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Quarterly Commentary

Q4 2013 · December 31, 2013


The fourth quarter S&P 500 gain of 10.51% placed a positive coda on the best year for US stock market returns of the 21st century. 2013's 32.39% total return (dividends re-invested) for the S&P 500 Index even surpassed the global financial crisis rebound year of 2009. Despite the continued lackluster economic recovery and manifestly dysfunctional political system in the US, the most remunerative stance was to stay fully invested and 100% exposed to equities. Whether due to fears of a quantitative easing-led inflationary spiral or fears of QE tapering leading to weakening demand, the fixed income markets generally performed poorly. Yields on longer-dated US Treasurys backed up, with the yield on 10-year Treasurys rising from 1.76% to 3.03% and the 30-year yield moving from 2.95% to 3.97% over the course of the year. At the short end, yields hardly budged, and the associated steepening of the yield curve generally indicates better economic times ahead. The performance of investment grade corporate bonds was equally moribund, while the hunt for yield led to decent returns in the junk market. In the physical markets, both hard and soft commodities performed poorly in 2013, while the gold price declined for the first time in 13 years on a calendar year basis.

So what's an investor to do as we enter the new year? Our first observation is that market returns in 2013 depended more on expanding valuations than rising earnings. S&P 500 earnings in 2012 were $102.92 per share, and the current estimated EPS for 2013 stands at $107.10, a gain of only 4.1%. If earnings rise 4% and the market rises 32%, valuations must expand to fill the gap, and that has been the case. The S&P 500 entered 2013 with a trailing price-to-earnings ratio of 14.2x and exited 2013 at 17.4x. Desultory earnings performance is nothing new, with EPS of $99.83 in 2011 indicating 2012 growth of only 3.1%. Regardless, since the beginning of 2012 the S&P 500 Index has gained 46%, and the trailing valuation is now the highest since 2007. Investors may recall that 2007 was not the best time to adopt an aggressive stance.

Of course, that's all backward-looking, and stock markets anticipate the future. Why should we concern ourselves with trailing valuation when forward earnings growth will support equity prices? Consensus figures indicate just such a viewpoint, with S&P 500 earnings forecasted to increase 10.6% to $118.42 this year and another 10.8% in 2015 to $131.24.¹ In other words, S&P 500 earnings are forecast to grow more in dollar terms over the next two years than they have in the past seven since the $86.29 registered in 2006. Admittedly, we endured a global financial crisis in the interim, but the outlook still appears sanguine, and history shows that we should discount initial earnings estimates.

None of the above implies we believe markets are poised to stumble in 2014. In fact, we have no idea how major indices will perform over the next 12 months, and investors should back away from anyone who claims otherwise. As mentioned above, the steepening yield curve can be interpreted as a signal of better economic times to come, and we agree, at least for the US. The outlook for Europe and Japan remains challenging, although their markets also did well in 2013, with Japan among the world's strongest performers (proving that if you drop a dead cat from high enough, it will, indeed, bounce). China appears headed for a slowdown despite the inevitable 7.4-7.6% GDP growth figures that will be released each quarter, while other emerging markets are hampered by fears of QE tapering.

Regardless, there's no demonstrable short-term correlation between economic and stock market performance. How conditions develop from an economic or earnings perspective likely matters less than the path followed by the world's central banks. Most believe that Ms. Yellen's ascension to the position of Fed Chair implies no quick end to QE. The same is almost certainly true of the European Central Bank and the Bank of Japan. Money might never sleep, but it does require a place to repose, and as long as the Fed continues to inject tens of billions of dollars monthly into the market, the Benjamins will need to find a home. More likely than not, that home will be equities.

Amana Income

As of December 31, 2013

Ten Largest Contributors Return Contribution
Bristol-Myers Squibb 16.48% 0.42
Johnson Controls 24.16% 0.40
3M 18.03% 0.37
Exxon Mobil 18.43% 0.37
Parker Hannifin 18.78% 0.37
PPG Industries 13.91% 0.31
Canadian National Railway 12.90% 0.30
Microsoft 13.23% 0.30
Carlisle 13.30% 0.29
United Parcel Service 15.71% 0.29
Ten Largest Detractors Return Contribution
Stanley Black & Decker -10.35% -0.07
W.W. Grainger -2.07% -0.05
Cenovus -3.25% -0.03
Chunghwa Telecom ADS -1.96% -0.02
Tenaris ADR -6.08% -0.02
JM Smucker -0.82% -0.01
Enersis ADS -6.66% -0.01
1Malaysia Sukuk 0.63% 0.00
Telstra ADR 1.08% 0.00
Potash Corp. of Saskatchewan 1.54% 0.01
Top Ten Holdings Portfolio Weight
Nike, Class B 3.0%
Bristol-Myers Squibb 2.6%
Illinois Tool Works 2.6%
Colgate-Palmolive 2.4%
Rockwell Automation 2.4%
Honeywell International 2.4%
W.W. Grainger 2.4%
PPG Industries 2.4%
Canadian National Railway 2.3%
Microsoft 2.3%

Asset Weighted Average Debt to Market Cap: 16.9%

In the fourth quarter the Amana Income Fund performed roughly in line with the benchmark, with Investor Shares rising 9.06% versus a 10.51% increase in the S&P 500 and a 10.01% gain in the Russell 1000 Value Index. For the full year, Investor Shares of the Fund gained 29.72% versus 32.39% for the S&P 500 and 32.56% for the Russell 1000 Value Index.

Despite another strong performance by the Finance sector, the largest in the Russell 1000 Value Index and second largest in the S&P 500, the Amana Income Fund largely kept pace with the benchmarks due to solid stock selection. Our top contributors in the fourth quarter represented a diverse set of sectors with Industrials, Technology, Health Care, Energy, Transportation, and Consumer all present. With the market rising 10% in the quarter, it's not surprising that all of the sectors in which we invested provided positive returns, led by Materials (primarily industrial/processed materials), Information Technology, and Consumer.

In the fourth quarter a stock didn't have to fall to be among the top detractors. Stanley Black & Decker had a difficult quarter due to challenges integrating a European acquisition, and we will be watching closely to evaluate progress when results are next released. If there is a theme to the weaker performers, it's that our overseas holdings did not participate in the Q4 rally. We are pleased that none of the largest detractors from last quarter have re-appeared, while three from that list — Canadian National Railway, Exxon Mobil, and Microsoft — are among the best performers. We have often commented that stocks do not move in a linear fashion and we believe the majority of stock turnover one sees in the industry adds no value.

There have been two changes among our top positions, with Canadian National Railway and Rockwell Automation taking the places of PepsiCo and Novartis. This was due entirely to the relatively stronger performance of the two former companies during the quarter.

Amana Growth

As of December 31, 2013

Ten Largest Contributors Return Contribution
Google 27.95% 1.05
Adobe Systems 15.29% 0.53
Apple 18.38% 0.51
Trimble Navigation 16.80% 0.43
Intuit 15.43% 0.42
SAP ADS 17.88% 0.40
Norfolk Southern 20.73% 0.40
United Parcel Service, Class B 15.71% 0.36
TJX Companies 13.28% 0.34
Qualcomm 10.75% 0.29
Ten Largest Detractors Return Contribution
Akamai Technologies -8.74% -0.22
ASML Holding -5.12% -0.12
PetSmart -4.35% -0.11
Fastenal -4.97% -0.10
Cisco Systems -3.44% -0.08
Cenovus Energy -3.25% -0.03
Xilinx -1.47% -0.02
Danone ADR 0.13% -0.01
Anglo American ADR -0.08% -0.01
Suncor Energy 1.29% 0.00
Top Ten Holdings Portfolio Weight
Google 4.7%
Adobe Systems 3.8%
Intuit 3.1%
Amgen 3.0%
Qualcomm 2.9%
Trimble Navigation 2.9%
TJX Companies 2.8%
Apple 2.8%
Johnson & Johnson 2.7%
Church & Dwight 2.6%

Asset Weighted Average Debt to Market Cap: 12.3%

The Amana Growth Fund Investor Shares gained 9.19% in the fourth quarter, versus the S&P 500's 10.51% rise and the 10.44% return from the Russell 1000 Growth Index. For the full year, Investor Shares of the Fund have gained 22.83% versus 32.39% for the S&P 500 and 33.49% for the Russell 1000 Growth Index. We are by no means satisfied with the gap in performance between the fund and the relevant benchmarks, but we have taken significant steps over the course of the year to address the shortfall and these adjustments have yielded results. In the second half of 2013, Investor Shares of the Fund returned 16.43%, just ahead of the 16.31% return from the S&P 500, although still trailing the 19.40% registered by the Russell 1000 Growth Index.

The Amana Growth Fund's largest sector exposure is to Technology, which performed well in the quarter with six of the top ten contributors in the group. Apple, Adobe, and Trimble are appearing for the second consecutive quarter, as is TJX. Stock selection was also good among our Consumer investments.

The Amana Growth Fund's largest sector exposure is to Technology, which performed well in the quarter with six of the top ten contributors in the group. Apple, Adobe, and Trimble are appearing for the second consecutive quarter, as is TJX. Stock selection was also good among our Consumer investments.

As with Amana Income, there are two new companies among the top ten positions, with Trimble and TJX replacing PetSmart and Cisco. Both Trimble and TJX outperformed during the quarter, but we have also actively reduced our position in PetSmart as we see a risk that the business could be partially dis-intermediated by alternative retailers.

Amana Developing World

As of December 31, 2013

Ten Largest Contributors Return Contribution
Western Digital 32.8% 0.70
VF 25.8% 0.57
Genomma Lab Internacional 23.2% 0.45
Baidu ADS 14.6% 0.43
Freeport-McMoRan Copper & Gold 15.2% 0.27
IOI 13.6% 0.24
Richter Gedeon 17.2% 0.23
Mead Johnson Nutrition 13.3% 0.21
Colgate-Palmolive 10.6% 0.19
Dr. Reddy's Laboratories ADS 8.6% 0.19
Ten Largest Detractors Return Contribution
MercadoLibre -20.0% -0.67
Ford Otomotiv Sanayi -23.1% -0.45
Alamos Gold -21.7% -0.41
Turk Telekomunikasyon -20.0% -0.26
Quimica y Minera Chile ADS -12.7% -0.24
Manila Electric -14.1% -0.23
Bangkok Dusit Medical Services -10.9% -0.18
Indofood -17.6% -0.16
Petroleo Brasileiro ADS -11.0% -0.16
Jasa Marga -14.9% -0.16
Top Ten Holdings Portfolio Weight
Baidu ADS 3.3%
Western Digital 2.8%
MercadoLibre 2.8%
VF 2.8%
Telenor 2.5%
Aspen Pharmacare Holdings 2.4%
Genomma Lab Internacional 2.3%
Dr. Reddy's Laboratories ADS 2.3%
Freeport-McMoRan Copper & Gold 2.1%
M. Dias Branco 2.1%

Asset Weighted Average Debt to Market Cap: 15.3%

2013 was a difficult year for emerging markets as fears of an end to quantitative easing, political disruption, and even massive storms such as the typhoon that devastated the Philippines presented challenges. In other words, apart from QE, a typical set of events. Such are the risks of investing in the developing world but we continue to believe in the long-term opportunities. In the fourth quarter the Amana Developing World Fund Investor Shares lost -0.83% versus a 1.83% gain in the MSCI Emerging Markets Index. For the full year, Investor Shares of the Fund slipped -0.65%, while the MSCI Emerging Markets Index has dropped -2.60%.

Companies domiciled in the developed world that have the majority of their operations or sales in the developing world, (including baby formula-maker Mead Johnson, Colgate-Palmolive, textile company VF Corp, and storage device manufacturer Western Digital) were well-represented among our best performers during the quarter. Chinese search engine Baidu continued its long march higher, as did Mexican consumer products company Genomma Lab.

Companies affected by the disruptions mentioned in the first paragraph appear throughout our list of largest detractors. Demonstrations and a wide-ranging corruption scandal in Turkey have led to a sell-off of the market and currency, pushing Ford Otomotive and Turk Telekom lower. Concerns over QE tapering have damaged equity markets and currencies throughout Southeast Asia, a region where we are over-represented relative to the benchmark. Manila Electric, Bangkok Dusit, Indofood, and Jasa Marga all fall into this category. Previously, we expressed the view that the weakness was a buying opportunity, but the devastation wrought by Typhoon Haiyan across the Philippines and the resurgence of political unrest in Thailand have caused us to step back. In the meantime, we are seeking investments in countries that look to be moving in the right direction. Mexico tops the list, while India could become more interesting depending on the results of upcoming elections. We continue to be lukewarm on China and have our concerns regarding Brazil.

Three new entrants to our top ten holdings are Genomma Lab, Brazilian pasta and cookie maker M. Dias Branco, and Indian pharmaceutical company Dr. Reddy's. They have replaced Danone, Ford Otomotive, and Bangkok Dusit Medical.

Please note: On September 25, 2013, Saturna Capital introduced Institutional Class Shares for each of the Amana Funds. Investors holding $100,000 or more in an individual Amana fund may register to transfer their shares to the institutional class; the key benefit of which will be a 0.25% reduction in fees.


¹ Source: Bloomberg LP

As of December 31, 2013

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Average Annual Total Returns (Before Taxes) 10 Year 5 Year 3 Year 1 Year Expense Ratio
Amana Income Investor Shares (AMANX) 11.16% 14.98% 13.18% 29.72% 1.19%
Amana Income Institutional Shares (AMINX)¹ n/a   n/a   n/a   n/a   0.94%
S&P 500 Index 7.40% 17.93% 16.16% 31.39% n/a
Russell 1000 Value Index 7.56% 16.65% 16.05% 32.56% n/a
Amana Growth Investor Shares (AMAGX) 10.74% 15.52% 10.27% 22.83% 1.11%
Amana Growth Institutional Shares (AMIGX)¹ n/a   n/a   n/a   n/a   0.86%
S&P 500 Index 7.40% 17.93% 16.16% 32.39% n/a
Russell 1000 Growth Index 7.82% 20.37% 16.44% 33.49% n/a
Amana Developing World Investor Shares (AMDWX)² n/a   n/a   -0.84% -0.65% 1.54%
Amana Developing World Institutional Shares (AMIDX)¹ n/a   n/a   n/a   n/a   1.29%
MSCI Emerging Markets Index 11.16% 14.78% -2.06% -2.60% n/a

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Expense ratios shown are as of the Funds' most recent Prospectus dated September 25, 2013.

Performance data quoted represents past performance, is before any taxes payable by shareowners, and is no guarantee of future results. Current performance may be higher or lower than that stated herein. Performance current to the most recent month-end is available by calling toll-free 888/73-AMANA or visiting Month-end Performance. Average annual total returns are historical and include change in share value as well as reinvestment of dividends and capital gains, if any. The 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. Shares of a Fund may only be offered for sale through 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 US stock market in general. The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US 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 US 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. When available, Saturna uses total return components of indices mentioned. Investors cannot invest directly in the indices.

¹ Institutional Shares of the Amana Funds began operations September 25, 2013, and consequently have no returns to report.

² The Amana Developing World Fund began operations September 28, 2009.

A Few Words About Risk

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 www.amanafunds.com, or call us toll-free at 888/73-AMANA (888-732-6262).

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-US companies and in foreign markets. Investing in foreign securities involves risks not typically associated directly with investing in US 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 investmentor 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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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 adviser 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 US 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, 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, which 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.

The S&P 500 is an index comprised of 500 widely held common stocks considered to be representative of the US stock market in general. The MSCI Emerging Markets Index, produced by Morgan Stanley Capital International, measures equity market performance in over 20 emerging market countries. When available, Saturna uses total return components of indices mentioned. Investors cannot invest directly in the indices.