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Quarterly Commentary

Q2 2012 · June 30, 2012


In contrast to the reasonably strong employment and Purchasing Managers Index (PMI) data in Q1, Q2 2012 has witnessed slowing growth to what can best be described as tepid. Jobs data has been solidly below 100,000 each of the last three months. The Q1 numbers benefited from extremely mild weather in many areas of the continental U.S., likely bringing forward some demand that affected jobs data in Q2. As job creation is seen as driving future consumption, it has been elevated to a level of heightened importance to the equity markets.

S and P 500 vs. Initial Jobless Claims

Most major economies are experiencing similar and, in many cases, more pronounced economic slowdowns. Weakness among countries carrying current account deficits has negatively impacted export oriented economies with current account surpluses. China's economy grew at a rate greater than 9% as recently as Q3 2011. In contrast, Q2 real GDP is expected to be significantly less than the 8% target set by its government, with a senior Chinese official indicating that, while stable, there are significant downward pressures.¹ Japan's current account surplus continues to decline, as export markets remain weak.

Adding to these woes are the ever present rolling crises in the peripheral eurozone countries. Capital markets are becoming increasingly numb to the latest high-profile meeting of European leaders and the resulting announcement of a new rescue program. Two years ago, these announcements were able to placate the markets for a few months. Now, it seems, the half-life of these press releases has shrunk to as little as a couple of days. Political leaders now appear to acknowledge the need for some level of fiscal integration and have made moves toward this via the recent agreement to lend Spanish banks €100 billion. Even with the press announcement, there are scarce details on how this mechanism will work and whether €100 billion will be enough to save these institutions. Added to this are the continuing uncertainties surrounding the eventual shape of the eurozone. This does not foster an environment that encourages investors to take risks. No wonder eurozone GDP growth was zero in Q1, while in Q2 it is widely expected to be negative.

Given the gloomy milieu, it is not surprising that equity markets were down from the March 2012 close. What might astonish some was that markets declined so little, with the S&P 500 Index down only -2.79% and still showing a 9.49% total return for the year to June 2012. Foreign markets generally did not fare as well. Domestic stock benchmarks outperformed both foreign developed and emerging markets with the S&P 500 Index outperforming the MSCI EAFE and MSCI EM indices during the quarter by 4.18% and 6.04%, respectively. Japan's Nikkei index declined 7.45% despite the country's efforts to continue working through a $125 billion monetary stimulus program announced earlier this year. European markets also saw negative returns due to the continuing fiscal and political crises and the expiration of the Long Term Refinancing Option (LTRO) program in Q1.


As indicated in our Q1 report, structural problems plaguing the eurozone area are affecting economic fundamentals, and these are having spillover effects to other countries inside and outside Europe. We continue to believe that future sovereign defaults are likely. While further bailouts and monetary stimulus programs are possible, their effects are temporary. What is needed within the eurozone is either a change in membership and/or a move toward greater fiscal integration. The larger economies of Spain and Italy, currently seeing sovereign yields rise toward 7%, will force some change as these countries are viewed as "too big to fail." Despite this uncertainty, much of the world continues to trudge along at lower levels of growth. Consensus estimatesput real GDP growth in the U.S. at 2.2% for 2013 versus previous estimates of 2.5%. Given the state of affairs and the lack of fiscal stimulus program announcements, any real economic growth above 2% might be considered a welcome surprise by the markets.

As slowing economic growth takes its toll on corporate earnings, future gains in the equity markets should be closer to long-run fundamentals, although there is some uncertainty due to the willingness of central banks to continue to engage in easy monetary policies. We mentioned Japan's $125 billion program to buy yen denominated Japanese sovereign bonds. China's central bank cut deposit and lending rates twice in the last month. The Bank of England announced £50 billion of "unconventional monetary easing" in June (bringing its total program to £375 billion). Here in the U.S., three prominent Federal Reserve officials are advocating further rounds of quantitative easing. That further monetary stimulus is able to promote economic growth in an environment of historically low interest rates appears to be wishful thinking. However, it will probably have the usual stimulative effects on risk assets when and if announced. With markets anticipating possible future monetary stimulus from various central bank authorities around the world, it is beginning to feel like we are near to a state of perpetual QE.

Amana Income Fund (AMANX)


Along with the broad market decline, the Amana Income Fund's total return was -3.10% for the second quarter, trailing the S&P 500 Index benchmark by 0.35. For the three-years and five-years, respectively, to June 30, 2012, the Fund returned 39.64% and 14.49%, as compared with 57.70% and 1.09% for the S&P 500 Index. Over ten years the Fund had remarkable performance exceeding the annual benchmark by an average of 3.84% per year.

Portfolio Highlights

The Fund finalized its disposition of CP Rail in the quarter as the company saw its shares rise sharply due to a proxy battle initiated by Pershing Square. Despite the sale, the Fund roughly maintained its exposure to industrials in the month by adding to its position in 3M, which has continued to see steady revenue and earnings growth.

Stock Sector Return
Kimberly-Clark Consumer Staples 14.42%
McCormick & Co Consumer Staples 12.06%
PPG Industries Materials 11.39%
Telstra ADR Telecommunication Services 9.98%
Pearson ADS Consumer Discretionary 8.57%
Eli Lilly Health Care 7.83%
Bristol-Myers Squibb Health Care 7.59%
PepsiCo Consumer Staples 7.33%
Colgate-Palmolive Consumer Staples 7.13%
EnCana Energy 7.06%


In contrast to the first quarter, the Fund's overweight position in Industrials and Materials sector stocks held back performance in Q2, with both having returns lower than the benchmark. While the Fund's relative overweight position in Health Care supported performance, it was not enough to offset the lower than benchmark exposure to other defensive sectors such as Consumer Staples and Utilities. As can be seen in the tables before and after this paragraph, companies in these defensive sectors dominated the best performing securities, while the stocks that performed poorly were those from cyclical sectors such as Materials and Industrials.

Stock Sector Return
United States Steel Materials -29.73%
Nike Consumer Discretionary -18.78%
BASF ADS Materials -17.55%
Rockwell Automation Industrials -16.66%
Stanley Black & Decker Industrials -15.82%
Dun & Bradstreet Industrials -15.53%
Johnson Controls Consumer Discretionary -14.17%
Methanex Materials -13.60%
Air Products & Chemicals Materials -11.34%
Cenovus Energy -10.91%


Amana Growth Fund (AMAGX)


With its emphasis on stocks having above average earnings potential, which tend to trade at higher multiples, the Amana Growth Fund is generally out of favor in down markets. Q2 was no exception as the Fund underperformed the benchmark S&P 500 Index by 1.16%, though the Fund performed in line with growth-oriented style benchmarks. For the three and five-year periods to June 30, 2012, the Amana Growth Fund returned 47.91% and 15.95% versus 57.70% and 1.09% for the S&P 500 Index.

Portfolio Highlights

With risk being out of favor in Q2, Amana Growth's large overweight position in Information Technology meant that sector's lagging performance was the principal cause of the Fund's poor relative performance. Indeed, the Information Technology sector was the worst performing sector in the quarter. Lack of exposure to Financials and lower than benchmark exposure to the Energy sector provided some relief as we looked for relative safety in defensive sectors such as Consumer Staples. The Consumer Discretionary sector tended to be weak, but names such as PetSmart and TJX Companies were an exception to the rule. These companies are well positioned within their industry niches with TJX continuing to benefit from more budget minded consumers.

During the quarter, the Fund added to positions in technology company SAP, veterinary hospital operator VCA Antech, and biotechnology company Celgene. In the case of the latter, the Fund tripled its investment — from 34,200 shares at the beginning of the quarter to 100,000 shares at the end as this company's blood cancer treatments continue to experience worldwide growth. VCA Antech's position increased nearly 30% as the company continues to find acceptably priced growth opportunities.

Stock Sector Return
PetSmart Consumer Discretionary 19.44%
Monster Beverage Consumer Staples 14.67%
Church & Dwight Consumer Staples 13.28%
Amazon.com Consumer Discretionary 12.76%
Union Pacific Industrials 11.60%
Convergys Information Technology 11.02%
Norfolk Southern Industrials 9.72%
TJX Companies Consumer Discretionary 8.41%
Eli Lilly Health Care 7.83%
Amgen Health Care 7.82%


While IT stocks saw general weakness, some names in the portfolio bucked the trend. Recent addition ASML Holdings gained 3.78% and continued to increase past the end of the reporting period.

Stock Sector Return
SanDisk Information Technology -26.44%
F5 Networks Information Technology -26.23%
Fastenal Industrials -25.22%
Crane Industrials -24.49%
Infosys ADR Information Technology -19.93%
Staples Consumer Discretionary -18.71%
Cisco Systems Information Technology -18.51%
Qualcomm Information Technology -17.83%
Celgene Health Care -17.23%
Canon ADS Information Technology -16.20%


As for dispositions, the Fund sold its remaining position in CP Rail to take advantage of a steep rise in the price of the stock.



As in Q1, equity markets in most emerging economies trailed the performance of domestic markets, with the S&P 500 Index outperforming the MSCI Emerging Markets Index by 6.04% for the second quarter and 21.20% for the trailing 12 months. Perceived safety may have been a factor in driving investors into liquid U.S. markets despite continued monetary easing in many Asian and South American countries. The Amana Developing World Fund experienced a relative benefit from the down market. The Fund outperformed the MSCI Emerging Markets benchmark by 4.55% for the three months ended June 2012 with a return of -4.24% as compared with -8.79% for the benchmark. The Fund's cash position acted to buffer Fund returns against broad based emerging market equity declines. Similarly, returns for the 12 months also exceeded benchmark returns by 9.46% with the portfolio returning -6.29% as compared with -15.75% for MSCI Emerging Markets Index.

Portfolio Highlights

As with U.S. markets, negative sentiment in emerging markets led investors to favor defensive sectors. As a consequence, most of the best performing securities were representative of these sectors. Health Care names were among the best performing, with KPJ Healthcare, Bangkok Dusit Medical Services, and Kalbe Pharma all seeing strong gains. The Fund initiated positions in M. Dias Branco, Bangkok Dusit Medical Services, Clicks Group, and CNOOC. M. Dias Branco is Brazil's largest pasta and crackers producer and continues to benefit from a growing product line and its exposure to rising incomes; Bangkok Dusit Medical has a long history of earnings growth and benefits from a rising tide of medical tourism; while CNOOC enjoys the enviable position of having a superior reserves profile relative to many other energy companies.

Stock Sector Return
Telekomunik Indonesia Telecom Services 20.54%
CNOOC ADR Energy 12.21%
KPJ Healthcare Health Care 10.26%
Clicks Group Consumer Staples 9.84%
Bangkok Dusit Med. Services Health Care 7.58%
Colgate-Palmolive Consumer Staples 7.13%
Kalbe Pharma Health Care 5.89%
M. Dias Branco Consumer Staples 5.28%
América Móvil ADS Telecom Services 4.95%
Gold Fields Materials 4.83%


Information Technology and Energy companies dominated laggards. FX Energy and property developer MRV Engenharia were sold in the quarter. MRV earnings results were disappointing. Fortunately, the Fund was able to dispose of the position on a bounce.

Stock Sector Return
MRV Engenharia Consumer Discretionary -31.99%
Petroleo Brasileiro ADR Energy -28.64%
Pacific Rubiales Energy Energy -27.13%
Mercadolibre Information Technology -22.37%
Baidu.com ADR Information Technology -21.12%
Infosys ADR Information Technology -19.93%
Telefonica Brasil Telecom Services -16.59%
Impala Platinum Materials -16.52%
Nidec Industrials -15.87%
China Petroleum & Chemicals Energy -15.16%

¹ "The economy is running at a generally stable pace, but there is still huge pressure for it to go downward," the official Xinhua News Agency paraphrased Premier Wen Jiabao, the country's top economic official. Vancouver Sun, July 8, 2012. http://www.vancouversun.com/business/all/Chinas+premier+warns+huge+pressure+economy+slow+down+


Top Ten Holdings

Amana Income Fund
Intel 2.4%
Colgate-Palmolive 2.4%
Microsoft 2.3%
Eli Lilly 2.3%
Exxon Mobil 2.3%
Canadian National Railway 2.2%
Bristol-Myers Squibb 2.2%
W.W. Grainger 2.2%
PepsiCo 2.2%
Pfizer 2.1%
Total 22.6%
Other Portfolio Securities Mentioned
Air Products & Chemicals 1.5%
Cenovus 1.0%
Dun & Bradstreet 1.1%
EnCana 0.8%
Johnson Controls 1.3%
Kimberly-Clark 1.9%
McCormick & Co 1.4%
Methanex 0.6%
Nike, Class B 2.1%
Pearson ADS 0.5%
PPG Industries 1.6%
Rockwell Automation 1.6%
Stanley Black & Decker 0.5%
Telstra ADR 0.2%
3M 1.8%
United States Steel 0.4%
Positions Closed
Canadian Pacific Railway 0.0%
Amana Growth Fund
Apple 5.2%
Monster Beverage 2.7%
Amazon.com 2.4%
Intuit 2.4%
TJX Companies 2.3%
Humana 2.2%
Google 2.2%
IBM 2.2%
PetSmart 2.1%
Amgen 2.1%
Total 25.8%
Other Portfolio Securities Mentioned
ASML Holding 1.4%
Canon ADS 1.1%
Celgene 0.3%
Church & Dwight 2.0%
Cisco Systems 1.5%
Convergys 0.5%
Crane 0.5%
Eli Lilly 1.2%
F5 Networks 0.2%
Fastenal 1.4%
Infosys ADS 1.5%
Norfolk Southern 1.6%
Qualcomm 2.0%
SanDisk 0.6%
SAP ADS 1.6%
Staples 0.3%
Union Pacific 1.5%
VCA Antech 0.7%
Positions Closed
Candian Pacific Railway 0.0%
Amana Developing World Fund
KPJ Healthcare 2.2%
VF Corp 2.2%
Clicks Group 2.1%
LAN Airlines ADS 2.0%
Mead Johnson Nutrition, Class A 1.9%
Infosys ADR 1.9%
Telekomunikasi Indonesia ADS 1.9%
IOI 1.9%
América Móvil ADS 1.8%
Quimica y Minera Chile ADS 1.8%
Total 19.7%
Other Portfolio Securities Mentioned
Baidu.com ADR 1.2%
Bangkok Dusit Med. Services 1.7%
China Petroleum & Chemicals 0.4%
Colgate-Palmolive 1.8%
Gold Fields ADS 1.1%
Impala Platinum ADS 1.4%
Kalbe Pharma 1.5%
M. Dias Branco 1.6%
Mercadolibre 1.3%
Nidec ADR 0.5%
Pacific Rubiales Energy 0.9%
Petroleo Brasileiro ADR 0.8%
Telefonica Brasil 1.1%
Positions Closed
FX Energy 0.0%
MRV Engenharia 0.0%

Q2 2012 Performance

Average Annual Total Returns (Before Taxes) 10 Year 5 Year 3 Year 1 Year
As of June 30, 2012
Amana Income 9.17% 2.74% 11.77% -1.76%
S&P 500 Index 5.33% 0.22% 16.40% 5.45%
Russell 1000 Value Index 5.27% -2.19% 15.80% 3.00%
Amana Growth 10.06% 3.00% 13.94% 2.12%
Russell 2000 Index 7.02% 0.54% 17.80% -2.08%
Russell 1000 Growth Index 6.00% 2.86% 17.50% 5.76%
Amana Developing World Fund¹ N/A N/A N/A -1.77%
MSCI Emerging Markets Index 13.92% 0.11% 9.93% -15.75%

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.

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.

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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.