Getting To Know You: Amana Participation Fund
Download a PDF:
Getting to Know You: Amana Participation Fund Investment Process and Frequently Asked Questions
OWAIZ DADABHOY: Today's presentation is about the Amana Participation Fund and why it's here. It’s the fourth fund that we've added. And so, we're going to get into that in a second, but what we'll start with—in the interest of allowing others to join—I want to mention to you a top ten list which I actually shrunk down to, I think, six. And then as soon as we're done with that, we'll get started with the presentation. We've got two great guests here today. So let me start off with the first fact about Social Security benefits. The benefits are modest and the typical person in 2020, the average Social Security check, was $1,514 a month, or about $18,000 a year. As we know, that's not going to be enough to be able to live our lives if that's the only money we have. If we don't have a pension plan, we have the average Social Security check, and we don't have any of our own retirement savings we might be in a lot of trouble. So, this just tells us that we need to either work for a company that has a pension and actually save for ourselves as well enough for one cake, for three being Roth IRA, traditional IRA, et cetera. Number two, Social Security is more than just a retirement program. I think most of you probably know this, but 64 million people in America are receiving some type of Social Security. The last I had checked, it was about 40 million people getting regular Social Security retirement, but this includes children that their parents, one of their parents, passed away maybe before the age of 18. So, they receive a small benefit there. Or you may know people that are on disability insurance through Social Security as well. So, all told, it's 64 million people. So, if you do the math, that's what 64 out of 330 or 350 million, that's quite a few quite a large percentage. One out of six. Number three, Social Security provides a guaranteed progressive benefit that keeps up with increases in the cost of living. So, if you start off with, let's say, your Social Security check is $2,000 a month and that's enough to live on what they want to do is they want to make sure to increase it over time every year, give you a cost-of-living increase. And so that will allow you to continue buying what you need to do even with inflation. But if you don't start off with the right amount of Social Security benefits, then you'll probably never catch up to what you need because the increase is going to be anywhere from 2-5%, depending on how inflation is, and usually 2-3% every year. The next one that I wanted to talk to you about is children. Nearly 2.8 million children, almost 3 million children, receive benefits from Social Security because their dependents of retired, disabled or deceased workers and or parents were, you know, or relatives who receive Social Security benefits. So, you know, if you do have someone that passes away that you know in the family and their children, make sure that they go there to Social Security and get the benefits for the children if they're under 18. If you know someone that's disabled and they need benefits, they may already know. But if they don't, you can send them there as well. The next fact I wanted to mention, number five, is most elderly beneficiaries rely on Social Security for the majority of their income. So, you know, when they go back and they look at people's incomes, when they do their testing, they figure out that the majority of what they are spending is from Social Security. So if they're receiving that $1,500 Social Security check, they might have another $500 income somewhere. So, 75% of it is from Social Security itself. So again, this is another cautionary tale for us to see whatever we can. It's never, I would say it's never too late. As long as you're working, you should be able to save something, right? I was talking to somebody the other day, 53-year-old religious figure at one of the religious institutions here locally in Southern California, and he said that he hasn't saved anything because he didn't have the information, which is why he asked me to come speak at his religious institution, to his congregation, to be able to teach them about, you know, saving and getting started early. So, he was wondering, is it too late for me? And I told him, “No. I mean, you still probably have 10 to 15 years that you're going to choose to work.” So, whatever you can put away at that time during this time would be beneficial so you can enhance or, you know, get something above and beyond your Social Security check. So that was our top list today. It was about Social Security. We're going to get the official start going. So good afternoon. Thank you again for joining us for the webinar on the Amana Participation Fund. Is a particularly important mutual fund that we created back in 2015. Yesterday happened to be the six-year anniversary. And the person that is leading the charge is Patrick Drum, who is the fund manager for this particular fund. And you know, when he came into the Saturna not too long after he actually got started with this fund. And Elizabeth Alm works on this particular fund as well, as a portfolio manager. And so, we're happy to have both of them on the line today, and they're both going to present to us about this particular fund. Again, six years starting in 2015, made for diversification, a few of the different reasons we started it. I'll give you one example and that’s, you know, some of my relatives that have Amana Mutual Funds. In the beginning, they just had Amana Income and Amana Growth and they didn't have anything where they could cut down some of the stock market risk. So, it's made for them as well, right? If you enter retirement or are getting close to retirement, you're going to need that diversification. Another reason is financial advisors throughout America use our funds with their clients, and they have to go through compliance when they create a portfolio. And if they don't have any bonds, then their compliance might say, “You can't take on this client.” So, if they have the Participation Fund in hand, then they can complete the portfolio for the client. So, as you get closer to your goals, you know, so if your retirement is ten years away, you might have less of the Participation Fund. As you get closer to retirement, you might have more of the Participation Fund, just like the average investor out there, would increase the amount of bonds that they hold. Another reason we created this was specifically for people holding lots of cash that they did not want to put into the stock market. So instead, they can put it into something like this, which holds sukuk, which Patrick is going to go over in just a little bit. It is also the fastest growing fund since inception that we created since 2015 September. It is now... it just crossed $206 million. That's the fastest six-year growth of any of our funds. So, we're happy that this is meeting the needs of our clients. So, some disclosures to go over is that some of the information will go through today... We might give you some examples of, you know, potential returns. We might give you past performance as well, but anything that we give you is not a guarantee of future results. Since the folks that we invited here today are clients of ours, you all know that about investing. The same goes for the Participation Fund. Now we're going to play a video for you about the sukuk fund, which is called the Participation Fund. Rachel will play that.
VIDEO NARRATION: For more than 30 years, Amana Mutual Funds have provided professionally managed investment portfolios serving the needs of our clients. Beginning with the Amana Income Fund in 1986, Amana's equity funds have made it the largest fund family in the United States guided by Islamic principles. To help investors diversify their portfolios, we created the Amana Participation Fund: the first dedicated sukuk mutual fund offered in the US. Traditionally, investors following Islamic principles have been limited in their investment choices. Unlike the other funds in the Amana family, which invest primarily in halal stocks, the Amana Participation Fund invests in Islamic fixed income securities, most notably sukuk, an asset class separate and distinct from fixed income bonds and equity that embodies the principles of halal investing. Sukuk have characteristics similar to conventional bonds. Generally, they have a stated maturity date, offer a stated income rate, and usually obtain a credit rating from recognized agencies. While conventional bonds are generally prohibited due to the payment of interest, sukuk typically reflect an undivided beneficial ownership interest in an underlying asset, similar to a stock. Sukuk can invest in a broad range of tangible assets, including facilities, real estate, operating businesses, and equipment, to name a few, which are owned by the investors for the duration of the sukuk. For example, a company—perhaps an airline—purchases a physical asset such as a plane and places it into a trust. The plane is then sold to investors via a sukuk. As owners of the plane, the investors receive payments based on the profitability of the asset. When the sukuk matures, the airline repurchases the plane from the investors. If the investment becomes impaired, investors may face the risk of loss. Because of this, sukuk represent a true risk-sharing endeavor between the company or government and the investor. This is key to what makes sukuk halal, as risk-sharing differs sharply from the risk-transferring debt-based nature of traditional bonds. To ensure investments meet the requirements of the Islamic faith, all aspects of sukuk are subject to review by Islamic scholars that provide a fatwa that forms the basis for claims of compliance with Islamic tenets. The launch of the amount of Participation Fund marks an important development for Muslim investors, broadening access to an essential leg of basic asset allocation within the Muslim community and beyond.
OWAIZ DADABHOY: Well, so we wanted to share that with you. It's on our website at amanafunds.com. There are four flags there, one is Amana Income, Growth, Developing World, and Participation Fund. If you click on Participation Fund, you'll find a couple of different videos on there and this is one of them. If you want to go back and look at it later to again, look at what you might be investing in would be a good idea. You know, it gives the story, I think, in the best way possible through that video but we're going to reiterate it here today and Patrick and Elizabeth will tell us a little bit more about that. So, I'm going to continue sharing here my screen because I want to share with you some updates. This is as of June 30th. You’re investors of ours. So, you know, our company's been growing over time. Thank you for helping us do that. We now have almost $6 billion in assets under management. We were founded—Saturna was founded—in 1989. It is the fund manager to the Amana Funds, along with some other funds that we manage and of course, private accounts for clients that need customized solutions. We now have 103 employees worldwide and we say worldwide because we do have that office in Malaysia, which was started, I think, like ten years ago now. That is called Saturna Sendirian Berhad. Saturna Trust Company was started, you know, 9-10 years ago, something like that. And it's also here locally in America. This is in Henderson, Nevada. If you have a living trust or a different kind of trust that you need managed, this is the place to go and ask questions. And we also have the brokerage services if you want. If you already have Amana Mutual Funds and you want to do trading, long term trading, through our brokerage account, you can have everything in one place. And we started the environmental corporation. We own some land in Washington, where we train people and educate people on environmental rules and so forth. And you know what we do with our ESG or environmental, social and governance funds. We remain a community contributor. You probably see us in locales close to you. When we come out there, we try to sponsor events for nonprofit organizations to support the local communities. And since 1986, Amana Mutual Funds has been a low-cost provider, and Saturna has been as well. So please ask any questions of this in the chat and we will get to your questions. Some of you may have started investing back all the way in 1986, so you can see that fund is now 35 years old. The Amana Income Fund. This is a dividend stock fund that we hold dividend-paying companies in. So, you know, this pays a dividend and has roughly $1.5 to $1.6 billion in assets. The Amana Growth Fund was started back in 1994, has 47- 50% in technology and 17-20% typically in health care. And then other stocks that are spread across other growth sectors are there as well. In 2009, we started the emerging markets fund called the Amana Developing World Fund. And in 2015, as I mentioned, six years ago yesterday, we started the Amana Participation Fund to be able to help our clients to diversify their risk and take some of the risk off the table in their portfolios. I'll pass it on now to Patrick Drum, who is the fund manager of the Participation Fund, to talk to us a little bit about the investment strategies of the four funds.
For performance current to the most recent month-end, please visit our Month-end Performance page.
PATRICK DRUM: Thank you, Owaiz. It's a pleasure to be here. Salaam Alaikum. Appreciate you all attending. My name is Patrick Drum. I’m portfolio manager of the Participation Fund, from its launch, and my colleague Elizabeth Alm is the deputy portfolio manager. And she and I, along with our extensive team, work together to provide an asset allocation choice that simply didn't exist in the market, and we're delighted and feel extremely privileged to do so. As Owaiz has sort of given an overview and mapping of Saturna’s work and the fund family of Amana... The Amana Participation Fund was really aimed to serve part of the community that really didn't have a solution, and that solution was to try to find and establish an important asset allocation option: that is capital preservation and current income consistent with Islamic principles. And it's a very unique and niche market, and it's been quite an experience and I'm delighted to share yesterday the Amana Participation Fund quietly celebrated its sixth year in operation, so with all your contributions and interest, this wouldn't exist without you and in part from leadership from Owaiz and members of our team that were advocating for this well before my arrival. So, performance is always a question. Performance and how we kind of structure and provide that information is important, but also it also involves. I will share with you that these fees and expenses are extremely low, particularly in comparison to our existing Amana equity funds. The amount of legal work, the amount of not just legal but operational... This is an entirely different asset class and it's unique and separate from others. And the tremendous amount of teamwork in going through each of these prospectuses with a detailed comb. We’ll spare you the details but each of these prospectuses would rival that of a Manhattan phone book. It kind of starts aging and staging us by these kinds of comments. The results of this type of fund... it's really philosophically aimed to provide that most important attribute which really is capital preservation. We have three great equity funds that can provide you that growth and that risk exposure. But the aim here is to provide you the stable. I get a lot of questions. Well, the FTSE Sukuk benchmark is the benchmark which was selected to launch the fund. There are only two benchmarks and it's a rather small, unique space, and I get a lot of questions as to well, why are we dramatically underperforming relative to that particular benchmark? The FTSE Sukuk represents a benchmark to represent the worldwide universe of global sukuk. And so, it's structured very differently. Quick example, I think in the next slide will actually help kind of illuminate that. So, this in part highlights diversification because it is a fund aimed to broadly diversify investors among a variety of Shariah-compliant... bond equivalent is the proper term, but it's clearly sukuk. Our goal is to diversify on issuers, regions of the world as best we can, and also duration. Duration reflects maturity. So, an issuer may issue a sukuk that either 1-year, 2-year, 5-year, 10-year, sometimes as much as 30-years, if not longer, in the benchmark. The FTSE Sukuk benchmark at the end of last year had over 30% of its weighting, in particular maturities for seven years or longer. And it's important to impart that because the longer the maturity, the more subject to volatility is when you're seeing changes in interest rates. And while sukuk pay profits rather than interest, they are priced along an interest rate curve, meaning interest rates in part effectively drive their pricing and sensitivity to changes in yields. So, while separate and distinct of providing profit rates, it’s sensitivity to longer duration. Also, the benchmark has a higher degree of concentration. At the end of the year between Indonesia and Saudi sovereign, they had a concentration of well over 40% just among two countries. And as you can see here in the sector allocation, government bonds—or rather government bonds should really say government sukuk; it's a category in itself—represented 30%. And they’re much more diversified than just Indonesia and Saudi, but also includes Qatar. It also includes issues from the UAE, Dubai and so forth. So, it's much more diversified holdings. And as you can see, among the top ten holdings, it represents a full scope of different issuers. TNB Global is the utility out of Malaysia. It's their largest utility operator, followed by the IFC. For those that are familiar with the financial district in Dubai, ICD is essentially the Investment Corporation of Dubai. It's the sovereign fund, so it gives you a list of names in that particular region. And then the next slide...
OWAIZ DADABHOY: So, Patrick, on this, on the financials here would be what kind of issuances? This would be Islamic banks?
PATRICK DRUM: These are dedicated Islamic banks. Correct. So, they are they are long term and have been long time issuers in this particular space in providing both financing and funding for them to do Islamic-permitted loans, whether it be for households such as for mortgages, car financing and also businesses. These are issued banks that are Islamic full in nature and have an Islamic license otherwise known as participation banks. And I’m going to now pass this over to Elizabeth who will talk a little bit about the fund overview and some of the key risks that we navigate.
ELIZABETH ALM: Absolutely, thank you, Patrick. So as Patrick mentioned, our main investment objective is capital preservation and current income consistent with Islamic principles, but really capital preservation is the primary objective. So, for us, boring is good. We want to be the safety net when things go bump in the night. So, our entire investment process is really dedicated to that objective and to mitigating risk. So, we invest at least 80% of assets in short and intermediate Islamic fixed income investments. So, these, as you saw on the slide before, are notes and certificates issued by foreign governments or agencies and financial institutions. But as the video that you saw showed, these are specifically structured to be in accordance with Islamic principles, and we see ourselves as risk managers and over the next few slides, we'll go over some of the risks that we consider within our investment process to meet that objective of capital preservation. So, on this slide, you see market risk, diversification risk, and strategy risk. As Patrick mentioned in terms of market risk, we really do have a deep and extensive review process for every single security we purchase for the fund, and market risk is a part of any investment strategy. But we aim to have a very conservative maturity profile with strong issuers to mitigate some of that market volatility. And that really is one of the things that differentiates us from that benchmark is our goal and our focus on capital preservation. In terms of diversification, as you saw, no single issuer is over 5% of the portfolio, and we really do take care to diversify across issuers and across industries in terms of liquidity and foreign investing risk. As part of our internal process, we have a monthly review of the liquidity profile of every single one of our holdings and of the portfolio as a whole. But generally, we're only investing in strong issuers of very strong liquidity in the market. And as Patrick mentioned, each one of these certificates has a prospectus that looks a little bit like a phone book. We're talking about hundreds of pages, and we go through all of the issuer information, legal, structural language, cash flow, tax information, and we review it as portfolio managers. But we also have a review by our operations department. So, two departments look at each security to approve it on a structural basis and make sure that it fits into the portfolio and is going to further that goal of capital preservation. And to go to the next slide. Some of the final risks here. We do take a deep dove on credit and cash flow. We have an internal system where we can put all of our reviews. And not only are we reviewing on initial purchase, but we also have produced a stringent surveillance process where we're looking at credit after we buy it. But just given where we're investing here where some of these are frontier markets. But we do take one step further, not just looking at published data, but we have local broker dealers that can give us some market color locally, and that's absolutely invaluable. And before the pandemic, and hopefully again soon, Patrick will actually spend up to a month in the Middle East. I believe his last trip, he visited 60% of our holdings. And even though the portfolio has the ability to invest in non-rated or high yield bonds, the ones that we do have in the portfolio are generally not rated by choice and we view them closer to investment grade. But ultimately here, capital preservation is our goal, and we work very hard to achieve it.
PATRICK DRUM: She brought up a really good point. We do work most extensively with local broker dealers for that on the ground context. And so, it really makes an essential of forming those relationships with our issuers, and this is in part really imparts to the community of which we serve, but also the community with whom we work with. And this kind of now will take a bit of a step as to what our sukuk and really how they how are they structured or at least how to think about that. And that in part is best also can be served by reviewing the video that we saw earlier. So essentially, AAOIFI is the auditing and accounting organization for Islamic financial institutions. They were formed in 1991 out of Bahrain to really establish a sort of the best practices and standards as to what is identified as Shariah compliant for sukuk. It is a body of advisers that are steeped in in both the religious review, but also more importantly, in best practices of establishing and formalizing the market. The wording on that is a bit unique, but really what the key element that separate sukuk from conventional notes is not only just a religious review, but it's structuring. In the next slide will provide you a little insight as to what that looks like. And here we've kind of aligned here two different categories as to what a sukuk is and conventional bonds. I think best way I've often explained it is to view sukuk as having four legs to a chair. And each of these four legs essentially are key and essential in keeping the chair upright. The first is that it has really to do with what are known as risk sharing. And risk sharing is aligned with the Islamic principles that as an investor, that you not only can share in the profits, but you also are subject to the risks. And Elizabeth really kind of spent time identifying and providing a mapping of how we think about a risk and more importantly, as being risk managers. And sukuk in themselves are risk-sharing. We are subject to the risks. Unlike a conventional bond in the simplest terms an issuer under a legal obligation, heck or high water has to make payment. And you've heard of quite a bit of news if you have not out of China with everyone where their seemingly questionable as to whether they're able to make the payment. That debt obligation is forcing their hand as to whether or not they'll still be operating. Sukuk, however, you do have that potential for a risk for nonpayment. The second aspect that makes it underlying part is it's underlying. A sukuk has, underlying, some assets service or you've struck. Essentially, it can be intangibles, but the point is that the underlying source of income is derived from an asset. Rather, conventional debt is a debt obligation. There's a lot of nuances in the space. The third thing that makes this unique is that there can't be any guarantees, i.e. there can't be a guarantee of payment, there can't be a guarantee of return of principal. Taqi Usmani in 2004, excuse me, in 2008, truly upset of the market by indicating that most of the sukuk were structured with some promissory aspects. So, the market almost had to do a considerable reset during that time. And so, as such, there can't be guarantees, and that really aligns with that risk sharing component. Unlike that, which is an obligation in last and in the last leg of the chair is the fatwa. Each of these instruments obtain a review by a Shariah board as part of our investment process. We first look as to whether it has obtained the Shariah approval of consistent with Islamic principles. Our intent is, first and foremost is to honor the faith of the community, but more importantly, to make certain to the best of our abilities that what we own and what we're looking to consider as potentially owning has gone through this rigorous review. So, in summary, the four legs of the chair are first it’s risk sharing. Second, it has to have an underlying asset. Third, no promises. And lastly, a religious review. The next slide will provide kind of a similar breakdown that you just saw in the video, and you'll see conventional notes or conventional bonds highlighting four commonalities, three commonalities, with sukuk, meaning it has a maturity date and income rate and credit rating. But then you'll see on the red that conventional notes have the risk transferring and debt interest, which are unique to conventional notes, but also different and distinct from sukuk, where you'll see in the blue the risk sharing in the underlying assets. The video really does a nice replay on that, but this just really is the point that we're trying to stress and evaluate is making this unique market. The following slide is giving you a little bit of the attributes. This market has really come alive, and it is really a preferential area of global investors. The market which we invest in tends to be more concentrated in the GCC region. While there are quite a considerable issuers that take place from Southeast Asia, as well as Turkey and Pakistan. What you'll see here this is issuance in the gray line total global and it's in US dollar. Clearly, other this does not include local currencies such as ringgit, lira, and so forth. So, this is really kind of the focus the fund is permitted to own non-US dollar sukuk. However, philosophically, our view is that to retain the capital preservation and current income, our investors tend to be largely US-domiciled clients, and as such, it makes sense to align their assets with the investment assets. And as you'll see in the gray line, there are these large issuance followed by the sort of bluish being issues from the GCC. What you find here is that in the blue bar, the predominant issue of US dollar sukuk by and large has been historically well over two thirds historically from that region. And more so, it provides you kind of an indication of how that trend is evolving. I said two thirds, and I meant to say more around the 50% range. Currently, we're experiencing tremendous issuance. Last year was a bit unique, in particular because a lot of the pandemic brought about a lot of governments to issue sovereign sukuk as well as conventional notes. And that was in part to sort of help offset fiscal deficits brought about by massive fiscal spending in response to the Covid crisis. This year, we're seeing a lot more corporate issuance that's taking place. One of the largest that ever came to the market was the Aramco sukuk. It was a $6 billion issue, and we do not own that one. I'll just make mention it really won't go too much in the details, but that in part really elevated the total sukuk issuance here today in the US dollar market. And then on the next slide, it's a bit of the information that is that that that our team has created over time. And I'll share each of these are part of what I call sidewalk talk. Each of these have come about through conversations I've had with you and the community, from retail investors to those that are curious to institutions. And it's helped me learn and kind of, more importantly, impart education. Sukuk is a very unique asset class and more importantly, a unique market in itself. And so first, we started off as What Makes a Sukuk Halal, Dancing with Correlation. What that really tries to identify is how should we think about this type of risk and return attributes with respect to these types of securities? So, it gives a little dive into the history, a little bit of the correlation and behaviors. Can Revenue Bonds be Halal? This was a common question that I found myself coming across. And the answer is revenue bonds are not halal because in part, they're not an asset. They’re a debt obligation. And the second important part is the typical revenue bond does not go through a fatwa. And as a result, they are not halal. But that was a typical question that I found, so I've decided to put together a white paper on that. There's been quite a bit of issuance and behaviors with regards to ESG or what is known as environmental, social, governance and green sukuk or green bonds. This community is also really elevating its presence in that area, and I saw I explored that market and what those attributes look like exploring both Malaysian ringgit issues in US dollar issues. And then more recently, here is the GCC sukuk. It's a primer. There's a lot of literature about global sukuk, but interestingly, very little on the US dollar sukuk. And so, as part of that, I go through the history and explaining also an update on risk attributes correlation, but also kind of how that a market evolved. And in 2014 is really when the GCC market was evolved and soon yet to be released is I have produced another whitepaper called The Amana Participation Investment Process. And this paper is going to impart a lot of commonly asked questions as to how do we review sukuk as being halal, our investment process, how do we determine to sell? And more importantly, kind of providing an overview of what are the difference between the fund and the benchmark? And they're just trying to help aim to provide a go-to resource that you can kind of spend your own time out. And then on the next slide, I think, is when I am done. Yes.
OWAIZ DADABHOY: And so, I do want to mention that in the chat group, some of our team has been putting in links that you might find useful. The last one that was just placed in there by Amjad is the link to all of these white papers. So if you want to take a look at these and do a deeper dive, you can pull those up online and take a look there. If you go to amanafunds.com, you know you'll be able to look up about anything about the Participation Fund and the other funds as well. Just a couple of quick notes. There was a question about maturity date and what that is specifically. So, Patrick, if we can take a half a minute on what that means?
PATRICK DRUM: Sure. So sukuk actually follows a very similar structure to a conventional bond. And what I mean by that is when you issue a bond, or let's say you already again obtain a car loan or a home loan, there's a date of maturity of that issuance, meaning at that point in time, the principle is paid down. And in an issue of a sukuk, as well as a note that you may use to borrow to purchase a home or car has a term, meaning a rather maturity the length of years that it's outstanding and that can range from anywhere from one year to all over 30 years. Typically, behavior in the market is still issued to five, ten and sometimes 30 years. So that's what it means by maturity.
OWAIZ DADABHOY: And one of our clients or attendees today asked about whether there's less potential return for a sukuk versus the Growth Fund or income fund. That definitely is the case. If you take a look at just the returns so far this year, the Growth fund is up over 16% year to date and the Amana Participation Fund is just over 1% and it's supposed to be similar to that, right? What is the ultimate objective that you're looking for in terms of long-term returns, Patrick?
For performance current to the most recent month-end, please visit our Month-end Performance page.
PATRICK DRUM: That's a great that's a great question. I think the there's two ways to look at it, and I think one and first and foremost, is that old notion of not having all your all your eggs in one basket. And really, in part... Saturna Capital has a long history of stewardship, of managing through various business cycles and various dynamic markets. Let's just put it at that. And in each of those funds, whether it'd be the Growth or the Income or the Developing World, have different expressions during these different market experiences. As part of that, also what they have is a different degree of volatility and kind of risk characteristics. The objective of this fund is to provide that safety and we're obtaining competitive rates of return that that market in part provides. And right now, given the market rates and lower yields that we have now experience is that this is in part a bit of the demand. The increased demand for sukuk in the region are global. And as such, they bid the prices up, meaning the profit rates are now a bit lower than they have. So, in part, the fund is providing the rate of competitive return that the market's bearing. But currently, as we all know, when stocks are high, yields sometimes are low. And so, this in part references how the current profit rate distribution is where it's at.
OWAIZ DADABHOY: So, you all have been able to take a long look at the bios of Patrick and Elizabeth. Both are portfolio managers, you know, Patrick is lead and Elizabeth is deputy here. Quick question again for Patrick, I just found this one interesting. I know you do a lot of travels, but you when you travel internationally, you actually visit the companies that you're purchasing sukuk of. And so, Elizabeth mentioned that you visited 60% of them. I think in the last year, I think was the number there. So, when you visit a company that you bought the sukuk of, who are you visiting? Like, what does that look like?
PATRICK DRUM: Yeah, that's actually a great question. So generally, I participate in a due diligence tour, in some part sponsored by various investor institutions and in part we meet the either sometimes the CEO or the CFO, the chief financial officer. My one on one visits tend to be with either the CFO, the chief financial officer or the Treasury group, and then in part, I'm just trying to establish and formalize a relationship and understanding their business there and getting a better idea as to the strategic plan. But between the lines, I'm really trying to understand their tempo or tone towards fiscal prudence, trying to make certain I understand overall how their business is running, where kind of the risks are, and more importantly, to establish a long going relationship where I have questions, I can circle back with them. To give you an idea. Typically, I'll go to the middle to the Middle East for about a month. That's been my experience. I visit all the countries that are there on the GCC and I will also take a little bit of subset sort of off-site kind of a working vacation. Last time I was, I spent about four days in Oman, and I had a guide. And so literally we did a lot of driving, and it was I was curious as to the infrastructure. I wanted to understand to the extent that they're establishing building out the transportation and logistics. So that whole process is really getting a sense of the lay of the land and the community and the culture. But we work with about over 80% of our trades are done with local broker dealers. So, I visit these groups and also formalize some pretty robust relationships. And that's in part because right now is a great example. I haven't traveled in over 18 months. And in doing so, I can talk to them about, well, what's the footfall at Dubai Mall? What's kind of the tone of the people there? And through that, I'm able to get a lot more of a sense that it's just not numbers. When you're investing in parts of the world that are very culturally driven as well as kind of navigating different markets, it is that relational aspect that's important. When I was there in 2019, I had over 70 appointments. And so, they're full days. Some days had 8 meetings. And let me tell you, you're kind of bleary eyed and not all the not all those companies we invest in. Some of them, I've followed closely over the years. Some of them I know very well. And there's a lot more new issuers that are coming in the market. But I hope that offers a little flavor.
OWAIZ DADABHOY: No, appreciate that very much. Please do ask your questions whatever questions you have in the chat group, and we will address those. Obviously, all of the funds, any type of investment like this has risks. So, you know, you've got to be able to sleep at night because movements happen every single day in the market. And sometimes you see big, big ups and big downs, and sometimes you don't see much volatility at all. But you can see everything in between. So just make sure that you're, you know, reading about your investments before you go into them and continually keep up on them. You can also reach out to us. We're happy to talk to you about risk. One thing that I will mention here is that you can go to the Amana Fund Selector, and that's a tool that we have on our website, on amanafunds.com. It's on the main page. If you click there, it'll ask you to say yes for us to move forward. And then once you accept that, they will ask you eight questions, and at the end of it will say this is what your risk profile looks like. And so, you may want to invest 50% of your money in Participation Fund and the rest of it in these other Amana funds. So, if you have a higher amount of Participation Fund, which is sukuk, that means that you are willing to take on less risk and that's why you have more Participation Fund. So, I think that helps to maybe help people to understand, you know, the difference between the Participation Fund and the other funds, which are stocks. The stock funds will move up and down much more rapidly on any given day compared to the Participation fund, which doesn't move that much on a typical day. So, if you are somebody that really does not like to be in stock market risk, even though it is educated risk led by a portfolio manager, you still might be the type of person that says, “I need to be much more conservative.” The other thing is, look, if you have a child, you're in the education savings account and your child is now 18 years old going to college, you don't want there to be a big drop in the market and affect your funds, right? Because if you had, let's say, your child was 18 in 2008, the market went down significantly when the global financial crisis happened. If you were all in stock at that time, you may have delayed taking money out for education and used your checking account instead. So, what you could have done back then if we had the Participation Fund is, look, I know I'm going to be using this much in the next two years, so let me move that much into the Participation Fund. So even if there is some type of temporary or longer drop in the market, I'm not taking on the full market loss here. I'm taking on Participation Fund risk instead of stock market risk. So, I hope that helps you all definitely take a look at the Fund Selector so you can determine how much you want to put into the different funds. When we talk to clients, we find, you know, if they started early on in the eighties, they only have the Growth Fund. Or Income Fund, excuse me, if they started in the nineties when the Growth Fund came out, they heard about that fund and they just invested in that fund. And so, what you really want to do, though, is diversify your portfolio. So, we do think everyone we're going to answer a couple more questions here, but you can see Patrick's information, you know, usually portfolio managers are reading about the holdings in their portfolio. They're looking at new potential investments they are looking to make. They’re visiting clients. They're on the phone. Excuse me, they're visiting companies that they want to own or they do own. They’re on the phones with people like that as well, analysts from those companies. So, they are very busy people. But you know, you can always shoot an email to Patrick and ask a question. He might send you something like one of the white papers and answer your question on email as well, or even connect with you. So, feel free to do that and you have the contact information there. Let me see if there's any questions in the group here. Can you clarify the maturity again? Is holding the sukuk until maturity a requirement or can it be sold early? What is the profit-sharing payment frequency?
PATRICK DRUM: Yeah. I was seeing that question, so maturity again is the tenor at which it matures. So, upon payment. So, if you were to go to a bank and borrow money to purchase a car, it would be like, say, if five-year loan or a seven-year loan. Again, I'm using loans in view of the same way as sukuk - the same structure. There is a due date of when those funds are payment is the full return of principles required. There is no obligation to hold it at maturity or it can be sold earlier. And I have. And in this upcoming whitepaper, I do explain at times I will sell an issue because I see some concerns with regards to the direction or adverse financials that are material or also, quite frankly, sometimes in less severe circumstances such as a swap, meaning an issuer may come out...the same issuer. Let's say Dubai Islamic Bank has currently a two-year sukuk and then they come out with a five-year sukuk. So, I like, you know, in the example, hypothetically, let's say I like Dubai Islamic Bank and I do. But point is, is that it may offer a little more of a better fit for the portfolio, as well as a higher profit rate. So, I might sell that two-year sukuk and roll those proceeds into the five-year. That's part of the trading in the secondary market. Frequency of payments. Typically, sukuk are structured to have semiannual. So that's how that works in there.
OWAIZ DADABHOY: Yeah, I'll just I'll just mention one other thing, Patrick. You know, there's a company that you all know, and it's called Emirates Airlines. Many of you may have traveled. You're trying to get to another place in the world. You fly from your location to Dubai and then from Dubai, you fly somewhere else. And they did create a sukuk a number of years ago, I think it was around $1 billion. And so, let's call it a 30-year maturity. What that would mean is Emirates would be making payments to the sukuk owners for basically renting those planes that they purchased through the sukuk as an example. And so, they've been making those payments. At the end of the 30 years, the $1 billion would get paid back. Right. So that's a very simplistic way to give this example. There is a question about, you know, is there a place where we could see longer term view of the performance? There was the Citi Sukuk Index, Patrick, is that still around?
PATRICK DRUM: It is. It was acquired by FTSE Russell. And what I recommend is... you're welcome to go their website. It's under, excuse me, the first place I would recommend, if you really want to kind of get a sense of return risk characteristics in history, go to the GCC Primer. That in part provides you all sort of the history that I've collected and information, as well as referencing the benchmark, FTSE Russell benchmark sukuk information can be obtained online. That benchmark was formalized back in 2005. But if you're trying to get a little flavor as to returns history, that's what Dancing with Correlation and the GCC Primer is all about. You know, to really provide you one of the few published resources that exists in the market as to how that industry, how those market classes have performed.
OWAIZ DADABHOY: And we know search engines can often be our friends. So, you can put in FTSE Sukuk Index and go to all the places that Patrick has mentioned as well. Keeping in mind, of course, you know, we gave you the index early on. We said these were... this was the performance of the participation fund. This was the index. But there's different holdings, right? So, if the index is holding every sukuk known to man, or virtually, and our particular fund has, how many holdings do we have at this time, 20 to 25, Patrick?
PATRICK DRUM: We're probably now around 35.
OWAIZ DADABHOY: So, you know, we're not comparing apples to apples here. So as long as you go in understanding that, then I think that's a good thing to take a look at. This might have been the first time you ever heard the word sukuk. And you know, that is the plural of sakk, which is what we've been talking about today. These instruments that allow us to invest in a different way, which is not taking on stock market risk. I don't see any other questions at this point. If Patrick or Elizabeth have anything else to add, otherwise we will hope to see you at a future webinar, which will be next month. We are looking at doing one for health savings accounts. So, we would love to see you at that one, Patrick or Elizabeth, do you have anything else to mention today?
PATRICK DRUM: Yeah, I think one thing about the benchmark is the beauty of a benchmark is they don't actually have to go in the market and trade. It's a paper benchmark. So, it's a hypothetical. Unlike us, we actually have to find the issue, negotiate the issue, and also determine indeed whether it's something that we want to pay for. These benchmarks just simply are essentially creating a hypothetical simulation of holdings. It's an important benchmark. I'm not. I'm not discrediting it, but those are things that are often overlooked.
OWAIZ DADABHOY: Well, thank you all. We hope you've enjoyed this particular webinar. We'll see you next time. Thank you.
PATRICK DRUM: Thank you.
ELIZABETH ALM: Thank you.
Performance data quoted herein represents past performance and is no guarantee of 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 significantly higher or lower than data quoted herein. Performance current to the most recent month-end can be obtained by visiting www.amanafunds.com or by calling toll-free 1-800-728-8762.
Please consider an investment’s objectives, risks, charges and expenses carefully before investing. To obtain this and other important information, which you should carefully consider before investing, about the Amana Funds in a free prospectus or summary prospectus, please visit www.amanafunds.com or call 1-800-728-8762.
The Amana Funds are distributed by Saturna Brokerage Services, member FINRA/ SIPC and a wholly-owned subsidiary of Saturna Capital, investment adviser to the Amana Funds.
More About Amana Participation Fund
The Amana Participation Fund is the first non-equity, halal income fund offered in the US. It seeks to earn current income and preserve capital with a portfolio of securities designed to be less volatile than equities.
In our informational article, Behind the Scenes: A Closer Look at the Amana Participation Fund Investment Process, we answer seven commonly asked questions about the Amana Participation Fund's investment process.
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 FTSE Sukuk Index measures the performance of global Islamic fixed income securities, also known as sukuk.
A FEW WORDS ABOUT RISKS
Income, Growth, Developing World, and Participation Funds: The value of the shares of each of the Funds rises and falls as the value of the securities in which the Funds invest go up and down. The Amana Mutual Funds limit the securities they purchase to those consistent with Islamic principles. This limits opportunities and may affect performance. Each of the Funds may invest in securities that are not traded in the United States. Investments in the securities of foreign issuers may involve risks in addition to those normally associated with investments in the securities of US issuers. These risks include currency and market fluctuations, and political or social instability. The risks of foreign investing are generally magnified in the smaller and more volatile securities markets of the developing world.
Growth Fund: The smaller and less seasoned companies that may be in the Growth Fund have a greater risk of price volatility.
Participation Fund: While the Participation Fund does not invest in conventional bonds, risks similar to those of conventional nondiversified fixed-income funds apply. These include: diversification and concentration risk, liquidity risk, interest rate risk, credit risk, and high-yield risk. The Participation Fund also includes risks specific to investments in Islamic fixed-income instruments. The structural complexity of sukuk, along with the weak infrastructure of the sukuk market, increases risk. Compared to rights of conventional bondholders, holders of sukuk may have limited ability to pursue legal recourse to enforce the terms of the sukuk or to restructure the sukuk in order to seek recovery of principal. Sukuk are also subject to the risk that some Islamic scholars may deem certain sukuk as not meeting Islamic investment principles subsequent to the sukuk being issued.
This material is for general information only and is not a research report or commentary on any investment products offered by Saturna Capital. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.
We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This podcast is prepared based on information Saturna Capital deems reliable; however, Saturna Capital does not warrant the accuracy or completeness of the information. Investors should consult with a financial adviser prior to making an investment decision. The views and information discussed in this commentary are at a specific point in time, are subject to change, and may not reflect the views of the firm as a whole.
All material presented in this publication, unless specifically indicated otherwise, is under copyright to Saturna. No part of this publication may be altered in any way, copied, or distributed without the prior express written permission of Saturna.