxons and Chevrons of the world. We generally include that industry, nothing against those companies. But when you look at which industries are more sensitive and better reflect underlying crude or natural gas prices, it's those companies closer to the underlying production, which kind of makes sense, right?

And that's what we do across the board. We do it within, the four main sectors we look at, energy, agriculture, base metals, and precious metals. And we're really trying to target the industries and companies that are the most upstream and will best deliver the underlying commodity price exposure and all the benefits that come with it. At the same time, highly diversified, usually over 300 names, roughly 300 names in the portfolio. The idea being, if we spread our risk around enough names, we will better deliver the underlying commodity price exposure to the end investor. So a great example of where that was beneficial to us happened last year when a company, Freeport Mac Moran had a mudslide event at their mine in Indonesia, right? The Grasberg Copper Mine,

One of the biggest copper mines in the world, second largest copper mine in the world. That sent copper prices up 4% that day because copper is a very tight market at the moment, especially with AI data centers, all these uses we have for copper. But the stock of Freeport dropped like 20% on that day. So if you were just using Freeport as your proxy for copper, you would have been in trouble on that day. But we held, I believe, 12 different copper miners in the portfolio, including Freeport at the time. But our basket of those 12 names was up about 4% right along copper prices. And I'd use that as an example because that's what we're trying to do sort of across the commodity complex is provide the

Underlying price exposure by diversifying across enough highly upstream names. So, and I want to talk a little bit deeper about that because it was a question I had for you specifically, which is, can you talk us through why upstream is better for commodity exposure rather than like the refiners and other downstream operations? Absolutely. And it goes back to that being closer to the commodity production better delivers the underlying exposure to the commodities that are produced. And that is where your benefits stem from, right? Your diversification, your inflation protection, that's coming from the underlying stuff that those companies make, right? As opposed to just, idiosyncratic company, single company risk or equity beta, you're really getting the benefits to your portfolio from exposure to the

Underlying natural resources. So in our view, if you own the companies closest to those, closest to that production, you're going to better deliver that underlying natural resources exposure. And empirically, that has been the way it's played out over time. We tend to see higher inflation sensitivities with those more upstream names. So can we talk about like the structural case for commodities in general? Because I think it's, it's pretty underappreciated. Like producers used to make up like 35% of the S&P in the late 70s. And today it's like 5% while tech is, the third of the index. Can you walk us through what that shift means for investors going forward? Absolutely. It's a great talking point and one that we've been focusing on quite a bit with investors. these are the companies that make

Real things, the energy, the materials and the food that powers the world, right? That we need and need more of year in and year out as populations grow, as standards of living rise, all these things we always use more and more and more of. And in the age of AI now, like electricity, power, energy is becoming even more of a huge area and in some ways a bottleneck to a lot of that growth. that is incredibly important. Yet, as you say, you look at something like the S&P 500, 5% in commodity producers and the bulk of that in just a couple of companies.

We feel that investors are, I think many investors assume they have exposure to these companies that make all this real stuff because they own broad-based equities. But then when you look under the hood, you see that you really don't. So we think investors have been, under allocated to the space because of the rise of tech, in those indices as tech has basically, over the last 50 years or so, it's become now over a third of the index. And when you looked back in the late 70s, early 80s, roughly a third of the index, as you pointed to, was companies that make real stuff. So that transition has sort of shifted investor portfolios, maybe without them being fully aware of that. And I think as we've highlighted that point with investors, it's really been one that

They've taken into account and has resonated with them because they see just how much exposure they have to, the Magnificent Seven or whatever we're calling it nowadays and how little they have to these kinds of companies. So we all understand and I think can see and get the demand side of the equation. But on the supply side, I think I read you pointed out that a new copper mine can take 15 years from planning to production. And investment in new production is really lagged. So like, how big is that supply gap? And where do we kind of see it show up first? It's, it's, I think it's very big and it varies depending on what market you're looking at. I think copper is a great example of, in, unlike technology companies, software companies,

The production of natural resources is not a light switch, right? Even if we invested the money we should have invested decades ago today, it's going to take a very long time before that CapEx spend translates through to new production and new supply. And companies are reticent to do it these days, right? We had energy companies back prior to the pandemic spending, we had in many cases, these zombie companies that had borrowed so much money and it was so profitable for Wall Street to lend money to that industry. They borrowed so much money and all of a sudden when prices fell during the pandemic, many companies ended up going bankrupt or really in financial straits.

They've kind of come around to a new mentality, which is capital restraint, focusing on improving margins, returning cash flows to investors. And that's something we've seen in the mining space as well. The problem is these companies are very comfortable, I think, in the position they are today, financially very strong, shareholders are happy. they're paying down debt, they're buying back shares, they're returning dividends to their shareholders. There's not really an appetite for CapEx spend and we haven't seen it. And if prices go higher because we're not increasing the supply to match the demand, the companies continue to benefit. So I think that gap is pretty wide, particularly in something like copper. And we don't really see many signs of it closing. We don't see a lot of investment in new greenfield supply. We sort of see incremental,

Marginal, technological improvements, enhancing productivity, brownfield expansion, expanding existing mines. But we're not seeing a lot of greenfield development. And I think that's what we really need. It's sort of no secret that, the copper market is extremely tight and it's heading for a bigger imbalance in supply and demand by the end of the decade. Yet we're not really seeing any action happening to try to remedy that. So, supply and demand and commodities generally means that the prices are going to have to go up to compensate for that imbalance. Well, yeah, let's can we stay on, copper and the AI data center trade here just for a minute, just because it's so popular. It's like, we definitely have talked about copper,

But other things like natural gas, uranium is even being talked about again. Like, how is CCNR positioned to kind of take advantage of some of these different areas in commodity exposure? Yeah, it's one of the things I think that does set it apart from many of the passive indices and competitors out there is, because we built this thing from the ground up and we built it in a way that we thought made the most sense, we do include a lot of exposure to a lot of things you won't see in other indices. So uranium is a great example. There's not a ton of uranium companies out there that that one can own and in sort of a sufficiently liquid fashion, but there are some

And we generally include uranium as an industry in our portfolios. Natural gas, you can certainly plenty of producers out there, but that's going to be a huge area going forward. But so is some of the renewable and alternative energy, which are things that we have included in our energy portfolio. When you look at the fact that, roughly 20% of US power production is coming from renewable and alternative sources. Like that should be in an energy portfolio in our mind, even if, passive indices, market cap weighted indices, these more legacy approaches don't include those. So because we're actively managed, because we construct a portfolio the way we do, we have tried to include those sorts of things that are more relevant to your point. AI data centers, a great,

A great point. We're going to need energy kind of, I like to say all of the above, right? Like it's not just going to be the natural gas, although that is going to be a huge component of it. It's also going to be these renewable and alternative sources. It's going to be uranium. We're going to need so much more energy. We're not going to get to be that picky about where we get it from. And I think that's one of the advantages our product provides is that it does have that really broad based exposure. So you don't have to, try to predict, is it just going to be natural gas or solar or wind, you kind of own it all. And I, I'm very confident that we're

Going to need more and more energy going forward from all those different sources. And I think it's one of the ways we're differentiated and, in metals, similarly, we include things like lithium specialty metals, these things that are becoming more and more relevant. It's, it's always sort of been in the DNA of the product to try to include as many globally important, relevant commodities as possible. Yeah. And just looking through the portfolio, I know you guys aren't allowed to like really talk about individual names, but you've got, agriculture link names and, timber producers in here. So like, why does things like agriculture and timber belong in a conversation, uh, in a commodities fund like this? Absolutely. So agriculture is obviously incredibly

Important. It's, all the food and everything that we need and use every day. And it is one of the areas where it is, uh, more interesting, I think, uh, on the equity side, because it's not quite the direct as direct to link as say on the energy side, right? So, you can't go out and buy publicly traded farming companies or, corn companies or wheat companies like we see on the future side of things. But what we can own are things like fertilizers, things like water companies, things like, uh, seed producers and, and herbicide and pesticide companies, all those inputs into the growing and production of food, uh, including things like, uh, agricultural machinery tends to be, one of the highly correlated areas to the underlying agriculture prices, because you need

Your, John Deere tractor or what have you to, to, um, to harvest all that food. So sort of the inputs and the tools for the outputs is how we get it on the agriculture side. And it's just, again, it's, it's energy stuff and food. That's, that's kind of the, the three main things in natural resources. And that's how we get our exposure on the ag side. So you've got some real international exposure to in the fund, like how important is the global scope versus a U S only natural resources fund? It's incredibly important. commodities are global. Natural resources are global. They're produced all over the world. They're consumed all over the world. Certain, um, geographies have certain natural resources and others don't. Like when we look at things like platinum and PGM metals, you know,

A lot of that is coming from places like South Africa, right? Uh, it's just what that country was blessed with in terms of its natural resources here in the U S we have, abundant crude oil, natural gas, and these hydrocarbon products, uh, but those get used all over the world. Right. So, uh, the portfolio is really meant to reflect that. Uh, we tend to be on average, I think about 40% U S with 60% being international. And that's really more a function of, what companies are available to us to invest in on which exchanges, can we access them? Um, and then, we put everything together in the portfolio and that's kind of where it shakes

Out. But, um, also important, I think in that is the fact that, there's a, a correlation, an inverse correlation between broad commodity prices and the dollar, right? Um, when the dollar goes up, commodity prices tend to go down vice versa, um, because it's purchasing power and of a dollar, right? Um, so by having a portion of our portfolio outside the U S we're, we're sort of enhancing that commodity like nature of the product. Cause we're not hedging that, that foreign, uh, currency exposure back to, to dollars. We're keeping it in the local currency that adds a additional layer of enhancement of that, like commodity, like diversification you're getting. Now, if you were in something that was, um, more North America focused, there is an index out there. I won't pick

On them, but they are more North American focused natural resources. Uh, they, you would see a lot more energy, right? Because that's what we have here in North America and we have nothing against energy. It's our, our largest sector as well, but we don't think it should be 80% of the portfolio. We think it should be around about 40%. So by diversifying globally, we're really getting at just that broader basket, uh, the broader swath of natural resources exposure. So just out of curiosity on the active side, um, is, is there a point in your process where, it sounds like to me, you're trying to get as correlated as exposure as you can using, actual companies to get this commodity exposure instead of just going out and buying

Futures. Is there any part of your process that you're looking at the fundamentals of a company and saying, Hey, we don't want to own this company, even though it gives us the exposure. Absolutely. So the way we actually do our active management, uh, because as you, as you point out, is an actively managed fund is we leverage sort of a systematic data-driven quantitative process to do our portfolio construction, but it's all very much rooted in common sense fundamentals. I, the term that used to get used was quantamental. It's sort of fallen out of favor, but that's, that's kind of the style of it, right? So it's leveraging our expertise in commodities and our background as, as really like fundamentals, commodities people, along with my background,

That's more, quantitative, technical, systematic. And what we're doing is we're, we're using a, uh, a number of different, what we call sort of portfolio drivers or models. Each one is looking at a single factor. So, um, and some might be operating at a sector level to overweight or underweight sectors. Some might be operating, uh, at an individual company level or an industry level within sectors. So a couple examples that might make it a little more clear, we'll look at things like the term structure in the futures markets on a sector level. That's the, the futures term structure. That's telling you something about supply and demand in those futures markets. We'll translate that over and say, okay, all else being equal, if something like the energy sector is showing a lot of what we call backwardation or, you know,

A tight market where supply and demand are mismatched in the favor of, uh, demand outstripping supply, all else being equal, we'd want to own more energy companies in our portfolio and less of the other sectors. But then we might look within energy companies and look within, let's say EMP companies and look at the extraction margins of each company and say, all else being equal, we'd prefer to own companies that can extract oil and gas out of the ground more cheaply than their competitors. And so we'll say, we want to have more exposure to those single names that are getting better margins and less exposure to the names with worse margins. And we do that across, a number of different factors, roughly 25 or so. We're always looking to improve those,

Add new ones, take ones away when they, when they no longer are adding alpha to the process, but that's sort of the active management process. It's, it's a collection of, we think sort of, um, unique factors that we're looking at leveraging our expertise in commodities markets, just applied systematically because when you have to practically manage a portfolio of 300 or more names, it's kind of lends itself to that type of approach. Yeah. So with CCNR, it carries a lower beta than broader equities and a lower correlation to the S&P. Like if I'm an advisor listening to this and I've got a diversified model portfolio, like two parter, what is the, what's the case for having commodities exposure, like period. And like, how would you use this fund and a diversified

Model portfolio? Absolutely. So the case for commodities exposure right now, let's, let's split that into the tactical case versus the strategic case. We do think there is value in having a strategic allocation, mainly again, for that diversification and inflation sensitivity. When you look at the things that are typically used for inflation sensitivity in a portfolio, right? You're thinking, uh, commodities and natural resources, um, EM exposure tips, uh, those sorts of things, the sensitivity to inflation is highest amongst commodities and natural resources by a wide margin. Right. And that's important because if you have something that has a beta to inflation of, five or six, that means every dollar you put in your portfolio into that thing is going to cover an additional four or $5 of exposure elsewhere.

Right. And that's, that's the idea is you want to put the most inflation sensitive thing in because you're not going to, own a hundred percent of your portfolio in these things. You're trying to get the most bang for your buck through that high inflation sensitivity. So that's where we see it being used. Uh, some, some advisors and, and end users have real assets buckets. It fits nicely as a part of a real assets bucket, but also in the case of CCNR, I think it's important to keep in mind, they're not commodity futures, strictly speaking, they're equities. And we think that they have a place sort of in your overall equity allocation, as opposed to just, a small sliver of a sliver of a real assets allocation. Um,

Obviously you take that with a grain of salt coming from me, but, um, that is where we do see a good fit. Like we talked about earlier, just trying to diversify that really tech heavy, broad equity you have, because again, the strategic case is diversification, inflation protection. Now, the tactical case I think is really interesting these days is, potentially a way to gain exposure to what's happening with infrastructure, AI, nearshoring and onshoring trends, uh, military spending and rearmament. Uh, there's a lot of tailwinds to this asset class right now. Um, but we haven't really seen the investment dollars flow into it. And like we talked about earlier, we haven't seen the capex on the company side being spent like we've seen the capex of the

Hyperscalers and things. So these companies haven't ramped up spending in reaction to things like AI, but they do stand to benefit greatly if all this infrastructure ends up getting built. So from a tactical standpoint, we think it's a really interesting time and we see the risk and reward, uh, the risk and reward really being skewed less to the downside, I would say, because you haven't seen these companies doubling down on all this spending. They've sort of just been sitting, enjoying good margins. And, we think investors are starting to, uh, take notice. Well, Doug, I really appreciate you being here with me today, but before I let you go, where can people learn more about core commodity and your CCNR ETF?

Absolutely. To more about the ETF, you can definitely find on our partners, the Alps Funds website. Um, and, uh, the CCNR page there, we also have a website, uh, corecommodityllc.com that people can go to and take a look as well. Well, again, thanks for being with me today, Doug. I really appreciate it, Brad. Thank you for having me. Thank you.