Invesment Philosophy | Saturna Capital

Saturna views investing as a business partnership and seeks high-caliber performers operating with integrity and with a view toward the long term. Saturna’s deep-rooted belief in value investing influences all of our investment decisions. We don’t follow trends, we analyze opportunities through detailed research exploring geopolitical developments, industry themes, technology trends, competitive environments, and corporate leadership. We view consideration of environmental, social, and governance (“ESG”) factors as essential in forming portfolios of high-quality companies that are better positioned to reduce risk and identify opportunities. We believe that companies proactively managing business risks related to ESG issues are more resilient and make better contributions to portfolios designed for patient investors.

We seek issuers that demonstrate financial characteristics such as strong free cash flows, attractive growth rates, increasing dividends, and low price volatility. We believe issuers with effective corporate responsibility policies are better positioned to avoid crises that could lead to reputational damage, higher costs, lost production, and fraudulent operations. We favor companies in which management has a meaningful stake. Because we are moderately risk adverse, our performance may trail the averages in rising markets, as we seek to minimize losses during falling markets.

Saturna’s research team conducts detailed due diligence in order to understand every aspect of a firm’s operations. Saturna employs a disciplined buy-and-hold strategy with turnover that rarely exceeds 20% annually, an approach that fosters tax efficiency.

PROCESS

Saturna Capital screens more than 5,000 global securities monthly. Roughly half receive a quantitative A rating based on financial metrics and business activities, making them potential investment candidates. Companies with marginal financial metrics receive rankings of B, C, & D. About one-tenth are rejected outright for the Amana Funds (ranked F), due to prohibited business activities.

After initial screening, Saturna’s analysts begin the investment process with a thorough review of an issuer’s fundamentals, both at the company and industry levels. Our analysts search for companies that feature financial sustainability and that avoid excessive debt, which supprts Saturna’s long-term investment approach and helps to reduce risk. High debt can point to future problems such as increased risk of bankruptcy, quick fixes that lead to excessive risk taking, and lapses in governance.

CULTURE

Superior ethical standards are a mainstay of Saturna Capital. For over 30 years, Saturna has provided clients with quality investment products that reflect their values while adhering to our own values every step of the way. Similarly, social responsibility is such an essential part of our culture that it is embedded throughout our core values.

As an asset manager, Saturna Capital prioritizes the education and empowerment of its investors; as an employer, we prioritize crewmember ownership, wellness, and development. In the community, our excellent reputation for job creation and philanthropy helps define us as a responsible employer of choice and underscores our pursuit of long term, sustainable success.

Saturna Capital has been a signatory to the UN PRI since 2013.

AMANA FUNDS

Saturna Capital’s first and largest client, the Amana Mutual Funds Trust, follows Islamic Principles as well as ESG Investing Principles among the equity funds.

Islamic principles require investors to share in profit and loss, to exclude investments in prohibited activities, and to avoid speculation in favor of long-term investment. Business sector and ESG screens eliminate companies primarily involved in certain activities including:

  • Interest
  • Gambling
  • Pork
  • Fossil fuel extraction
  • Alcohol
  • Tobacco
  • Pornography
  • Weapons

 

 

Financial screens eliminate companies with:

  • Greater than 5% of their revenue coming from haram, or unacceptable, sources (such as those listed above).
  • Greater than 33% total debt as compared to their market capitalization (trailing 12-month average).
  • Greater than 45% accounts receivable as compared to their total assets (trailing 12-month average).

The guidelines developed for the Amana Funds help ensure that investments meet the requirements of the Islamic faith and were established by Saturna Capital in collaboration with the Fiqh Council of North America (FCNA), a non-profit organization serving the Muslim community. To ensure that investments continue to meet the requirements of the Islamic faith, Saturna Capital engages Amanie Advisors Sdn Bhd, a leading consultant specializing in Islamic finance.

Amana Funds Equity Investment Process

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Amana’s equity funds also support the fossil fuel divestment campaign by excluding energy extraction and refining companies.

SATURNA SUSTAINABLE FUNDS

At Saturna Capital, we view the consideration of ESG factors as essential in forming portfolios of high-quality companies better positioned to reduce risk and identify opportunities. We believe that a thorough review of how a company addresses ESG issues provides an important indication of how that company will perform over time.

ESG PROCESS

Saturna is committed to analyzing an issuer’s strength through a holistic lens and believes that ESG investing must include identifying how a company addresses the key sustainability factors that materially impact its industry. We have developed a proprietary scoring system which provides an assessment of how well a company performs relative to a blend of its industry, sector, and country peers in each ESG category. Using a combination of negative and positive screening, Saturna’s analysts seek issuers who outperform their peers on a variety of ESG metrics.

Saturna’s negative screening excludes firms engaged in:

  • Alcohol
  • Tobacco
  • Weapons
  • Pornography
  • Gambling
  • Fossil fuel extraction

 

 

We positively screen for issuers with low environmental, social, and governance risk profiles which — in addition to material and non-financial ESG considerations, such as carbon emissions, water usage, renewable energy and fair labor and supply chain practices — includes firms that show management stability and diversity, low debt, strong balance sheets, high quality operations, and a long-term focus. The Saturna Sustainable Funds also support the fossil fuel divestment campaign by excluding energy extraction and refining companies.

In order to assess the relevance of the data used to generate our scores, we carefully examine the quantity and quality of reporting for each scoring factor, including how the reporting varies—both in response rates and the distribution of reported data—by industry, sector, country, and region.

Each ESG category is built up from related subcategories:

Environment

Energy

Climate

Water

Waste

Social

Community

Labor

Governance

Board quality

Corporate policies

Executive compensation

 

 

We evaluate companies according to their transparency (i.e., whether they report data on a given factor) and their quality (i.e., how their reporting compares to their peers). Each factor is weighted by our assessment of its importance within its economic sector, or, when appropriate, by its importance relative to its country or regional peers.

While the quantitative ESG scoring process provides an invaluable stock identification tool, we believe meaningful stock evaluation and portfolio inclusion requires active management — detailed fundamental analysis of industry, financial, managerial, and ESG considerations. Numerous pitfalls challenge quantitative ESG scoring such as a pronounced “large-capitalization bias” since smaller companies, even good actors, may lack the resources to provide detailed ESG metrics. Key performance indicators determining executive pay present another area benefitting from qualitative review. Our belief in active management from a financial perspective applies equally to our ESG analysis.

SEXTANT FUNDS

Launched in 1995, the Sextant Funds provide the basic elements to build a low-expense, balanced investment program, emphasizing a value approach to investing.

Value investing allows for longer holding periods which can lead to tax efficiency. The Sextant Funds’ investment process focuses on fundamentals at both the issuer and industry level. Saturna’s research team further seeks issuers with sustainable competitive advantages, high-quality operations (including diverse and high-functioning management teams), strong free cash flows, attractive growth rates, increasing dividends, low price volatility and low debt.

The Sextant bond funds employ rigorous comparative analysis that examines credit prices relative to credit default swaps from the same issuer, if available, as well as prices on comparable instruments with similar maturities. In general, for portfolio managers to consider a credit instrument for inclusion in a Sextant Fund, the security must be investment grade and be considered high quality commercial paper. Consistent with its objective of high income, the Global High Income Fund favors bonds of lower quality, but may have up to half of its investments in bonds rated A- or higher.

The Growth Fund and International Fund invest primarily in stocks, the Short-Term Bond Fund and Bond Income Fund invest in bonds, the Core Fund invests in both stocks and bonds, and the Global High Income Fund invests in common stocks, preferred stocks, and bonds. All Sextant Funds seek tax-efficiency for their shareowners and reduced trading expenses by limiting portfolio trading.

The Funds do not purchase securities on margin or sell securities short or purchase or write put or call options; purchase "restricted securities" (those which are subject to legal or contractual restrictions on resale or are otherwise not readily marketable); or invest in oil, gas or other mineral exploration leases and programs.

IDAHO TAX-EXEMPT FUND

Idaho Tax-Exempt Fund seeks to provide income free from federal income, federal alternative minimum, and Idaho state income taxes. Preservation of capital is a secondary objective. The Idaho Tax-Exempt Fund invests in debt securities issued by the State of Idaho and its political subdivisions. These municipal bonds, notes, and commercial paper may be in various forms, including general obligation bonds, revenue bonds, mortgage bonds, certificates of participation, local improvement district bonds, and refunding bonds.

The Fund buys investment grade bonds; at least 40% of bonds that the Idaho Fund buys must be rated "A" or higher or, if unrated, of equivalent quality, on a similar basis. Factors used in bond evaluations include information such as the bond district's financial position, population size, employment trends, economic activity, and diversification. The portfolio's dollar-weighted average effective maturity is expected to range between 6 and 15 years. In accordance with the fundamental investment policies of the Idaho Fund, under normal circumstances, at least 80% of net assets are invested in debt securities generating income exempt from both federal and Idaho income tax.

INVESTMENT MANAGEMENT ACCOUNTS

Saturna strives to deliver superior performance to our investors. We tailor our advisory service to the specific needs of each client by first conducting a thorough analysis of the client's financial situation, goals, and risk tolerance. We are primarily long-term investors, seeking to preserve and grow clients' capital over time. We believe that for the long-term investor equity securities are the investment of choice, but we recognize that bonds or cash equivalents may be better suited in certain circumstances. Therefore, we also offer advice on most securities commonly held in US investment accounts: domestic and foreign common and preferred stocks; government, corporate, and municipal bonds; mutual funds; convertible securities; warrants; exchange-traded options contracts; and partnership interests.