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Following the Principles of Islamic Finance

Quarterly Commentary

Q3 2010 · September 30, 2010


Growth dominated Value in the third quarter as markets shook off the Q2 2010 downturn and concerns over sovereign debt risks in Europe and at home to post positive results in the last month of the quarter. While the S&P 500 Index provided investors with a 6.65% loss (on a total return basis) as of the June quarter, this was quickly reversed with the index returning 11.29% in the quarter (8.92% in September alone). For the year to September 30 the Index has now produced a total return of 3.89%.

Bond funds continued to benefit from investor inflows, helping the BarCap Bond Index outperform the S&P 500 by 4.05% year-to-date. However, it is notable that there has been some reversal of fortune with the S&P 500 Index now having an excess total return of 8.81% relative to this Bond Index in the third quarter.

The Q3 rally was lead by Industrials (up 14.31% in the quarter and 13.32% year-to-date). In this sector, Machinery (23.63%), Capital Goods (14.00%), and Electrical Equipment (20.86%) all had strong returns in the quarter. The performance of the Transports sector was also worth noting with Airlines and Railroads returning 21.15% and 14.59% respectively.

Clearly, market sentiment remains mixed. European debt default concerns, as well as anxieties over our own fiscal deficit here in the U.S. have heightened fears of austerity measures that may negatively impact the fragile demand growth that marks this economic recovery.


The U.S. and most other developed economies continue to experience a slow recovery from the Great Recession. While we do not subscribe to the view that the economy will soon fall into another recession, we recognize that this remains a non-trivial risk. With the rate of corporate earnings growth somewhat in question, we note that many companies still have significant free cash flows to deploy. In the absence of robust growth in demand, companies have been using these cash flows to not only recapitalize their balance sheets but also to acquire other companies, invest in their own businesses (usually to the benefit of capital goods producers and the like), and/or return capital to stockholders in the form of stock buy backs or dividend increases.

Also expected to positively influence the markets will be the possibility of quantitative easing by the Federal Reserve. With 10-year Treasury yields currently at 2.51%, it is difficult to know what the fixed income market has already discounted. However, with yields under pressure, we expect the equity markets to see an increase in flows of investor capital.

Tepid growth in aggregate demand combined with exogenous global events will undoubtedly continue to negatively weigh on investor sentiment and produce periods of higher than usual volatility. Despite this, the above factors lead us to a view that the equity markets will be biased to the upside.



The Amana Income Fund managed to modestly outperform the S&P 500 Value Index during the quarter. The Income Fund had a total return of 11.31% as compared with a total return of 9.98% for the S&P 500 Value Index and 10.57% for Morningstar's Large Cap Value peer group. However, for the nine months ended September 30, 2010 the Amana Income Fund slightly underperformed relative to the S&P 500 Value Index and the Morningstar Large Cap Value peer group. The Amana Income Fund returned 2.95% as compared with a total return of 4.15% for the Index and 2.99% for the Morningstar peer group.

Portfolio Highlights

Portfolio dispositions remained light, with the fund only divesting its position in BP. While this particular stock had recovered to the mid-$30s before the fund sold its position, it still incurred a loss over its original cost. This is illustrative of the extent to which BP's stock declined after the news of its troubled Macondo well became known. Portfolio additions were limited to existing names with Industrials (the Illinois Tool Works position was increased by a third), Materials (the Air Products and Chemicals position was increased 25%), and Information Technology (Intel's position was increased by 18%) getting modest increases to their respective sector allocations.

The Income Fund's lackluster performance over the nine months was principally due to the effects of adverse selection − primarily in energy and utility names. However, the Materials and Consumer Staples sectors also had stocks that detracted from performance. BP, Total SA, Exxon, and Encana reduced the performance for the portfolio's allocation to the Energy sector. U.S. Steel, Nucor and Alcoa did likewise for the fund's exposure to the Materials sector.



As with prior quarters, the Amana Growth Fund continued to exhibit exceptional performance. For the quarter ended September 30th, 2010 the Amana Growth Fund returned 12.77%, slightly beating the performance of the S&P 500 Index (11.29%), and the Morningstar Large Cap Growth peer category (12.66%). For the nine month period ended September 30th, 2010 the Amana Growth Fund had a total return of 6.42%, which also compares favorably to both the S&P 500 Index's total return of 3.89% and the Morningstar Large Cap Growth peer category which returned 3.38%.

Portfolio Highlights

Minimal changes were made to the portfolio in the third quarter. Relative to the S&P 500 Index, the fund remains strongly overweight in Information Technology as well as Health Care and Materials. Positive sector allocation impacts were strongest for Materials (1.89% overweight bolstered by attractive selection impacts in Teck Resources, Rio Tinto, and Potash Corp), Information Technology (18.66% overweight), and Financials (16.17% underweight). The sector allocation impact (and selection impact) was only negative for Telecommunication Services, which had gross returns of 21.11% for the Index versus 10.75% for the fund.

The biggest individual contributors to excess return for the quarter (relative to the S&P 500 Index) were Potash Corp (up 67.20%), Akamai Technologies (up 23.69%), Intuit (up 26.00%), and Genzyme (up 39.43%). All have significant overweight positions in the portfolio. During the quarter the portfolio managers added to positions in Retail (Coach), Information Technology (Harris, Hewlett-Packard, Intel and Adobe), as well as Industrials (Fastenal). The fund closed its positions in BP, CVS Caremark, and Whole Foods Market during the quarter. No new positions were initiated.

For the year to September 30, 2010 the Amana Growth Fund modestly outperformed the S&P 500 Index by 2.53%. The outperformance was roughly equally driven by positive sector allocations (Information Technology, Health Care, and Materials) and positive selection effects. Akamai Technologies (up 98.03%), LAN Airlines (up 80.43%), Novo Nordisk (up 56.85%), Intuit (up 42.56%), Genzyme Corp (up 44.44%), and Potash Corp (up 33.13%) were among the top individual return attribution contributors. Stocks that detracted from the fund's performance included BP and Seagate Technologies (down 27.88% and 35.27% respectively), Consol Energy (down 25.23%), and Hewlett-Packard (down 17.89%).



The Amana Developing World Fund returned 5.42% in the quarter ended September 30, 2010. This contrasts negatively with the MSCI Emerging Market Index which returned 18.10% and the Morningstar Emerging Market peer group which returned 18.67%. For the year to September 30, the fund returned 3.78% as compared with 10.87% for the MSCI Emerging Market Index and 11.19% for the Morningstar emerging market fund peer group.

Portfolio Highlights

The fund benefited from allocations to Telecommunications, Information Technology, and Industrials sectors. Underweights in Health Care and Financials materially detracted from performance. With regard to the lack of exposure to the Financials sector, we remind investors that this fund invests according to Islamic principles. As such, exposure to the Financials sector tends to be minimal and consistently will be materially underweight relative to the benchmark in this regard. The performance for the calendar year to September 30, 2010 was marked by a strong sector allocation to Information Technology. This was largely driven by internet services stocks Mercadolibre (up 39.16%), and Baidu (up 149.54%). Industrials also provided support with LAN Airlines gaining 80.43%. For the September 2010 quarter, newly initiated positions include Alamos Gold, Companhia de Concessoes Rodoviarias, IOI Corporation Bhd, KPJ Healthcare Bhd, Mead Johnson Nutrition, and MRV Engenharia e Participacoes. Positions were increased for Telekomunikasi Indonesia, Millicom International, and MTN Group. The fund closed out its investment in American Oriental Bioengineering during the quarter.

Q3 2010 Performance

Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year
As of September 30, 2010
Amana Income 9.97% -1.02% 5.58% 5.82%
S&P 500 Index 10.16% -7.14% 0.64% -0.43%
Amana Growth 15.23% -0.87% 6.04% 4.24%
Russell 2000 Index 13.35% -4.28% 1.62% 4.04%
Russell 1000 Index 10.76% -6.77% 0.89% -0.17%
Amana Developing World Fund¹ 7.00% N/A N/A N/A
MSCI Emerging Markets Index 20.37% -1.25% 12.88% 13.11%

As of the Funds' most recent Prospectus dated September 3, 2010, the expense ratios were 1.26% for Amana Income, 1.21% for Amana Growth, and 1.59% for Amana Developing World.

Please consider an investment's objectives, risks, charges and expenses carefully before investing. For this and other important information about the Amana Funds, please obtain and carefully read a free prospectus from www.amanafunds.com or by calling toll-free 888/73-AMANA.

Distributor Saturna Brokerage Services, a wholly-owned subsidiary of Saturna Capital Corporation, investment adviser to the Amana Funds and Member FINRA / SIPC.

Performance data quoted herein represents past performance and does not guarantee future results. The investment return and principal value will fluctuate. Shares of the fund, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data quoted herein. Returns do not reflect the potential deduction of a 2% redemption fee on shares held less than 90 calendar days which if applied would have lowered quoted returns. The Funds cannot guarantee that their investment objectives will be met. Securities of the Fund may only be sold by offering the Fund's prospectus. The Russell, S&P 500, and Morgan Stanley ("MSCI") indices are widely recognized indices of common stock prices which reflect no deductions for fees, expenses or taxes. Investors cannot invest directly in the indices.

¹ The Amana Developing World Fund began operations September 28, 2009.

A Fund's performance depends primarily on what happens in the stock market. The market's behavior is often volatile, particularly in the short-term and in periods of unusual market occurrences. Because of this, the value of your investment will rise and fall, and you could lose money. For performance current to the most recent month-end, please ask your representative, visit our Average Annual Returns Page or call us toll-free at 888/73-AMANA (888-732-6262).

A Few Words About Risk

By diversifying its investments, each Fund seeks to reduce the risk of owning only a few securities. Diversification does not assure a profit or protect against a loss in a declining market. The Growth Fund typically invests in smaller and less seasoned companies than the Income Fund, which may lead to greater variability in the Growth Fund's returns. Growth stocks, which can be priced on future expectations rather than current results, may decline substantially when expectations are not met or general market conditions weaken.

The Funds may invest in non-U.S. companies and in foreign markets. Investing in foreign securities involves risks not typically associated directly with investing in U.S. securities. These risks include fluctuations in exchange rates of foreign currencies; less public information with respect to issuers of securities; less governmental supervision of exchanges, issuers, and brokers; and lack of uniform accounting, auditing, and financial reporting standards. There is also a risk of adverse political, social or diplomatic developments that affect investment in foreign countries.

Islamic principles restrict the Funds' ability to invest in certain stocks and market sectors, such as financial companies and fixed-income securities. This limits opportunities and may increase risk.

Important Disclaimers and Disclosure

This report is intended only for the information of the reader, and is not to be used for or considered as an offer or the solicitation of an offer to sell or buy any securities or other financial instruments of any kind, including without limitation, any mutual fund or other product offered, sponsored, created, or managed by Saturna Capital Corporation or its subsidiaries or affiliates ("Saturna"). This report is not intended for distribution to, or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country, or other jurisdiction in which such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Saturna to any registration or licensing requirement within such jurisdiction.

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Past performance does not imply or guarantee future performance, and no representation or warranty, express or implied is made regarding future performance. The price, and value of, and income from, any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of foreign securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs — the values of which are influenced by currency volatility — effectively assume this risk.