Q1 2015 • March 31, 2015 | Saturna Capital

Following Principles of Islamic Finance


Stock market performance in the first quarter was essentially unchanged for commonly cited US indices such as the S&P 500 or the Dow Jones Industrials. But the tech-heavy Nasdaq Index gained 3.86%, and the Russell 2000 Index rose 4.32%. The broadly accepted rationale for the disparity is that larger companies represented in the S&P 500 have significant overseas exposure, while those in the Nasdaq and Russell indices are generally smaller and more domestically oriented. The US Dollar Index (DXY) zoomed to a multiyear high as the greenback strengthened, which can erode overseas sales and earnings.

Elsewhere in the world, weaker currencies and central bank quantitative easing have supported buoyant stock market performance in local currency terms. The Nikkei 225 gained 10.69% (yen) and 10.24% (US dollar) as the dollar-yen exchange rate was stable over the quarter. From the end of July though the end of December, however the yen weakened -14.18% against the dollar, so the returns for dollar-based investors depend on the period under review. For example, the European Stoxx 50 Index soared 17.93% in euro terms over the first quarter. Translate that into dollars, however, and the gain was only 4.55% due to significant euro weakening. In Europe and Japan the rationale for strong local performance is the exact opposite of the US; larger companies captured in the major indices tend to have a significant portion of overseas (US) sales providing a solid boost to their local currency results.

US Dollar Index

The issue of currency exchange rates received a jolt in mid-January when the Swiss central bank abandoned its effort to contain the Swiss franc.¹ Tensions within the eurozone and concerns about Greece resulted in a flight to safety in strong currencies that exerted heavy appreciation pressure on the franc. Fearing diminished local industry competitiveness, the bank adopted a policy in early 2012 of selling francs and buying euros to maintain the 1.20 level. After three years of success, the bank threw in the towel, and on January 15 the Swiss franc spiked from 1.20 to 0.98 in a single day. A 20% strengthening of a currency in a day imparts significant deflationary pressures — pressures that were already building within Europe and that are now manifest in negative sovereign yields across the continent.

Economically in the US it's déjà vu all over again. Atrocious weather across much of the country restrained economic activity in the first quarter of 2014 leading to concerns over the pace of recovery that were ultimately proven unfounded.

This year, winter brought us a replay, and once again indicators of first quarter activity are looking weak. Are these signs of an impending downturn or just another meteorological blip? We believe the latter. It's hard to go shopping or even get to work when your car is buried under three feet of snow. Fundamentally, several indicators appear positive, including unemployment, loan growth to nonfinancial business, declining debt burdens among consumers, and rising consumer confidence. The strong dollar will undoubtedly create challenges for exporters, but the US remains an economy primarily driven by domestic activity.

Civilian Unemployment Rate

Loans to Non-Financial Corporations


Household Debt Service Payments as a Percent of Disposable Person Income

University of Michigan: Consumer Sentiment



We are sanguine regarding the prospects for US equities for the remainder of the year. Negative earnings adjustments have dominated year-to-date, but the winter weather and the strengthening of the US dollar largely explain this development. The significant returns of the past several years are unlikely to continue, but we see few signs of impending disaster. In Europe the fears of a "Grexit" are growing, which presents a short-term risk, but Greece is a minor part of the eurozone and economic indicators of late point toward a recovery that's gathering pace. Even Warren Buffett believes a Greek exit from the euro would be manageable.² We remain unconvinced that Abe-nomics will provide a long-term solution to Japan's problems, but the vastly weaker yen has provided a boost to exporters, and we are starting to see some wage increases among those companies that benefit most directly, such as Toyota. 

In emerging markets conditions varied widely. South and Central America posted negative returns in the quarter, led by corruption-based disaster in Brazil. Eastern Europe managed a small gain due to a rebound in Russia, but Turkey was weak. South Africa provided positive returns as the rand stabilized somewhat against the dollar. Asia Pacific was the big winner in the quarter, led by China, South Korea, and Taiwan. New signs of economic slowing appear every day in China, but the stock market has soared on expectations that further slowing will lead to government support measures.


Amana Income Fund

The Amana Income Fund Investor shares slipped -0.19% in the first quarter, substantially better than the -0.72% decline in the Russell 1000 Value Index, although lagging the 0.95% return for the S&P 500. The first quarter was a difficult one for value investors. Benchmark returns were negative for the Consumer Staples, Energy, Financials, Information Technology, and Utilities sectors. In all of these sectors the contribution to Fund returns was superior to the benchmark contribution. Consumer Discretionary and Health Care were the only benchmark sectors to register significant gains, but here our performance wasn't as impressive. Despite positive returns to Consumer Discretionary stocks, we posted a loss due to Genuine Parts giving back gains after rising 21.50% in the final quarter of last year. The same was true in Health Care where we lagged benchmark returns primarily due to AbbVie, which also had a strong Q4 2014.

While trailing the benchmark returns, Health Care still provided solid gains with major pharmaceutical companies accounting for five of the top seven contributors. Microsoft and Intel appreciated well ahead of the market in 2014 but are affected by having significant overseas sales, particularly Microsoft, and both reduced guidance in the first quarter.

After entering the Top Ten Holdings list on strong fourth quarter performance, Genuine Parts dropped out following its weak first quarter this year. Also exiting was Canadian National Railway. Carlisle Companies, Colgate-Palmolive, and Honeywell International entered the list. None of these are new holdings but all have appreciated since the start of the year.

As of March 31, 2015

Ten Largest Contributors Return Contribution
Pfizer 12.66% 0.30
Bristol-Myers Squibb 9.27% 0.27
Novartis ADS 9.42% 0.25
Jm Smucker 15.27% 0.25
Eli Lilly 6.06% 0.16
Microchip Technology 9.17% 0.16
GlaxoSmithKline ADS 9.57% 0.15
General Mills 6.94% 0.14
Honeywell International 4.91% 0.12
Rockwell Automation 4.89% 0.12
Ten Largest Detractors Return Contribution
Microsoft -11.85% -0.35
Genuine Parts -11.98% -0.33
Intel -13.22% -0.30
United Parcel Service, Class B -12.17% -0.26
Procter & Gamble -9.41% -0.22
WW Grainger -7.07% -0.17
Parker Hannifin -7.41% -0.17
Exxon Mobil -7.37% -0.15
Kimberly-Clark -6.54% -0.14
Abbvie -9.85% -0.14
Top Ten Holdings Portfolio Weight
Bristol-Myers Squibb 3.3%
Illinois Tool Works 3.1%
PPG Industries 2.9%
Eli Lilly 2.9%
Novartis ADR 2.9%
3M 2.8%
Carlisle 2.8%
Pfizer 2.7%
Honeywell International 2.7%
Colgate-Palmolive 2.7%

Asset Weighted Average Debt to Market Cap: 14.5%


Amana Growth Fund

Amana Growth Fund Investor shares gained 1.58%, handily outpacing the S&P 500, but lagging the Russell 1000 Growth Index, which rose 3.84% over the period. Several of the stocks that drove Amana Growth to strong returns in the fourth quarter of 2014 took a breather to start the new year. Apple, however, was not one of them; its contribution to Fund returns was second only to Danish pharmaceutical company Novo Nordisk and marked the fourth consecutive quarter it appeared in the list of Top Ten Contributors. Both stocks are among our longest-held positions in the Fund, having been purchased in the 1990s.

Information Technology and Health Care represent our largest sector exposures. As can be seen in the top contributors list, both sectors were well represented with Akamai and Intuit joining Apple, while Novartis and VCA (admittedly health care for pets) joined Novo Nordisk. Consumer stocks rounded out most of the remainder with Church & Dwight, Estee Lauder, and Lowe's all performing well. The latter, along with Home Depot, has appreciated strongly over the past year showing that even in the absence of a buoyant new construction market there's still plenty of home improvement work to be done.

Not all of the news in technology was positive. Mobile chip behemoth Qualcomm suffered from market share concerns. Solid-state drive (SSD) maker SanDisk was punished on two separate occasions during the quarter as the company issued lukewarm guidance early in the year, which it subsequently reduced at the end of the quarter. While unimpressed with management communication, we see SSDs as a growth industry and SanDisk as one of the key players.

One would think lower oil prices would be a boon to UPS, but management has had a hard time over the past couple of holiday seasons calibrating its operations to demand. After finding itself stretched to the breaking point in 2013, UPS vowed it would not happen again and, indeed, successfully adjusted its service levels during the 2014 holidays. The unexpectedly high costs incurred to provide that service, however, led to lower than anticipated earnings. Other transport stocks, such as railroads, have also suffered of late with concerns over oil shipments often cited as the reason.

As of March 31, 2015

Ten Largest Contributors Return Contribution
Novo-Nordisk ADS 28.07% 0.62
Apple 13.17% 0.50
Akamai Technologies 12.84% 0.39
Church & Dwight 8.83% 0.27
Novartis ADS 9.42% 0.25
Lowe's 8.49% 0.22
Estee Lauder, Class A 9.45% 0.22
Intuit 5.47% 0.18
VCA 12.41% 0.18
Harris 10.35% 0.14
Ten Largest Detractors Return Contribution
SanDisk -34.82% -0.61
United Parcel Service, Class B -12.17% -0.32
Union Pacific -8.67% -0.27
Fastenal -12.33% -0.23
Qualcomm -6.17% -0.18
Norfolk Southern -5.58% -0.14
ASML Holding -6.31% -0.13
Trimble Navigation -5.05% -0.11
Johnson & Johnson -3.12% -0.09
Lincoln Electric Holdings -4.93% -0.08
Top Ten Holdings Portfolio Weight
Adobe Systems 4.2%
Apple 4.2%
Amgen 4.1%
Intuit 3.6%
Akamai Technologies 3.4%
Church & Dwight 3.3%
Union Pacific 2.9%
Lowe's 2.8%
Novo Nordisk ADS 2.8%
PepsiCo 2.8%

Asset Weighted Average Debt to Market Cap: 10.5%


Amana Developing World Fund

After easily surpassing the benchmark in 2014, the Amana Developing World Investor shares had a rough and tumble first quarter in that performance was rough and several stocks tumbled. The Fund declined -3.67% compared to a 2.24% rise in the MSCI Emerging Markets Index. From a macro perspective, the Fund suffered from poor performance in Latin America, an underweight position in Asia in general and China in particular, and from US-based companies that conduct the majority of their activity in developing markets.

China, Hong Kong, Taiwan, and South Korea contributed the most to benchmark returns in the quarter. We do not participate in the latter two, and we are underweight China and Hong Kong (primarily Chinese companies listed on the Hong Kong Exchange). Signs of China's economic slowdown have been growing in frequency and severity, which has caused us to proceed cautiously. We are also cognizant that post the global financial crisis, China embarked on an economic stimulus program that dwarfed every other nation's efforts. Taken together, these do not point to a promising economic environment. Investors, however, have decided that Chinese economic slowing will mean future government support, and they are probably right. Given the investment boom of the past several years, it's also likely true that government support will be reflected in asset prices (and capital flight) rather than productive investment, as has been the case in the US and, more recently, in Europe and Japan.

While we are underweight Asia, companies from that region dominated positive returns. Bangkok Dusit Medical has been an excellent investment since we first purchased it in 2012, as have IHH Healthcare and KPJ Healthcare in Malaysia. All three companies benefit from increasing domestic health care spending, as well as medical tourism from wealthier regions. Wuxi Pharmatech, Lenovo, and CNOOC represented China, while Indonesia and the Philippines rounded out the group. South Africa retailer Clicks Group was the only non-Asian entrant.

As noted, Latin America has been difficult with three of the top four detractors coming from Brazil or Mexico. Kroton has been troubled by changes to government financial support for education, and Genomma Lab by poor domestic sales. M. Dias Branco has suffered largely from the collapsing Brazilian real, which raises import costs for wheat and diminishes the value of the holding in US dollars. Western Digital's weakness can be traced to a continuing shift in demand away from hard disk drives and the translation effect of the stronger dollar as most of their products are sold to assemblers in emerging markets. While the Indonesian rupiah has also weakened, margin pressures have largely affected cement producer Semen Indonesia. However, Indonesia needs significant infrastructure investment, and its government appears committed, so we are patient with Semen Indonesia.

As of March 31, 2015

Ten Largest Contributors Return Contribution
Bangkok Dusit Medical Services 17.14% 0.38
SM Prime Holdings 17.31% 0.36
IHH Healthcare 17.74% 0.25
Clicks Group 9.61% 0.23
Wuxi Pharmatech Cayman 15.18% 0.22
Lenovo Group 11.01% 0.19
KPJ Healthcare 9.41% 0.15
Indofood Cbp Sukses Makmur  6.14% 0.12
Unilever ADS 3.82% 0.08
CNOOC ADS 4.71% 0.07
Ten Largest Detractors Return Contribution
Kroton Educacional -44.80% -0.88
Genomma Lab Internacional, Class B -50.17% -0.88
Western Digital -17.34% -0.60
M. Dias Branco -21.32% -0.42
Semen Indonesia Persero -20.17% -0.40
Aspen Pharmacare Holdings -9.65% -0.33
Baidu ADS -8.58% -0.23
MTN Group -8.24% -0.15
Sasol ADS -10.35% -0.14
Alamos Gold -18.23% -0.14
Top Ten Holdings Portfolio Weight
VF 3.2%
Aspen Pharmacare Holdings 3.1%
MercadoLibre 3.0%
Western Digital 2.9%
Aboitiz Power 2.9%
Mead Johnson Nutrition 2.8%
Bangkok Dusit Medical Services 2.7%
Clicks Group 2.6%
Baidu ADS 2.6%
SM Prime Holdings 2.5%

Asset Weighted Average Debt to Market Cap: 13.7%



¹ Schweizerische National Bank Press Release. Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75%, January 15, 2015. http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf

² Buhayar, Noah and Bloomfield, Doni. Buffett Says Greek Exit From Euro 'May Not Be a Bad Thing." Bloomberg Business, March 31, 2015. http://www.bloomberg.com/news/articles/2015-03-31/buffett-says-greece-exit-from-euro-zone-may-not-be-a-bad-thing-


Performance Summary

As of March 31, 2015

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Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year Expense Ratio
Amana Income Investor Shares (AMANX) 7.54% 13.40% 11.55% 9.62% 1.15%
Amana Income Institutional Shares (AMINX)¹ 7.82% n/a   n/a   n/a   0.90%
S&P 500 Index 12.73% 16.10% 14.46% 8.01% n/a
Russell 1000 Value Index 9.33% 16.43% 13.75% 7.19% n/a
Amana Growth Investor Shares (AMAGX) 12.04% 12.26% 11.44% 10.10% 1.08%
Amana Growth Institutional Shares (AMIGX)¹ 12.27% n/a   n/a   n/a   0.83%
S&P 500 Index 12.73% 16.10% 14.46% 8.01% n/a
Russell 1000 Growth Index 16.09% 16.33% 15.62% 9.35% n/a
Amana Developing World Investor Shares (AMDWX)² -3.39% -0.99% 0.03% n/a   1.59%
Amana Developing World Institutional Shares (AMIDX)¹ -3.01% n/a   n/a   n/a   1.40%
MSCI Emerging Markets Index 0.44% 0.31% 1.75% 8.47% n/a

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Expense ratios shown are as stated in the Funds' most recent Prospectus dated August 15, 2014.

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 888-732-6262 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.

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.

All material presented in this report, unless specifically indicated otherwise, is under copyright to Saturna. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Saturna. Unless otherwise indicated, all trademarks, service marks, and logos used in this report are trademarks or service marks of Saturna.

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.

Asset-weighted average debt to market capitalization: This ratio represents the average debt to market capitalization of the portfolio. It is calculated by taking the debt to market capitalization for each company (its debt divided by its market capitalization), then weighting these values (multiplying each by the company's percent share of total portfolio assets), then totaling the weighted values.

The Nasdaq Composite Index measures the performance of more than 5,000 U.S. and non-U.S. companies traded "over the counter."

The US Dollar Index is a free float capitalization-weighted index of the 500 most highly capitalized European companies.

The Nikkei 225 Stock Average Index is a price-weighted average of the 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

The European Stoxx 50 Index is a European blue chip stock index representing the leading 50 supersector stocks from 12 eurozone countries.