Q2 2022

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During the second quarter of 2022, the Federal Reserve officially removed “transitory” from its dictionary, acknowledging that inflation remained higher and more persistent than expected.  Fears of further acceleration pushed the Fed governors to break out their bazookas, hiking the fed funds rate by 50 basis points (bps) on May 4 and then by 75 bps on June 15, pushing the rate to 1.58% compared to less than a tenth of a percent at the start of the year.¹  The last time the Fed increased rates by 75 bps was November 1994.²  Apart from the carnage in bond markets, anticipation of the spike helped push the stock market, as measured by the S&P 500 Index, into bear market territory in June by declining nearly -20% from its peak at the start of the year.  In fact, the January-June 2022 performance of the S&P 500 was its worst since 1970.  Interestingly, there have been six previous stock market declines of at least -15% in the first half of the year since 1932, and each were followed by an average 24% bounce in the second half.³  Perhaps that history steels the spines of Fed governors who are unanimous in their view that more increases are necessary to rein in inflation, which climbed to 8.6% in May, the highest since 1981.⁴  According to the Fed “dot plot,” every governor anticipates a fed funds target level midpoint of more than 3%, ranging from 3.125% to 3.875%.⁵

Such aggressive monetary tightening raises the prospect of tipping the economy into recession.  While the aggressive hikes of 1994 succeeded in engineering a “soft landing,”⁶ the Fed was acting preemptively to head off price pressures at that time, rather than racing to catch up to an inflationary ship that had left port.  Nor was the Fed simultaneously engaged in quantitative tightening, working to assess global supply chain bottlenecks, or studying the effects of a major Russian invasion on commodity markets.  Given the confluence of events, escaping an economic downturn would be a feat worthy of Houdini.  Indeed, Fed Chairman Jerome Powell has admitted as much: “Is there a risk we would go too far? Certainly there’s a risk.  The bigger mistake to make — let’s put it that way — would be to fail to restore price stability.”⁷

Environment and Outlook

What about the stock market?  As noted above, we entered bear market territory in June.  Apart from the occasional short-lived upswing and a relief rally inspired by Ukrainian battlefield success in the second half of March, the market has consistently trended down.  While market declines have lowered valuations and heartened some investors, valuation depends on two factors: price and earnings.  Lower stock prices and steady earnings estimates, as we have seen to-date, lead to lower valuations.  But what happens if (or when) the earnings estimates fall?  We cannot say with certainty that the Fed’s actions inevitably imply recession, but history points to chances being more likely than not, while recessions do inevitably lead to earnings reductions.

As we emerge from the current period of disruption, what sort of environment can we expect on the other side? There are two competing theses.  The first is that we return to a period like the decade following the Global Financial Crisis (GFC): anemic growth, low inflation, and low interest rates.  Presumably, such an easy money environment would support renewed asset price inflation with housing and stocks once again off to the races, the latter focusing on growth opportunities, be they immediate or in the future.  Elements contributing to this outlook include the deflationary effect of aging demographics, stagnant-to-falling developed world populations, and continued efficiency gains from technological developments such as automation.

The second thesis is that a pullback in globalization (coupled with an end to the China-driven surge in working age population that has helped restrain prices for much of the century) will empower workers to demand higher wages, leading companies to increase prices, creating a cycle of embedded inflation and implying higher interest rates.  Any sign of trouble will spur governments to act more aggressively than they did following the GFC and more closely follow their pandemic playbooks, given the apparent victory of Modern Monetary Theory and the absence of bond market vigilantes.

While it is far too early to settle upon the likely outcome, between now and then we face the highest interest rates in decades.  Given our focus on strongly cash generative, low-debt companies, such an environment may prove relatively beneficial for our investments.  They will not be burdened by high interest payments and may be able to exploit difficulties faced by other, more heavily indebted companies, or take advantage of opportunities to invest when others cannot.

Amana Income Fund

Amana Growth Fund

Amana Developing World Fund

Amana Participation Fund

Performance Summary

As of June 30, 2022

^A Expense ratios shown are as stated in the Funds' most recent Prospectus dated September 24, 2021.
^B Restated to reflect a reduction in the Advisory and Administrative Services fee, which became effective on December 1, 2020.

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 1-800-728-8762 or visiting www.amanafunds.com. 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 NASDAQ Composite Index is an index comprised of nearly all the stocks listed on the Nasdaq stock exchange. The MSCI Emerging Markets Index, produced by Morgan Stanley Capital International, measures equity market performance in over 20 emerging market countries.  The FTSE Sukuk Index measures the performance of global Islamic fixed-income securities, also known as sukuk.  When available, Saturna uses total return components of indices mentioned.  Investors cannot invest directly in the indices.

Institutional Shares of the Amana Funds began operations September 25, 2013.

The Amana Participation Fund began operations September 28, 2015.

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 goes 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.

Morningstar Ratings™

As of June 30, 2022

Performance data quoted herein represents past performance and does not guarantee future results.

© 2022 Morningstar^®. All rights reserved.  Morningstar, Inc. is an independent fund performance monitor. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely.  Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

^A Morningstar Ratings^™ ("Star Ratings") are as of June 30, 2022.  The Morningstar Rating^™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history.  Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes.  It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance (not including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics.  The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

% Rank in Category is the fund's percentile rank for the specified time period relative to all funds that have the same Morningstar category.  The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.  The top-performing fund in a category will always receive a rank of 1.  Percentile ranks within categories are most useful in those categories that have a large number of funds.

Unshaded stars indicate extended performance.  Extended performance is an estimate based on the performance of a Fund's oldest share class, adjusted for fees.

The Amana Mutual Funds offer two share classes – Investor Shares and Institutional Shares, each of which has different expense structures.

Footnotes

¹ “Federal Funds Effective Rate.” FRED: Economic Data. https://fred.stlouisfed.org/series/DFF

²  Klebnikov, Sergei. “Here’s How Markets Reacted Last Time The Fed Hiked Rates By 75 Basis Points.” Forbes, June 14, 2022. https://www.forbes.com/sites/sergeiklebnikov/2022/06/14/heres-how-markets-reacted-last-time-the-fed-hiked-rates-by-75-basis-points/?sh=66ab30d96b3b

³  Otani, Akane. “Stock Markets Post Worst First Half of a Year in Over Five Decades.” The Wall Street Journal, July 1, 2022. https://www.wsj.com/articles/markets-head-toward-worst-start-to-a-year-in-decades-11656551051?mod=djemMoneyBeat_us

⁴  “United States Inflation Rate.” Trading Economics. https://tradingeconomics.com/united-states/inflation-cpi

⁵  Federal Open Market Committee. “FOMC Projections materials.” Board of Governors of the Federal Reserve System, June 15, 2022. https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20220615.htm

⁵  Ibid.

⁷  Timiraos, Nick, and Fairless, Tom. “Powell Says Fed Must Accept Higher Recession Risk to Combat Inflation.” The Wall Street Journal, June 29, 2022. https://www.wsj.com/articles/powell-says-pandemic-could-alter-inflation-dynamics-11656509259

⁸ Sharma, Ruchir. “Emerging markets are in better shape than you think.” Financial Times, July 3, 2022. https://www.ft.com/content/25701623-8322-4af8-a34a-bb7f289bb846?shareType=nongift

⁹ The GCC is an acronym for the Gulf Cooperation Council, a political and economic alliance of six countries in the Arabian Peninsula. Its members include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). The GCC was established in 1981 to promote security and stability for its members and has an estimated population of 54 million.

¹⁰ Sahu, Rakesh and Bhogaita, Chavan. “Market Insights & Strategy: Global Markets.” First Abu Dhabi Bank, February 11, 2022.  https://www.bankfab.com/-/media/fabgroup/home/cib/market-insights/daily-morning-news/daily-morning-news-pdfs/2022/february/20220211.pdf

¹¹ “Saudi Arabia Brings Forward Budget Surplus Target Date.” FitchRatings, October 5, 2021. https://www.fitchratings.com/research/sovereigns/saudi-arabia-brings-forward-budget-surplus-target-date-05-10-2021

¹² Ugal, Nishant. "Saudi Arabia eyes first budget surplus in eight years as spending on strategic projects continues.” Upstream: Energy Exposed, December 16, 2021. https://www.upstreamonline.com/finance/saudi-arabia-eyes-first-budget-surplus-in-eight-years-as-spending-on-strategic-projects-continues/2-1-1123080

Important Disclaimers and Disclosure

This publication should not be considered investment, legal, accounting, or tax advice or a representation that any investment or strategy is suitable or appropriate to a particular investor's circumstances or otherwise constitutes a personal recommendation to any investor.  This material does not form an adequate basis for any investment decision by any reader and Saturna may not have taken any steps to ensure that the securities referred to in this publication are suitable for any particular investor.  Saturna will not treat recipients as its customers by virtue of their reading or receiving the publication. 

The information in this publication was obtained from sources Saturna believes to be reliable and accurate at the time of publication. 

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.

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. 

Effective maturity, modified duration, and effective duration are measures of a fund's sensitivity to changes in interest rates and the markets.  A fund's effective maturity is a dollar-weighted average length of time until principal payments must be paid.  Longer maturities typically indicate greater sensitivity to interest rate changes than shorter maturities.  Modified duration differs from effective maturity in that it accounts for interest payments in addition to the length of time until principal payments must be paid.  Longer durations tend to indicate greater sensitivity to interest rate changes than shorter durations.  Call options and other security specific covenants may be used when calculating effective maturity and modified duration.

A fund's 30-Day Yield, sometimes referred to as standardized yield, current yield, or SEC yield, is based on methods of computation prescribed in SEC Form N-1A.  Calculated by dividing the net investment income per share during the preceding 30 days by the net asset value per share on the last day of the period, the 30-Day Yield provides an estimate of a fund's investment income rate, but may not equal the actual income distribution rate.

We note that unlike many funds, the Amana Funds' expenses are not subsidized by its adviser, Saturna Capital, therefore the 30-Day Yields presented are actual, according to the SEC's calculation methodology.