2014 is Saturna Capital's 25th Anniversary

Values-Based Global Equity Managers Contact1-800-728-8762

Following the Principles of Islamic Finance

Quarterly Commentary

Q4 2011 · December 31, 2011


The market volatility experienced during the summer months carried through to the fall, with equities seeing numerous days of declines and advances greater than 1%. Despite the spike in volatility, U.S. markets performed reasonably well in the quarter, with the S&P 500 Index gaining 13.58% in late October before declining 2.14% to finish the year at 1258. It is an odd coincidence to see the S&P 500 virtually unchanged for the year: 1257.64 on 12/31/2010, and 1257.60 on 12/31/2011. Dividends, however, helped produce a 2.11% total return for the S&P 500 Index for the year.

Europe remains the source of much concern, as the financial crisis of 2008 has morphed into a sovereign debt crisis. A number of policy initiatives have been put forth to address it, including the recent provision of a U.S. dollar liquidity facility coordinated by the U.S. Federal Reserve. Despite this, Europe remains a slow-moving train wreck, and the issues surrounding the ability of peripheral European countries to fund themselves remain in the forefront of investors' minds. On the days that Europe's crisis seems to worsen, risk markets sell off, and on days when markets grow optimistic that solutions to the European debt crisis can be found, markets rally. Adding to the tension is political gridlock in Washington, D.C., and concerns over China's ability to sustain a high, single-digit GDP growth rate. Little wonder, then, that the benchmark 10-year Treasury yield started the quarter at a depressed yield of 1.92% and ended the quarter slightly lower, yielding 1.88%. In times of uncertainty some investors continue to prefer the safety of U.S. Treasurys in spite of their paltry yields.

Even while investors generally dialed down their risk allocations by pulling away from the Euro zone and emerging markets, they continued to shop domestically for moderate risk exposure. Returns of U.S. equities greatly outperformed foreign and emerging market stocks as investors sought to reduce their overall risk. The S&P 500 Index bested the MSCI EAFE Index and MSCI Emerging Markets Index by 8.41% and 7.37%, respectively.

Among large cap U.S. equities, valuation multiples saw modest increases in the quarter despite the conservative asset allocation preferences exhibited by investors. It appears a bit paradoxical to see risk on stocks rising (in the form of higher PE multiples) in a risk-averse environment. Perhaps there is some recognition of the stability and growth of the underlying cash flows for U.S. companies to provide this valuation support. Indeed, sector performance favored deep cyclical, higher beta sectors, as recent stock market gains have typically been accompanied by rallies in Materials and Energy. The performance of Industrials was also noteworthy as Transportation, Industrial Machinery, and Capital Goods also found favor with investors. Given the swing in risk appetites, defensive sectors such as Consumer Staples, Utilities, and Health Care lagged the market in the quarter.


Investors should expect choppy markets to continue in 2012 as uncertainty in the Euro zone increases. This slow-moving train wreck has resulted in substantial premiums being applied to risk markets. Recently, investors have been on edge as they question the ability of peripheral Euro area sovereigns to refinance their maturing debt. According to the International Monetary Fund, Italy alone has more than 20% of its national debt coming due in 2012. Austerity, combined with a banking system that is seeking to deleverage, will present a considerable drag on growth. From an investor's standpoint, economic and political uncertainties trump fundamentals — suggesting that valuation multiples will remain well below their long-term averages in the near-term. Beyond this, however, companies with sound fundamentals and the ability to increase earnings should be rewarded while these external uncertainties resolve themselves.



For the quarter ended December 31, 2011, the Amana Income Fund had a total return of 11.15%, underperforming the S&P 500 Index by -0.66%. Performance for the year was largely in line with the benchmark, lagging by only -0.17%. Amana Income's three-year performance lagged the S&P 500 by -7.28%, but outperformed it by 24.64% over five years.

Portfolio Highlights

In the fourth quarter, the Amana Income Fund reduced its exposure to the Utilities sector by selling its position in NextEra Energy and a quarter of its position in E.ON. In both instances, the utility holding companies increased balance sheet leverage. In the case of E.ON, the portfolio manager also sought to reduce the Fund's exposure to the Euro area. The Fund is now slightly underweight the Utility sector relative to its S&P 500 Index benchmark. The Fund also reduced its position in AstraZeneca due to concerns over the health of its developmental drug pipeline.

The Fund's performance was helped by its overweight position in Industrials, Materials, and Health Care. Underweight positions in Consumer Discretionary and Information Technology sectors also provided a boost to returns relative to the benchmark. Detracting from relative performance was the Amana Income Fund's overweight in Consumer Staples and underweight in both the Energy and Financials sectors.

In contrast to the prior quarter, where the best performers were dominated by defensive names in the Consumer Staples and Health Care sectors, the fourth quarter of 2011 saw gains in Industrials and Materials companies such as Tenaris, Carlisle, Rockwell Automation, Nucor, and Freeport McMoRan. The laggards included companies in defensive Health Care and Consumer Staples sectors such as Kellogg, Becton Dickinson, Novartis, and Kimberly Clark.



With investor appetite for deep cyclical sectors increasing in the quarter, the Amana Growth Fund's relatively high exposure to the Information Technology sector resulted in a slight lag in performance relative to its benchmark S&P 500 Index. The Amana Growth Fund returned 9.68% as compared with 11.82% for the benchmark. While the Fund had a lagging performance for the year, in part due to the benchmark's higher exposure to dividend paying stocks, it continues to have strong three, five, and 10-year relative returns — outperforming the S&P 500 Index by 2.03%, 20.15%, and 67.62%, respectively.

Positive selection effects in the Industrials sector and an overweight position in Health Care helped performance, but the fund was hurt by being underweight relative to the index in the Energy and Financial sectors. We remind investors that this fund is not permitted to invest in traditional financial companies and, as a consequence, will typically be underweight the Financials sector relative to the S&P 500 Index.

Portfolio Highlights

The fourth quarter saw little trading activity, though the Fund did invest more than $29 million in capital. More than half was allocated to the Industrials sector with the Fund adding to its position in UPS and initiating a new position in Union Pacific Railroad, which has shown strong fundamental performance in recent quarters. Aside from this, the Fund added to positions in Infosys (Information Technology), Estee Lauder (Consumer Staples), Church & Dwight (Consumer Staples), and Anglo American (Materials). These firms continue to do a good job of achieving their stated business objectives and have continued to create value for shareholders. We also feel that these firms are well positioned to endure significant bouts of economic and market volatility.

As with the Amana Income Fund, the best performers for the fourth quarter were dominated by companies in the Industrials sector, such as Lincoln Electric, Fastenal, Crane, and Genuine Parts. Information Technology companies Akamai, Google, Sandisk, and Cisco also helped Fund performance. As for lagging names, they were dominated by Consumer Discretionary stocks such as Jakks Pacific, Amazon.com, Best Buy, and John Wiley & Sons. Zimmer and Stryker (Health Care) also lagged, as investors grew concerned over the low rate of growth in hip and knee replacements.



The smaller, less liquid emerging markets continued to trail the performance of the larger, more liquid domestic markets. Consistent with this is the performance of the Amana Developing World Fund relative to its sister funds, the U.S.-oriented Amana Income and Amana Growth. The Fund returned a modest 3.80% in the quarter. This compares unfavorably relative to the benchmark MSCI Emerging Markets Index, which returned 4.44%. Despite the lagging quarterly results, we are pleased that the Fund outperformed its benchmark by 10.64% for the year.

The principal reason for the Fund's large, positive performance differential remains its substantial amount of uninvested cash, which at year-end amounted to 48% of portfolio value. Positive selection effects in the Information Technology and Energy sectors provided support, as did allocations to the Health Care, Materials, and Consumer Discretionary sectors.

Portfolio Highlights

With many Asian economies having undertaken monetary tightening policies in the last year, it appeared prudent to the Fund's management to delay deployment of its excess capital. This has worked out well for Developing World shareowners this year, as emerging markets in general have punished investors. The Hang Seng Index was down -17.30%, and Brazil's BOVESPA Index was down -27.07%.

Recently, however, monetary tightening has given way to some signs of easing. Given the change in tolerance toward easy money policies, the Fund favored adding hard assets its portfolio by increasing positions in the Brazilian miner Vale as well as Impala Platinum. Positions were closed out in Western Digital and Asya Katilim Bankasi. In the case of Western Digital, there were significant concerns over the long-term impact of the recent Thai floods on the company's competitive position, and therefore its value. The Fund also closed its position in the Turkish Islamic bank Asya Katilim Bankasi in order to reduce its exposure to European financials.

Despite having an Information Technology company MercadoLibre lead the way, best performers were dominated by Materials and Industrials companies, such as copper producers Freeport McMoRan and Southern Copper. Alamos Gold also performed well. Laggards included several Telecommunications holdings: Turk Telekomunikasyon, Telekomunik Indonesia, MTN Group, and América Móvil.

Top Ten Holdings

Amana Income Fund
Nike 2.3%
Exxon Mobil 2.3%
Intel 2.2%
Eli Lilly 2.2%
Bristol-Myers Squibb 2.2%
W.W. Grainger 2.2%
Colgate-Palmolive 2.1%
Canadian National Railway 2.1%
Procter & Gamble 2.1%
PepsiCo 2.0%
Total 21.7%
Other Portfolio Securities Mentioned
Novartis ADR2.0%
Rockwell Automation1.8%
Kimberly Clark1.7%
Becton Dickinson1.2%
AstraZeneca ADS1.1%
Freeport McMoRan Copper & Gold1.1%
E.ON ADS0.3%
Tenaris ADR0.3%
Positions Closed
NextEra Energy 0.0%
Amana Growth Fund
Apple 3.9%
Humana 2.7%
Intuit 2.3%
Hansen Natural 2.2%
International Business Machines 2.2%
Google 2.2%
Qualcomm 2.1%
Intel 2.0%
PepsiCo 1.9%
Johnson & Johnson 1.9%
Total 23.4%
Other Portfolio Securities Mentioned
United Parcel Service, Class B1.7%
Infosys ADS1.6%
Church & Dwight1.4%
Estee Lauder1.4%
Anglo American ADR1.2%
Best Buy0.9%
Lincoln Electric0.9%
Genuine Parts0.4%
Union Pacific Railroad0.4%
John Wiley & Sons, Class A0.2%
Jakks Pacific0.1%
Amana Developing World Fund
VF Corp 2.3%
KPJ Healthcare 2.0%
LAN Airlines ADS 2.0%
Mead Johnson Nutrition, Class A 1.9%
Sasol ADS 1.9%
Alamos Gold 1.8%
Colgate-Palmolive 1.8%
IOI 1.7%
Vale ADR 1.6%
MercadoLibre 1.6%
Total 18.6%
Other Portfolio Securities Mentioned
Telekomunikasi Indonesia ADS 1.3%
America Movil ADS 1.1%
MTN Group 1.1%
Impala Platinum ADS 1.0%
Freeport McMoRan Copper & Gold 0.9%
Southern Copper 0.7%
Turk Telekomunikasyon 0.7%
Positions Closed
Asya Katilim Bankasi0.0%
Western Digital0.0%

Q4 2011 Performance

Average Annual Total Returns (Before Taxes) 10 Year 5 Year 3 Year 1 Year
As of December 31, 2011
Amana Income 8.16% 4.29% 12.22% 1.94%
S&P 500 Index 2.92% -0.25% 14.12% 2.11%
Russell 1000 Value Index 3.90% -2.64% 11.55% 0.39%
Amana Growth 7.36% 3.52% 14.63% -1.86%
Russell 2000 Index 5.65% 0.15% 15.65% -4.17%
Russell 1000 Growth Index 2.54% 2.50% 18.03% 2.64%
Amana Developing World Fund¹ N/A N/A N/A -7.73%
MSCI Emerging Markets Index 13.85% 2.53% 20.19% -18.37%

As of the Funds' most recent Prospectus dated September 9, 2011, the expense ratios were 1.21% for Amana Income, 1.14% for Amana Growth, and 1.61% 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. Investment return and principal value of an investment will fluctuate so that an investor's shares, 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.

This document should not be considered as providing investment advice or services, or any service offered by Saturna. Saturna may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. Saturna will not treat recipients as its customers by virtue of their reading or receiving the report.

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.

All material presented in this report, unless specifically indicated otherwise, is under copyright to Saturna. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Saturna. Unless otherwise indicated, all trademarks, service marks and logos used in this report are trademarks or service marks of Saturna.

The information in this report was obtained from sources Saturna believes to be reliable and Saturna believes the information and opinions in the material are accurate and complete as of the date of this material. However, information and opinions contained herein will change over time and without notice. Saturna has no obligation to update or amend any information or opinions at any time. Saturna makes no representations as to the accuracy or completeness of this material, nor does it have any responsibility to ensure that any other materials, including any containing materially different information, are brought to the attention of any recipient of this report.

Under no circumstances shall Saturna, its employees, or any affiliate, be responsible for any investment decision by any recipient. This material is distributed on condition that it will not form the sole basis for any investment decision by any recipient. Any recipient who is not a market professional or institutional investor should seek the advice of an independent financial advisor prior to making any investment based on this report or for any necessary explanation of its contents.

Saturna does not provide tax, legal or accounting advice. Investors should consult their own tax, legal and accounting advisers before engaging in any transaction. In compliance with IRS requirements, recipients are notified that any discussion of U.S. federal tax issues contained or referred to herein is not intended or written to be used for the purpose of (A) avoiding penalties that may be imposed under the Internal Revenue Code; nor (B) promoting, marketing or recommending to another party any transaction or matter discussed herein.

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.