Q2 2015 • June 30, 2015 | Saturna Capital

Following Principles of Islamic Finance


The market environment in the US was subdued in the second quarter with the S&P 500 rising a mere 0.28% and the Dow Jones Index dropping -0.29%. The Russell Value and Growth Indices gained 0.11% and 0.12%, respectively. Only the NASDAQ Index registered a meaningful change, gaining 2.06%. The same was true in Europe with the MSCI EAFE Index rising less than 1%. The continued weakening of the Japanese yen spurred the Nikkei onto a 3.55% gain in US dollar terms, while Hong Kong's Hang Seng Index rode China's coattails to a 7.24% rise. All of that, however, occurred before quarter-end, which marked the return of volatility. China's Shanghai Composite Index had soared nearly 60% from the start of the year through its peak on June 15, but from that date through July 8 it plummeted over 30% only to rebound 11% the following two days after the government adopted market support measures wholly contrary to the concept of free and open trading. It's interesting that market-stabilizing measures were unnecessary while the index defied both gravity and financial common sense during its rise.

The Chinese market roller coaster distracted attention from the continuing Greek saga concerning the country's future in the eurozone. The prime minister called a surprise referendum, which further surprised when the Greeks offered a resounding "no" to the question of whether they should accept further austerity in return for financial assistance. Just when a Greek exit from the eurozone (Grexit) appeared inevitable, the government returned to the Troika (The European Commission, the European Central Bank, and the International Monetary Fund) with a package of measures largely indistinguishable from the package rejected by Greek voters. Perhaps a glimpse over the abyss convinced the government it ought to reconsider.

As expected, the first quarter US GDP concerns we discussed in April have largely faded from view. It remains to be seen whether record-breaking temperatures and drought will have the same deleterious effect on economic output as arctic temperatures and overabundant snowfall.

European economies show signs of recovery. While a Grexit poses risks, Nobel laureate Paul Krugman points out that the Greek economy is roughly the same size as the greater Miami area and is unlikely to pose major economic risks to Europe.¹ Banks would certainly suffer, but governments will find it much easier politically to support domestic financial institutions than a perceived profligate Greek government.


It can be argued there are two major questions facing global investors today and one sideshow:

  1. Will Greece exit the euro?
  2. When will the Fed start raising rates?
  3. What will happen with the markets in China?

In our view the first question points more to opportunity than risk. We view a Grexit and any associated European market turmoil as an opportunity to increase exposure to the continent given our belief that the economic fallout would be manageable.

The second question has been a source of endless speculation with recent developments pushing back the earlier consensus expectation of a September rate hike. Federal Reserve crystal ball gazing is not our stock-in-trade, but we recognize the importance of a return to normalized monetary policy. Any rate hike will almost certainly lead to short-term market weakness in the US and elsewhere, but the strengthening economy signaled by higher rates should be a longer-term positive for corporate activity.

We don't believe the gyrations of Chinese stock markets are important in the context of global economic performance. In fact, it can be argued that they're not even that important in terms of Chinese economic performance given the small number of market participants relative to the population and the fact that consumption (the economic activity most directly influenced by stock market wealth effects) remains a small part of the Chinese economy at roughly 36%.²

Further volatility, however, may provide an opportunity to invest in China-related businesses at significantly lower prices. We are currently focused on Hong Kong domiciled and listed companies due to better corporate governance.


Amana Income Fund

The Amana Income Fund Investor Shares dipped -0.58% in the second quarter, lagging the 0.11% gain in the Russell 1000 Value Index and the 0.28% rise in the S&P 500. Year-to-date (YTD) the Fund's -0.77% decline is in line with the Russell Value's -0.62% contraction. Of course, with such small YTD movements the Fund's position relative to the index can quickly change.

Second quarter stock selection suffered in Consumer Staples, Industrials, and Materials. We are overweight those sectors relative to the benchmark, which exacerbated the damage. Colgate Palmolive, J.M. Smucker, du Pont, and Canadian National Railway were the main culprits. Smucker performed very well in the first quarter, and we applaud their recent pet food acquisition, but they remain heavily exposed to the weakening center-of-the-store segment of grocery. Their coffee business faces challenges as well due to consumption habit changes. Colgate's large Latin American business has suffered from rapidly depreciating currencies. Du Pont management prevailed in a proxy battle with activist investors, which was not taken well by the market, while CNR has suffered from declining coal shipments.

In more positive news, our selections in Consumer Discretionary (Nike), Energy, Health Care (Eli Lilly and AbbVie), and Information Technology (Microsoft) outpaced the benchmark. In the top contributors table below we see representatives from each of those sectors, excepting Energy. The performance gap between the Fund and its benchmark largely resulted from of a lack of exposure to Financials — the sector that provided the single largest contribution to benchmark returns in the second quarter.

We reduced our weight in Bristol Myers due to its very strong performance over the past year and lofty multiples.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Eli Lilly 15.71% 0.47
Carlisle 8.36% 0.23
Microsoft 9.30% 0.22
AbbVie 15.73% 0.21
Nike, Class B 7.96% 0.20
Rockwell Automation 8.02% 0.20
Bristol-Myers Squibb 3.77% 0.12
McCormick & Co 5.53% 0.09
Abbott Laboratories 6.48% 0.07
Stanley Black & Decker 10.92% 0.07
Ten Largest Detractors Return Contribution
Canadian National Railway -13.27% -0.31
E.I. du Pont de Nemours -9.89% -0.24
Air Products & Chemicals -9.02% -0.23
3M -5.86% -0.16
Illinois Tool Works -5.01% -0.16
Colgate-Palmolive -5.15% -0.14
GlaxoSmithKline ADS -8.63% -0.13
JM Smucker  -5.81% -0.11
United Technologies -4.83% -0.09
Genuine Parts -3.28% -0.08
Top Ten Holdings Portfolio Weight
Eli Lilly 3.5%
Carlisle 3.2%
Illinois Tool Works 3.1%
PPG Industries 3.1%
Novartis ADR 3.0%
Bristol-Myers Squibb 3.0%
Nike, Class B 2.8%
Honeywell International 2.8%
Rockwell Automation 2.8%
Pfizer 2.8%

Asset Weighted Average Debt to Market Cap: 14.2%


Amana Growth Fund

After a solid first quarter the Amana Growth Fund Investor Shares fell -1.81%, well behind the 0.12% rise in the Russell 1000 Growth Index. Sector allocation played a role as we are overweight Industrials, which performed poorly, and underweight Consumer Discretionary, which was strong. As was the case in Q1, the strongest contributors to Consumer Discretionary performance were stocks such as Amazon and Disney, which we avoid due to our investment guidelines. The weakness in Industrials was concentrated in our rail positions. Both Norfolk Southern and Union Pacific performed poorly due to falling coal shipments.

In Health Care we enjoyed positive returns, but the weakness in Amgen and Agilent detracted from the strength of Eli Lilly. Adobe's strong performance and good returns from Intuit buoyed Information Technology, but continued weakness from Qualcomm and Trimble hindered the Fund.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Adobe Systems 9.56% 0.40
Eli Lilly 15.71% 0.36
Intuit 4.19% 0.15
Estee Lauder, Class A 4.49% 0.12
Novo-Nordisk ADS 2.57% 0.07
ASML Holding 3.80% 0.07
Convergys 11.81% 0.07
Express Scripts Holding 2.50% 0.06
Xilinx 5.13% 0.06
Apple 1.22% 0.05
Ten Largest Detractors Return Contribution
Norfolk Southern -14.62% -0.36
Union Pacific -11.48% -0.33
Lowe's -9.69% -0.27
Qualcomm -9.05% -0.25
Amgen -3.48% -0.15
Church & Dwight -4.64% -0.15
TJX Companies -5.24% -0.14
Trimble Navigation -6.90% -0.14
Agilent Technologies -6.92% -0.13
Keysight Technologies -16.04% -0.13
Top Ten Holdings Portfolio Weight
Adobe Systems 4.8%
Apple 4.4%
Amgen 4.1%
Intuit 3.9%
Akamai Technologies 3.5%
Church & Dwight 3.3%
Novo Nordisk ADS 3.0%
Express Scripts Holding 2.9%
PepsiCo 2.8%
Estee Lauder, Class A 2.8%

Asset Weighted Average Debt to Market Cap: 10.4%


Amana Developing World Fund

The Amana Developing World Fund Investor Shares continued to fall in the second quarter, shedding -2.15% versus a 0.69% rise in the MSCI Emerging Market Index. Disappointingly, one significant source of the weakness was developed country companies with significant emerging markets exposure that the Fund owns for the diversification and corporate governance benefits. Western Digital, VF Corp, Mead Johnson, and Colgate-Palmolive are all examples.

The other source of underperformance has been Southeast Asia in general — Malaysia and Indonesia in particular. Both countries have suffered from currency depreciation, but the larger issue has been poor stock performance, especially in the case of Indonesia. The election of former Jakarta mayor Jokowi to the Indonesian presidency was supposed to usher in an era of more competent government but that promise remains unfulfilled.

The final piece of the underperformance puzzle was below-benchmark exposure to China. During the quarter, Hong Kong's Hang Seng China Enterprises Index jumped 7.76%, lifted by the 14.77% rise in the Shanghai Composite. From the end of the quarter through mid-July, however, the index has shed -9.73%.

As of June 30, 2015

Ten Largest Contributors Return Contribution
MercadoLibre 15.74% 0.45
Kroton Educacional 19.42% 0.22
Telenor 10.37% 0.20
MTN Group 11.33% 0.19
WuXi PharmaTech 8.97% 0.14
Manila Electric Company 8.08% 0.13
Sasol ADS 10.66% 0.12
Hong Kong & China Gas ADS 6.19% 0.11
Ford Otomotiv Sanayi 5.41% 0.09
Unilever ADS 3.74% 0.08
Ten Largest Detractors Return Contribution
Western Digital -13.28% -0.37
Jasa Marga -25.47% -0.33
Indofood CBP Sukses Makmur -15.33% -0.30
Mead Johnson Nutrition -9.85% -0.26
Turk Traktor Ve Ziraat Makin -13.60% -0.25
Kalbe Farma -11.06% -0.24
VF -6.97% -0.21
Aspen Pharmacare Holdings -6.47% -0.19
Semen Indonesia -11.44% -0.18
Axiata Group -9.34% -0.17
Top Ten Holdings Portfolio Weight
MercadoLibre 3.4%
VF 2.9%
Aspen Pharmacare Holdings 2.9%
Aboitiz Power 2.8%
Bangkok Dusit Medical Services  2.5%
Clicks Group 2.5%
SM Prime Holdings 2.5%
Western Digital 2.4%
Baidu ADS 2.4%
Telekomunikasi Indonesia ADS 2.2%

Asset Weighted Average Debt to Market Cap: 14.2%



¹ Krugman, Paul. Greece's Economy Is a Lesson for Republicans in the U.S. The New York Times, July 10, 2015. http://www.nytimes.com/2015/07/10/opinion/paul-krugman-greeces-economy-is-a-lesson-for-republicans-in-the-us.html

² Roach, Stephen. Why the Stock Meltdown Doesn't Spell Doom for China. Slate.com, July 8, 2015. http://www.slate.com/articles/business/moneybox/2015/07/china_stock_meltdown_why_its_actual_economy_will_be_just_fine.html


Performance Summary

As of June 30, 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) 2.18% 14.37% 13.75% 9.64% 1.15%
Amana Income Institutional Shares (AMINX)¹ 2.42% n/a   n/a   n/a   0.90%
S&P 500 Index 7.42% 17.29% 17.33% 7.89% n/a
Russell 1000 Value Index 4.13% 17.33% 16.49% 7.02% n/a
Amana Growth Investor Shares (AMAGX) 7.00% 13.07% 13.37% 9.47% 1.08%
Amana Growth Institutional Shares (AMIGX)¹ 7.19% n/a   n/a   n/a   0.83%
S&P 500 Index 7.42% 17.29% 17.33% 7.89% n/a
Russell 1000 Growth Index 10.55% 17.97% 18.58% 9.10% n/a
Amana Developing World Investor Shares (AMDWX)² -9.72% -0.27% -0.13% n/a   1.59%
Amana Developing World Institutional Shares (AMIDX)¹ -9.43% n/a   n/a   n/a   1.40%
MSCI Emerging Markets Index -5.12% 3.71% 3.68% 8.11% 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.

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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.

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 Dow Jones Industrial Average (Dow or DJIA) index is a widely followed price-weighted index of 30 of the largest, most widely held U.S. stocks.

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

The MSCI EAFE Index is an index known by an acronym for the Europe, Australasia, and Far East markets produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization.

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 Hang Seng is a free-float capitalization-weighted index of companies selected from the stock exchange of Hong Kong representing the Commerce and Industry, Finance, Utilities, and Properties sectors.

The Hang Seng China Enterprises Index is a free-float capitalization-weighted index comprised of H-shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index.

The Shanghai Composite Index is a freefloatweighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges (China).