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Following the Principles of Islamic Finance

Quarterly Commentary

Q3 2012 · September 30, 2012


The third quarter of 2012 began amid negative headlines with the eurozone continuing to dominate the news and market sentiment. By late July, bond yields in Spain and Italy had climbed to worrisome levels, as investors doubted the impact of plans by eurozone finance ministers to commit €100 billion to the rescue of Spanish banks. Things changed quickly a couple of days later, when on July 26, European Central Bank chief Mario Draghi embraced the role of maverick and announced the ECB would do "whatever it takes" to support the eurozone and its members.

The yield on Spanish 10-year bonds, which had earlier climbed above 7.50%, plunged to 6.83% on the day of Draghi's statement, and had fallen further to 5.87% by the end of the quarter. This gives policymakers time and breathing room to work toward longer-term measures to address the problems facing the eurozone.

S and P 500

The August vacation season seemed to keep things fairly quiet until the U.S. Federal Reserve's annual symposium in Jackson Hole at the end of that month, after which speculation began to build that the Fed would commit to a new round of quantitative easing. Indeed, the Fed went on to surprise many observers by announcing that its new pledge to purchase mortgage bonds, in addition to maintaining and possibly increasing ongoing purchases of Treasury bonds, would be open-ended.

Previous attempts by the Fed to stimulate the economy through quantitative easing had set up-front limits on the size and duration of the program, leaving many observers (ourselves included) to wonder whether and how these efforts would translate into the real economy. By announcing an open-ended commitment, and tying its actions to improvement in the unemployment rate and economy, the Fed seeks to assure investors and households that it will not withdraw stimulus prematurely, perhaps acknowledging that limits on the scale of previous QE programs may have dampened their impact.

As an indication of the degree to which only a few headlines dominated stock market returns during the third quarter, we tallied the returns from the seven best and worst trading days for the S&P 500.

Seven best days, cumulative: 11.76%
Seven worst days, cumulative: -6.41%
Net: 5.35%

The price return for the S&P 500 during the quarter was 5.80%, while the total return (including dividends) was 6.35%. Thus, during a period with 63 trading days, the excess contributions from only seven of those days constituted almost all of the market's return. Periods such as this reinforce our conviction that a disciplined long-term approach to investing will trump short-term attempts to game headlines and the markets.


While the eurozone has escaped from crisis mode for the time being, economic conditions there are recessionary and unlikely to improve quickly. Growth in other large economies apart from the U.S., such as China, Japan, Brazil, and India, has also been slowing or anemic.

Here in the U.S., we are cautiously optimistic for a pickup in growth. While political uncertainty looms on the horizon with the upcoming elections and unresolved "fiscal cliff," private sector deleveraging has improved the financial position of households and businesses, and pent up demand for housing is building after five years of extremely low levels of new home construction and sales.

Even if we see a decent pickup in U.S. economic growth, however, our outlook for corporate earnings growth is tepid. With profit margins at all time highs it does not appear reasonable to expect earnings growth to outpace economic growth and drive margins even higher. If we get the pickup in employment the Fed would like to engineer with QE3, we may instead start to see rising wages constrain profit margins.

When we put these elements of our outlook together, we are convinced that good bottom-up selection of stocks that can evade top-down macro uncertainty will be necessary to exceed mediocre market returns.


The Amana Income Fund returned 4.53% in Q3, but it lagged the S&P 500's 6.35%. The bulk of this underperformance was due to cash and sector allocation differences.

At the end of the quarter, the Fund held 6.9% cash versus the fully invested benchmark. That was damaging in the short term when the market rallied. Since the portfolio's June 1986 inception, we have varied its cash position based on our view of market conditions and prospective risk and return. We continue to be comfortable with our relatively defensive position.

On a sector basis, we outperformed with our allocation decisions for Utilities (underweight). We trailed with our positions in Information Technology (underweight), Financials (underweight) and Consumer Discretionary (underweight).

Stock Sector Return
Phillips 66 Energy 40.28%
BASF ADR Materials 21.80%
Stanley Black & Decker Industrials 19.35%
Taiwan Semiconductor ADR Information Technology 17.45%
Freeport-McMoRan Materials 17.29%
Tenaris ADR Energy 16.59%
National Fuel Gas Utilities 15.83%
JM Smucker Consumer Staples 15.09%
Procter & Gamble Consumer Staples 14.22%
Regal-Beloit Industrials 13.51%


Active allocation "decisions" may be a misnomer. As you may recall, we manage the Amana Income Fund according to Islamic investment principles, which make the shares of Financials and Utilities companies poor if not prohibited investments (Utilities often carry debt on their balance sheets). And unlike "balanced" funds, the Amana Income Fund seeks income solely through dividend payments.

Information Technology contains few dividend payers, so that mostly explains the portfolio's ongoing underweighted position in that sector. As of the end of September 2012, the Amana Income Fund had 7.6% of total assets invested in the sector versus 19.9% for the S&P 500. Information technology stocks included Taiwan Semiconductor (2.5% dividend yield), Microsoft (3.1% dividend yield), Intel (4.0% dividend yield), and Microchip Technology (4.3% dividend yield).

Although we added value with our Consumer Staples, Industrials and Utilities holdings, we lost the most versus the benchmark in the near term with certain Information Technology stocks.

Stock Sector Return
Intel Information Technology -14.17%
Enersis ADR Utilities -12.35%
United Parcel Service Industrials -8.45%
U.S. Steel Materials -7.23%
Bristol-Myers Squibb Health Care -5.21%
Praxair Materials -3.96%
Microsoft Information Technology -2.00%
Carlisle Industrials -1.69%
Johnson Controls Consumer Discretionary -0.45%
Pearson ADR Consumer Discretionary -0.33%


Top Ten Holdings % of Portfolio
Eli Lilly 2.5%
Colgate-Palmolive 2.4%
Exxon Mobil 2.4%
W.W. Grainger 2.4%
Canadian National Railway 2.3%
Pfizer 2.2%
Microsoft 2.2%
Illinois Tool Works 2.2%
Nike 2.2%
Kellogg 2.1%
Total 22.9%


As shown above, the portfolio's top ten holdings accounted for 22.9% of its total assets on September 28, 2012. The Fund's most significant sector underweights versus the S&P 500 were Financials, Information Technology and Consumer Discretionary in that order. Again, for the reasons cited above, please note that you can expect us to continue to be underweight Financials and Information Technology. The portfolio's most significant sector overweight was Industrials followed by Materials and then Consumer Staples.


The Amana Growth Fund returned 3.45% in Q3, but it lagged the S&P 500's 6.35%.

At the end of the quarter, the Fund held 6.2% cash versus the fully invested benchmark. That was damaging in the short term when the market rallied. Since the portfolio's February 1994 inception, we have varied its cash position based on our view of market conditions and prospective risk and return. We continue to be comfortable with our relatively defensive position.

On a sector basis, we outperformed with our allocation decisions for Consumer Staples and Utilities. We trailed with our positions in Energy and Industrials. The largest negative allocation factor was our relatively large, defensive cash position.

Stock Sector Return
Urban Outfitters Consumer Discretionary 36.14%
Google Information Technology 30.07%
Harris Information Technology 23.37%
Akamai Technologies Information Technology 20.50%
SAP ADR Information Technology 20.17%
Celgene Health Care 19.08%
SanDisk Information Technology 19.05%
Taiwan Semiconductor ADR Information Technology 17.45%
Amgen Health Care 15.94%
Apple Information Technology 14.74%


The majority of Amana Growth Fund's underperformance came from selection. Although we added value with our Technology holdings, we underperformed in the near term with certain Consumer Discretionary, Consumer Staples and Materials stocks.

Stock Sector Return
Monster Beverage Consumer Staples -23.93%
Canon ADR Information Technology -19.85%
Gentex Consumer Discretionary -17.99%
Best Buy Consumer Discretionary -17.22%
Hewlett-Packard Information Technology -14.52%
Intel Information Technology -14.17%
Staples Consumer Discretionary -10.87%
Norfolk Southern Industrials -10.74%
Anglo American ADR Materials -10.56%
Lincoln Electric Industrials -10.43%


Monster Beverage reminds us why we are wary of short-term performance results. It was Amana Growth Fund's poorest performer in Q3. However, it still added value over the past year. For the trailing twelve months ended September 28, 2012, Monster's split-adjusted (two-for-one split in February 2012) shares were up 23.8%.

Top Ten Holdings % of Portfolio
Apple 5.9%
Google 2.8%
Amazon.com 2.7%
Amgen 2.4%
Intuit 2.3%
International Business Machines 2.3%
Qualcomm 2.2%
PetSmart 2.1%
Oracle 2.1%
Monster Beverage 2.0%
Total 26.8%


As shown above, the portfolio's top ten holdings accounted for 26.8% of its total assets on September 28, 2012. Six of the 10 securities were from the Information Technology sector, which for a long period has been the Fund's largest sector representation on an absolute basis and versus the S&P 500. Health Care was the next largest sector overweight at quarter-end.

The Fund's most significant sector underweights were Financials, Energy and Utilities in that order. All Amana portfolios, including the Amana Growth Fund, are managed according to Islamic investment principles. As such, financial services companies and utilities are often prohibited, or "haram" investments.


In Q3 emerging markets snapped back from the weakness experienced in Q2. The MSCI Emerging Markets Index appreciated 7.90% for the quarter versus 6.35% for the S&P 500. Year-to-date the MSCI Emerging Markets Index has trailed the S&P 500 by 4.25%. With emerging markets rising at a healthy clip the Amana Developing World Fund was disadvantaged by its significant cash position, gaining 3.25% in the quarter. Year-to-date the MSCI Emerging Markets Index has provided a total return of 12.19% against 4.79% for the Amana Developing World Fund.

Emerging markets bottomed in early June and, with the risk trade back on, less defensive sectors moved to the fore. Materials and Energy performed strongly as reflected in the table of our best performing positions. While Energy is well represented in the table, we were underweight the sector relative to the benchmark. Indeed, due to the Fund's cash position, our allocation effect was negative in most sectors due to our underweight exposure in a rising market. In Materials, however, our exposure was in line with the benchmark, while our stock selection provided positive returns. In Q3 the Fund initiated positions in Jasa Marga and Hong Kong & China Gas. Jasa Marga is the largest builder and operator of toll roads in Indonesia, while Hong Kong & China Gas dominates the supply of residential gas in Hong Kong and is aggressively expanding its gas distribution operations throughout China.

Stock Sector Return
PT Semen Gresik Materials 29.37%
Alamos Gold Materials 24.54%
Kalbe Farma Health Care 22.45%
Petroleo Brasileiro ADR Energy 22.22%
VF Consumer Staples 19.98%
Freeport McMoRan Copper Materials 17.29%
Tenaris ADR Energy 16.59%
MTN Group Telecom Services 15.00%
Ford Otomotiv Sanayi Consumer Discretionary 14.24%
Pacific Rubiales Energy Energy 13.39%


The Fund achieved positive returns in all sectors but one — Utilities. Although it is a small sector and the Fund was underweight, the two largest negative returns were from Utilities as potential regulatory changes in Brazil clouded the outlook for these companies.

Stock Sector Return
Paranaense de Energia ADR Utilities -24.26%
Enersis ADR Utilities -12.35%
Telefonica Brasil ADR Telecom Services -12.13%
Anglo American ADR Materials -10.56%
Vale ADR Materials -9.82%
Mead Johnson Nutrition Consumer Staples -8.62%
Autonavi Holdings ADR Information Technology -7.19%
Nidec ADR Industrials -4.17%
LATAM Airlines ADR Industrials -3.14%
Turk Telekomunikasyon Telecom Services -2.28%

Top Ten Holdings

Amana Income Fund
Eli Lilly 2.5%
Colgate-Palmolive 2.4%
Exxon Mobil 2.4%
W.W. Grainger 2.4%
Canadian National Railway 2.3%
Pfizer 2.2%
Microsoft 2.2%
Illinois Tool Works 2.2%
Nike 2.2%
Kellogg 2.1%
Total 22.9%
Other Portfolio Securities Mentioned
Bristol-Myers Squibb 2.0%
Carlisle 1.9%
Enersis ADR 0.2%
Freeport-McMoRan 1.6%
Intel 2.1%
JM Smucker 1.6%
Johnson Controls 1.2%
Microchip Technology 1.5%
National Fuel Gas 0.7%
Pearson ADR 0.4%
Phillips 66 0.6%
Praxair 1.7%
Procter & Gamble 2.1%
Regal-Beloit 0.5%
Stanley Black & Decker 0.6%
Taiwan Semiconductor ADR 1.8%
Tenaris ADR 0.3%
U.S. Steel 0.4%
United Parcel Service 1.6%
Amana Growth Fund
Apple 5.9%
Google 2.8%
Amazon.com 2.7%
Amgen 2.4%
Intuit 2.3%
IBM 2.3%
Qualcomm 2.2%
PetSmart 2.1%
Oracle 2.1%
Monster Beverage 2.0%
Total 26.8%
Other Portfolio Securities Mentioned
Akamai Technologies 1.7%
Anglo American ADR 0.9%
Best Buy 0.5%
Canon ADR 0.8%
Celgene 0.3%
Gentex 0.5%
Harris 1.6%
Hewlett-Packard 0.8%
Lincoln Electric 0.9%
Intel 1.7%
Norfolk Southern 1.4%
SanDisk 0.7%
SAP ADR 1.9%
Staples 0.2%
Taiwan Semiconductor ADR 0.9%
Urban Outfitters 0.8%
Amana Developing World Fund
VF 2.4%
KPJ Healthcare 2.2%
Clicks Group 2.1%
Telekomunikasi Indonesia ADR 1.9%
Infosys ADR 1.9%
MercadoLibre 1.9%
Quimica y Minera Chile ADR 1.9%
LATAM Airlines ADR 1.8%
Bangkok Dusit Medical Services 1.7%
Aspen Pharmacare Holdings 1.7%
Total 19.5%
Other Portfolio Securities Mentioned
Alamos Gold 1.7%
Anglo American ADR 1.1%
Autonavi Holdings ADR 1.1%
Enersis ADR 0.8%
Ford Otomotiv Sanayi 1.6%
Freeport McMoran Copper 0.8%
Hong Kong & China Gas ADS 0.3%
Jasa Marga 0.9%
Kalbe Farma 1.7%
Mead Johnson Nutrition 1.7%
MTN Group 1.6%
Nidec ADR 1.6%
Pacific Rubiales Energy 1.0%
Petroleo Brasileiro ADR 0.9%
PT Semen Gresik 1.5%
Telefonica Brasil ADR 0.9%
Tenaris ADR 1.4%
Turk Telekomunikasyon 1.2%
Vale ADR 1.1%
Positions Closed
Paranaense de Energia ADR 0.0%

Q3 2012 Performance

Average Annual Total Returns (Before Taxes) 10 Year 5 Year 3 Year 1 Year
As of September 30, 2012
Amana Income 11.65% 3.00% 9.55% 19.61%
S&P 500 Index 8.01% 1.05% 13.22% 30.20%
Russell 1000 Value Index 8.17% -0.91% 11.84% 30.91%
Amana Growth 12.74% 2.98% 11.05% 21.94%
S&P 500 Index 8.01% 1.05% 13.22% 30.20%
Russell 1000 Growth Index 8.42% 3.24% 14.75% 29.19%
Amana Developing World Fund¹ N/A N/A 1.63% 8.45%
MSCI Emerging Markets Index 16.91% -1.07% 5.81% 17.27%

As of the Funds' Prospectus dated September 14, 2012, the expense ratios were 1.20% for Amana Income, 1.13% for Amana Growth, and 1.63% 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. 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 or summary prospectus.

The S&P 500 is an index comprised of 500 widely held common stocks considered to be representative of the U.S. stock market in general. The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values. The MSCI Emerging Markets Index, produced by Morgan Stanley Capital International, measures equity market performance in over 20 emerging market countries. 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.