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Following the Principles of Islamic Finance

Quarterly Commentary

Q1 2011 · March 31, 2011


For the three months ended March 31, 2011, the equity markets continued their upward progress with the S&P 500 Index providing investors with a total return of 5.92%. Whether investors were influenced by Federal Reserve policy or other factors can be debated. However, we believe that the most recent corporate quarterly reports for the Q4 2010 earnings season appear to provide reasonable evidence of a strengthening economic recovery. Recently reported quarters had the benefit of favorable year-over-year comparisons, as final sales declined precipitously during the heights of the financial crisis. While weaker than previous economic recoveries, sales and growth numbers revealed so far this earnings season have been reasonable. We do recognize, however, that reported sales growth was weaker than in the previous four quarters. Of the companies reporting to date, the S&P 500 Index saw sales advance 7.83% and earnings per share advance 36.26%. Of the major sectors, deep cyclicals such as Energy, Information Technology, and Materials experienced the strongest sales growth, while Financials, Energy, Materials and Technology experienced the strongest growth in earnings per share. Earnings reported in the Financial sub-index continue to benefit from reserve releases, as these financial institutions were forced to take large asset impairment provisions during the financial crisis.

In the U.S., quality stocks were the among best performing as the Dow Jones Industrial Average's 7.07% total return only slightly lagged that of the small cap Russell 2000 Index in the quarter. Indeed, generally considered to be value oriented, these stocks outperformed growth by 42 basis points. Also of note was the continued outperformance of domestic markets relative to international markets. The S&P 500 Index returned 2.42% in excess of the MSCI EAFE Index. This outperformance was likely a result of the earthquake and tsunami that struck Japan on March 10, 2011, as the S&P 500 outperformed the MSCI EAFE Index by 2.23% in that month alone. The S&P 500 also outperformed the MSCI Emerging Markets Index by 3.97% for the three months ended March 31, 2011.

As for industry specific performance, Paper/Forestry showed strength, with much of the gain coming in March. The Energy sector was also a strong performer as geopolitical tensions positively impacted oil prices. Aside from these sectors, Capital Goods, Machinery, Electrical Equipment, Building Products and Transports continued to lead. Media and Aerospace stocks also performed well.


The Federal Reserve's continuing commitment to an accommodative monetary policy (absent a recovery in employment) should continue to be positive for stocks. However, many foreign central banks, including some Asian central banks, the Bank of Canada, and the European Central Bank, have all announced a reversal of expansionary policy stances. Policy reversals tend to weigh on equity markets, and we expect likewise this time. Indeed, it may very well be that foreign markets have already discounted this in part, considering that many of the developing world markets had little to offer in the way of performance in Q1. Recently, geopolitical events have also weighed on the market, with some events adversly impacting the supply of certain products. Generally, these shifts to the supply curves result in higher input prices such as we have seen with crude oil. In an environment where final demand remains soft, these factors suggest to us that corporate margins will continue to remain under pressure.

On a more positive note, statistical data suggest the manufacturing base will continue to grow. Employment data are also showing a clear (though tepid) positive trend, and consumer spending does not appear to be feeding into inflation. That said, we note that many growth investors appear to be downplaying market risks. Chief among them are rising Treasury yields. We find it interesting that these benchmark rates are rising in spite of geopolitical uncertainty and the Federal Reserve's quantitative easing program. In light of this, we expect them to rise even further. Rising rates should tend to penalize higher beta stocks, yet volatility indicators do not fully reflect this risk.

Near-term uncertainties, such as the exogenous events referenced above as well as questions concerning future Federal Reserve policy, should result in higher than expected near-term volatility. However, we believe these uncertainties will ultimately present us with opportunities to deploy capital where we best find long-term value for our investors.



For the calendar quarter ended March 31, 2011, the Amana Income Fund had a total return of 4.56% as compared with 6.46% for the Russell 1000 Value Index and 5.92% for the S&P 500 Index. The Fund also trailed the Morningstar Large Cap Value peer index which returned 6.04%. The Amana Income Fund's one-year performance slightly trailed the Russell Index by 0.81% and the S&P 500 by 1.31%. For three years ending March 31, 2011, the Fund outperformed the Russell Index by 13.81% and the S&P 500 Index by 8.39%.

Portfolio Highlights

In the first quarter of 2011, McCormick & Co. was added to the Fund. McCormick supplies specialty food products to the global food industry. Aside from this name, further additions were made to existing holdings in the Energy, Healthcare and Materials sectors. These include Cenovus Energy and ConocoPhillips in the Energy sector; Eli Lilly and Pfizer in the Healthcare sector; and Dupont, Nucor and PPG Industries in the Materials sector. The Fund sold its positions in AT&T and Medtronic in the quarter.

For the quarter, an overweight in Industrials, and underweight in Utilities helped the Fund's performance relative to the Russell 1000 Value Index. Energy stocks dominated top total return performers (Energen, Exxon Mobil, ConocoPhillips, Encana, Total and Cenovus Energy). Industrials also did quite well with Rockwell Automation being the top performing stock in the quarter. Honeywell, Parker Hannifin and Carlisle also provided Fund investors with solid returns.



Relative to the more value oriented Amana Income Fund, the Amana Growth Fund's results lagged as value stocks outperformed growth stocks in the quarter. The Fund underperformed by 2.75% compared to the Russell 1000 Growth Index and by 4.66% compared to the Russell 2000 Index. For the trailing 12 months, the Amana Growth Fund lagged the Russell 1000 Growth Index by 3.95% and the Russell 2000 Index by 11.49%. For the three years ended March 31, 2011, the Amana Growth Fund outperformed the Russell 1000 Growth Index by 4.02% and underperformed the Russell 2000 by 7.58%. The Fund's 3.28% return for the quarter compares unfavorably to that of the Morningstar Large Cap Growth peer category which returned 5.55%.

Portfolio Highlights

No new positions were added to the Amana Growth Fund in the quarter. Nevertheless, the Fund deployed roughly $50 million in capital (net of sales of securities) in existing names, with the Information Technology sector seeing the biggest additions. Investments within this sector were diverse and ranged from hardware makers, such as Intel, Cisco and Xilinx, to internet company Google. Consumer Staples also received a healthy allocation of capital with the Fund increasing its positions in Estee Lauder, Church & Dwight, and Pepsi. Other additions included Urban Outfitters, Amgen, LAN Airlines, Cree, and Lincoln Electric Holdings.

As noted in our last report, the Fund's policy constraints will result in significant differences in sector allocation relative to the Russell 1000 Growth and Russell 2000 Indices. The Amana Growth Fund continues to have significant overweight positions in Health Care and Information Technology.

Relative to the benchmark, performance benefited from being underweight Consumer Staples, and overweight Health Care. Energy stocks also performed well. However, this sector detracted from performance on a relative basis as the Fund continues to be slightly underweight relative to the benchmark. The Fund's large overweight in Information Technology proved to be the largest drag on the Fund's relative returns in the quarter.

Compared to the Russell 1000 Growth Index, the best performing sector was Consumer Staples, with Estee Lauder, Church & Dwight and Hansen Natural providing the strongest returns. Energy stocks also performed well with positive selection bias providing higher total returns relative to the Fund's weight in the sector. Here, Noble Corp, Encana, Suncor, Cenovus Energy and Consol Energy provided investors with a significant lift. Bottom performing stocks in the quarter were dominated by Information Technology names: Cree, Akamai Technologies, Cisco Systems, Sandisk, and Seagate Technology.



The Amana Developing World Fund continues to be overweight cash, though the level has come down since last quarter. While the cash was a drag on Q4 2010 performance, it proved to be of benefit to investors in the first quarter of 2011 as Emerging Markets struggled to provide investors with positive returns. The Amana Developing World Fund had a negative total return of 0.73% for the three months ended March 31, 2011 (as compared with a positive total return of 1.95% for the MSCI Emerging Market Index). Relative to the 0.44% total return of the Morningstar Emerging Market peer universe, the Fund underperformed its peers by 1.17%.

Portfolio Highlights

New positions added to the portfolio in the first quarter include Ford Otomotiv Sanayi, which manufactures and imports Ford model vehicles for sale in the Turkish market; and Danone, a global producer of dairy and nutritional products. Increases in existing positions included Petrobras, IOI Corporation, KPJ Healthcare, Dr. Reddy's Laboratories, America Movil, Infosys and Asya Katilim Bankasi. In all, the deployed capital was largely used to increase the portfolio's exposure to the Consumer Discretionary, Consumer Staples and Healthcare sectors. The Fund disposed of its position in China Green Agriculture in the quarter.

As Emerging Markets were generally soft in the quarter, most of the sectors also tended to demonstrate subpar performance. The Fund's overweight positions in Energy, Telecom and Materials detracted from performance, while its underweight in Financials supported relative returns. In contrast to the Q4 2010 report where the Fund disclosed an overweight position in Information Technology, the portfolio is now closer to market weight. Internet names such as Mercadolibre and Baidu both reported strong double-digit returns. Also showing strong performance was the newly added Ford Otomotiv Sanayi and Danone, as well as existing names such as KPJ Healthcare, Petrobras, Sasol, and China Petroleum. Stocks detracting from performance included Desarrolladora Homex, Impala Platinum, Southern Copper, MRV Engenharia, and LAN Airlines.

Q1 2011 Performance

Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year
As of March 31, 2011
Amana Income 14.34% 4.96% 7.02% 8.07%
S&P 500 Index 15.65% 2.36% 2.62% 3.29%
Russell 1000 Value Index 15.15% 0.60% 1.38% 4.54%
Amana Growth 14.31% 6.38% 6.03% 8.31%
Russell 2000 Index 25.80% 8.57% 3.36% 7.91%
Russell 1000 Growth Index 18.26% 5.18% 4.34% 2.88%
Amana Developing World Fund¹ 5.05% N/A N/A N/A
MSCI Emerging Markets Index 18.58% 4.46% 10.81% 16.55%

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 or summary 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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Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to a particular investor's circumstances or otherwise constitutes a personal recommendation to any investor. Saturna does not offer advice on the tax consequences of any investment.

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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.