Renewal of Investment Advisory Contract
During their meeting of September 15, 2015 the Trustees of Amana Mutual Funds Trust discussed the continuance of the Investment Advisory and Administration Agreements between the Trust, on behalf of each Fund, and Saturna Capital Corporation ("Saturna"). In considering the renewal of the agreements with Saturna, the Trustees discussed the nature, extent, and quality of the services provided by Saturna to the Trust and each of the Funds. The Trustees considered that the Funds offer a full range of high-quality investor services, including unique services for Islamic investors. The Trustees discussed Saturna's experience, ability, and commitment to quality service through performing internally such functions as shareowner servicing, administration, retirement plan and trust services, accounting, marketing, and distribution — all in addition to investment management.
The Trustees took into consideration Saturna's continued avoidance of significant operational and compliance problems, plus its investments in infrastructure, information management systems, personnel, training, and investor education materials, all designed to provide high quality investor services and meet investor needs. They recognized Saturna's efforts to recruit and retain increasingly qualified, experienced, and specialized staff and improve the capital base on which Saturna operates, which the Trustees believe is important to the long-term success of the Funds. They appreciate Saturna's focus on investors and avoidance of potential conflicts of interest.
The Trustees considered the investment performance of each Fund over time, including comparative information published by Morningstar Inc. ("Morningstar"), an independent data service provider that, among other things, ranks mutual fund performance within categories comprised of similarly managed funds. The Trustees considered and discussed at length each Fund's performance relative to the Fund's Morningstar category for the one-, three-, five- and ten-year periods and the related Morningstar rankings (one through five stars) for the one-, three-, five- and ten-year periods, ended as of July 31, 2015. In addition, the Trustees considered each Fund's performance relative to the Fund's category selected by Lipper, Inc. ("Lipper"), a nationally recognized organization that ranks mutual fund performance. The Trustees considered each Fund's performance within its Lipper category, as measured in quintile rankings.
The Trustees found that the long-term investment performance of the Funds, both in absolute numbers and relative to the Morningstar and Lipper categories, remained strong. The Trustees considered the short- and medium-term investment performance of the Funds relative to their Morningstar and Lipper categories. The Trustees noted the risk-averse investment style and other factors, which can affect a Fund's performance relative to the Fund's broader Morningstar and Lipper peer categories. They understood that Islamic restrictions increase Saturna's research expenses and obligations and impose major constraints on Saturna's selection of portfolio investments. The Trustees found that Saturna continued to manage the Funds in a manner that is designed to be acceptable to Islamic investors and that the risk-adverse approach also is attractive to non-Islamic long-term equity investors.
Recognizing the investment mandate of the Funds, the Trustees also considered the performance of the Funds as compared to a group of other faith-based managed funds with similar assets and investment objectives and strategies. The Trustees considered these comparative performance data, along with the comparative data published by Morningstar and Lipper, as well as each Fund's performance relative to its benchmark, to evaluate each Fund's performance over near-term and long-term time periods. In this regard, the Board noted that performance, especially short-term performance, is only one of the factors that it deems relevant to its consideration of each Fund's agreement and that, after considering all relevant factors, it may be appropriate to approve the continuation of the agreements notwithstanding the Fund's performance.
The Trustees also reviewed the fees and expenses of the Funds and considered the components of each Fund's operating expenses. The Trustees noted that the expense ratio for the Investor share class of Amana Growth Fund and Amana Developing World Fund was less than the Morningstar category average, and the expense ratio for the Investor share class of Amana Income Fund was 4 basis points above the Morningstar category average. In light of the services provided by Saturna, the Trustees found each Fund's advisory fees and expense ratios to be comparable to funds in its peer group and to be fair given the size of each Fund, the services provided, the volume of transaction orders processed by the adviser, and the expenses incurred by the adviser. They noted the significant sponsorship of the Funds by Saturna evidenced, in part, by the amount of fees and expenses paid by Saturna out of its own resources (known as "revenue sharing") to unaffiliated intermediaries. The Trustees noted that these fees and expenses imposed by financial intermediaries are often borne by funds and the Trustees appreciated Saturna's efforts to help make the Funds widely available and less expensive. The Trustees recognized that the Funds' positive performance record over the years had likely contributed to their asset size, which resulted in lower expense ratios due to rising costs being spread over a larger asset base.
The Trustees reviewed Saturna's financial information and discussed the issue of Saturna's profitability as related to management and administration of the Funds. They discussed the reasonableness of Saturna's profitability with respect to each of the Funds as part of their evaluation of whether the advisory fees bear a reasonable relationship to the mix of services provided by Saturna, including the nature, extent, and quality of such services. The Trustees noted the more than twenty-five years of dedicated service provided to Amana shareowners by Saturna.
The Trustees considered the extent to which advisory fees paid to Saturna reflect economies of scale. The Trustees noted that as the Funds have grown, Saturna has voluntarily undertaken to include breakpoints within the advisory fee structures and agreed that any changes to the breakpoint schedule would require the approval of the Trustees. Fee breakpoints lower the operating expenses and expense ratios of the Funds. They also demonstrate that the benefits of economies of scale are being shared with shareowners. The Trustees also noted the successful introduction of low-cost Institutional shares.
The Trustees considered and compared the fees charged by Saturna to other types of accounts, including non-mutual fund advisory clients. The Trustees noted the differences between the full range of services Saturna provides to the Funds, including investment advisory services, transfer agency services, shareholder services, and other services, as compared to the investment advisory services provided to the other advisory accounts. The Trustees also considered how the various services provided to those other accounts, which include Saturna's investment management, research, and customer service operations performed for those accounts, benefit the Funds.
The Trustees considered potential benefits to Saturna from acting as investment adviser and noted that there were no soft dollar arrangements with respect to trading in the Funds' portfolios. The Trustees also noted that Saturna's affiliated broker, Saturna Brokerage Services, voluntarily waives brokerage commissions for executing Fund portfolio transactions, resulting in lower transaction costs.
The Trustees concluded that the fees paid by the Funds to Saturna were, from an arm's-length bargaining perspective, reasonable and in the best interest of the Funds and their shareowners in light of the services provided, comparative performance, expense and advisory fee information, costs of services provided, profits to be realized, and benefits derived or to be derived by Saturna from its relationship with the Funds. Following this discussion, the Trustees unanimously agreed to renew the agreements of Amana Growth Fund, Amana Income Fund, and Amana Developing World Funds with Saturna Capital Corporation.