Q4 2015 • December 31, 2015 | Saturna Capital

Following Principles of Islamic Finance

Q4 2015 Highlights:

We review the highs and lows of 2015 and our outlook for 2016.

  • Price of oil fell below $30 to a 12-year low.
  • China still a wild card after epic late-year market rout.
  • F.A.N.G. stocks (Facebook, Amazon, Netflix, Google) spelled relief.
  • The US dollar strengthened against many foreign currencies.
  • Consumer Discretionary topped sector returns.


After three years of largely uninterrupted appreciation, global stock markets, with a few exceptions, hit a wall in 2015 as the S&P 500 Index squeaked out a paltry 1.38% rise, and the Dow Jones Industrial Average Index added only 0.21%. The Nasdaq, led by the F.A.N.G. highflyers (Facebook, Amazon, Netflix, and Google), provided some relief and rose a respectable 7.11%. While the non-tech oriented broad indices failed to register significant gains, that's not to say there weren't opportunities to make money, as we can see in the chart below. In the United States the consumer buoyed a double-digit return from Consumer Discretionary stocks and mid single-digit returns from Health Care, Consumer Staples, and Information Technology. Meanwhile, index performance was dragged down by the woeful year for energy and other commodity stocks as the prices of numerous soft and hard commodities plummeted over the course of the year.

S&P Sector Returns

Counterintuitively, the answer to the question everyone debated over the course of the year was initially treated as a non-event on December 16 when the Federal Reserve raised the target range for the federal funds rate by 25 basis points to between .25% and .50%. The S&P 500 dropped the following day but quickly recovered until the meltdown in China sparked a renewed sell-off.

Conditions were hardly better elsewhere with the developed market MSCI EAFE Index (Europe, Australasia, Far East) slipping -0.39%, as a US dollar-denominated 10.99% total return from the Japanese TOPIX Index was pulled down by the larger weight of Europe, where the FTSE Eurotop 100 Index fell -3.14% in dollar terms. For real carnage, however, one had to turn to the emerging markets, which were beset by falling commodity prices, capital flight, poor governance, and plummeting currencies. The MSCI Emerging Markets Index sank -14.92% during the year. Brazil, Malaysia, Thailand, Indonesia, Turkey, South Africa, and Mexico all suffered from declining markets and depreciating currencies versus the US dollar. Of course, the story of the year in emerging markets was the incredible run in Chinese stock prices over the first half of the year, which devolved into an epic rout in the second half — a rout that has accelerated as we enter 2016.


Crystal ball gazing always presents opportunities to look foolish in hindsight, but prognostication in the current environment seems unusually likely to embarrass. As we write, oil prices have dipped below $30 for the first time since 2003. Saudi Arabia appears committed to making life difficult for US shale oil producers and has continued to pump aggressively while US ingenuity has maintained production at higher-than-expected levels. At the same time, Iraqi production is rising and Iranian sanctions may soon be lifted, leading to increased production there. Continued weakness seems inevitable, but low prices have resulted in slashed exploration budgets and the shuttering of uneconomic wells. Meanwhile, consumers living in the moment have responded to cheap oil prices by driving more and buying SUVs and other trucks while shunning the more efficient passenger cars on the lot.

Our Funds are generally underweight energy relative to their respective benchmarks and, at the risk of suffering one of the aforementioned embarrassments, we find it unlikely prices will remain at these depressed levels throughout the year. Could energy prices decline further? Absolutely, in the short term, but ultimately supply and demand will determine prices as shown in the chart below. As countries recovered from the global financial crisis, inadequate supply pushed oil prices higher, while transitioning to surplus production led to our current situation. The supply/demand gap has begun narrowing, and we expect it will continue to do so. We seek opportunities to increase energy exposure given the longer-term expectation of higher prices.

OPEC Demand/Supply Balance until 4th Quarter 2016

China presents another wild card for 2016. The meltdown in Chinese equities has dragged down indices around the world, while China's rate of economic growth, potential for currency devaluation, and future appetite for commodity imports worry developing economies. Unlike oil, we have no confidence in predicting the likely outcome for China's economic development over the course of the next 12 months. It's abundantly clear that China's government is concerned given its posturing in the South China Sea as a means to distract the public. It's equally clear the government has no coherent policy strategy given stopgap measures such as reduced taxes on automobiles, market circuit breakers that are suddenly eliminated, and bans on the sale of stock. Good governance is important and, in China, lacking.

While the US looks at first blush to be in better economic health than most of the world, we have already seen the negative impact of a stronger dollar on industrial production and export industries. The US also faces the prospect of future Fed rate increases or, more ominously, a reversal of policy on recognition that the December hike was premature.

Of course, we are also in a presidential election year, one unlike anything most of us have ever seen. Populism on both the right and left has been a defining characteristic of the campaigns to date. Establishment candidates former Secretary of State Hillary Clinton and former governor of Florida Jeb Bush find themselves challenged in the case of Clinton, and swept away in the case of Bush, by competitors who reside much further away from the center. What this may mean for financial markets is impossible to know, but we expect large percentages of the American public to find the idea of "President Trump" or "President Sanders" distressing to say the least.


Amana Income Fund

The Amana Income Fund fared reasonably well in 2015. The Fund's Investor Shares returned 6.26% in the fourth quarter, ahead of the 5.63% appreciation in the Russell 1000 Value Index, but lagging the 7.04% gain in the S&P 500. For the full year, the Investor Shares slipped -2.86%, again lagging the S&P 500's gain of 1.38%, but leading the -3.84% decline in the Russell 1000 Value Index. Stock selection throughout the year was generally good, but our Achilles' heel in 2015 was the industrial sector where we had 26% exposure versus 10% for the Russell Value Index; positioning that was exacerbated by selections that lost -7.88% on average in a sector that gained 0.61%. Railways played a role, as well as positions in Parker Hannifin, United Technologies, Emerson Electric, and W.W. Grainger.

Amana Income is overweight Consumer Discretionary stocks with our selections returning -1.63% on average versus -5.76% for the sector largely due to excellent returns from Nike.

In Consumer Staples we are substantially overweight with 16% exposure compared to 7% for the Russell Value Index. The overweight has been supported by good selection giving our stocks an average return of 7.59% against -2.39% for the sector. General Mills, McCormick, Kimberly-Clark, and JM Smucker all performed well, while Procter & Gamble was the only notable loser.

Despite the inclusion of National Fuel Gas and ConocoPhillips in the list of detractors in Q4, our Energy allocation had positive effects since we carried less than half the weight than the Russell Value Index and our selections did not decline as severely. Stock selection benefited from the inclusion of refiner Phillips 66, which offset some of the losses among extraction investments.

Potash Corp of Saskatchewan continued to hurt Amana Income's Materials stocks. We are overweight the sector, and most of the selections held up well, but Potash was joined by Praxair and PPG in the loss column.

As of December 31, 2015

Ten Largest Contributors Return Contribution
Microsoft 26.20% 0.78
E.I. du Pont de Nemours 38.97% 0.70
Bristol-Myers Squibb 16.83% 0.49
Kimberly-Clark 17.60% 0.44
Illinois Tool Works 13.26% 0.41
PPG Industries 13.09% 0.35
Intel  15.10% 0.34
Honeywell International 10.01% 0.29
Becton Dickinson 16.65% 0.25
3M 6.95% 0.19
Ten Largest Detractors Return Contribution
Novartis ADR -6.40% -0.19
Pearson ADR -37.24% -0.11
National Fuel Gas -13.67% -0.08
W.W. Grainger -5.25% -0.07
Johnson Controls -3.84% -0.06
Potash Corp of Saskatchewan -15.25% -0.06
United Parcel Service, Class B -1.80% -0.04
ConocoPhillips -1.34% -0.01
Methanex 0.39% 0.00
Parker Hannifin 0.27% 0.01
Eli Lilly 4.1%
Microsoft 3.9%
Nike, Class B 3.7%
Illinois Tool Works 3.6%
Bristol-Myers Squibb 3.5%
Honeywell International 3.2%
Colgate-Palmolive 3.1%
PPG Industries 3.1%
3M 3.0%
Novartis ADR 3.0%

Asset Weighted Average Debt to Market Cap: 15.7%


Amana Growth Fund

Following a solid 2014 during which the Amana Growth Fund Investor Shares bested the S&P 500 Index and the Russell 1000 Growth Index and ended the year in the 10th percentile of the Morningstar Large Growth category, the Fund's 2015 performance disappointed. In the fourth quarter the Amana Growth Fund Investor Shares gained 5.23% against a 7.04% rise in the S&P 500 and a 7.32% return in the Russell 1000 Growth Index. For 2015, the Fund's Investor Shares slipped -0.42%, while the S&P 500 gained 1.38% and the Russell 1000 Growth Index appreciated 5.67%.

The Fund's 2015 performance lagged due to a combination of allocation and selection effects. Consumer Discretionary contained our largest allocation miscue as it was the best performing sector by a wide margin and is one in which are significantly underweight (average weight of 7% versus 20% for the Russell Growth Index). Selections that lagged sector performance exacerbated this. To a large extent the relative performance was captive to our investment guidelines. Amazon, for example, carries the largest weight in the sector and performed astonishingly well, providing half the Consumer Discretionary sector's contribution to benchmark return. As a distributor of alcohol and pornographic materials, however, Amazon is not a candidate for the Amana Funds. That said, several of our Consumer Discretionary selections that provided excellent returns in years past performed modestly in 2015, with TJX, Genuine Parts, and Gentex as the top examples.

Information Technology represents our largest exposure at 39%, compared to 28% for the benchmark, and there our selections lagged. We owned several of 2015's winners, including Google, Adobe, Intuit, and, of course, Apple, but these were outweighed by losses suffered in Akamai, ASML, SanDisk, and, most notably, Qualcomm.

The Fund's overweight allocation to the poorly performing Health Care sector negatively affected returns; however, our selections fared well. Winners included Amgen and Eli Lilly, with the largest contribution coming from Novo Nordisk, a stock that has been in the Fund almost since inception.

The Fund's Consumer Staples sector exposure aligned with the benchmark, yet our selected investments within the sector contributed higher returns. Clorox, Church & Dwight, Estee Lauder, and PepsiCo were among the top contributors. 
In Industrials we are slightly overweight, but our selections were weak. Our positions in Norfolk Southern and Union Pacific provided the most drag on returns, along with Lincoln Electric and Fastenal.

As of December 31, 2015

Ten Largest Contributors Return Contribution
Amgen 17.97% 0.73
Adobe Systems 14.20% 0.69
Trimble Navigation 30.63% 0.46
SanDisk 39.87% 0.44
Alphabet, Class A 21.87% 0.41
Agilent Technologies 22.12% 0.37
Intuit 9.09% 0.33
Lowe's 10.75% 0.32
Harris 19.53% 0.30
Estee Lauder, Class A 9.53% 0.27
Ten Largest Detractors Return Contribution
Akamai Technologies -23.79% -0.81
Union Pacific -10.97% -0.20
Infosys ADR -11.49% -0.19
Apple -4.16% -0.18
Novartis ADR -6.40% -0.17
Potash Corp of Saskatchewan -15.25% -0.14
Qualcomm -6.05% -0.13
Keysight Technologies -8.14% -0.06
TJX Companies -0.42% -0.01
United Parcel Service, Class B -1.96% -0.01
Top Ten Holdings Portfolio Weight
Adobe Systems 5.2%
Amgen 4.8%
Intuit 4.1%
Apple 4.1%
Church & Dwight 3.8%
Novo Nordisk ADS 3.6%
Lowe's 3.4%
Express Scripts Holding 3.2%
TJX Companies 3.2%
Estee Lauder, Class A 3.1%

Asset Weighted Average Debt to Market Cap: 11.4%


Amana Developing World Fund

The Amana Developing World Fund largely stood on the sidelines during the year's first-half run in Chinese stocks, which damaged relative returns at the time. With China rolling over in the back half of the year, much of that underperformance was recaptured. Nonetheless, the Fund's Investor Shares finished the year down -17.02%, while the MSCI Emerging Markets Index fell -14.92%. For the fourth quarter the Investor Shares returned 1.62% against a gain of 0.66% for the Index.

The jarring sell-off in Chinese stocks at the start of 2016 has set the stage for another volatile year and our positioning remains conservative given the importance of China to many emerging markets' economies, especially among the more resource-oriented.

Perhaps the biggest surprise during the quarter was the rebound of Indonesia's currency and stock market. Given that both had demonstrated considerable weakness through the first three quarters, and that Indonesia is a major commodity exporter to China, we are evaluating whether to use the recovery as an opportunity to reduce positions.

After the positive election outcome in Argentina, MercadoLibre performed well, as did Chinese search engine Baidu, which had sold off aggressively at the end of the third quarter.

For the full year, Health Care continued to be one of the most attractive sectors with our Southeast Asian hospital stocks and Chinese pharma position providing good returns. The Philippines has done well under the administration of President Aquino, which was reflected in the performance of Manila Electric and mall developer SM Prime. Pandora, which manufactures all of its jewelry in Thailand, was added to the portfolio late in the year but quickly contributed.

Telecommunications was a difficult sector in 2015. When Advanced Info failed to win spectrum in a recent auction in Thailand, this surprised investors. The Nigerian government shocked investors when it hit South African mobile provider MTN with a $5 billion fine (subsequently reduced). A controversy surrounding a Russian subsidiary embroiled Telenor.

The Fund disposed of several large detractors over the past year, including Semen Indonesia, Turkcell, and Kroton Educacional.

As of December 31, 2015

Ten Largest Contributors Return Contribution
Baidu ADS 37.57% 0.68
MercadoLibre 25.68% 0.61
Bangkok Dusit Medical Services 21.63% 0.56
Telekomunikasi Indonesia ADS 24.54% 0.52
Indofood CBP Sukses Makmur 15.50% 0.28
Lenovo Group 21.35% 0.27
Mindray Medical ADR 24.01% 0.27
Mead Johnson Nutrition 12.73% 0.21
IHH Healthcare 12.81% 0.21
Axiata Group 13.12% 0.21
Ten Largest Detractors Return Contribution
Advanced Info Service -32.13% -0.65
MTN Group -32.61% -0.46
Western Digital  -23.79% -0.40
Clicks Group -11.47% -0.30
VF -8.21% -0.26
Samsonite International -7.73% -0.17
Telenor -8.02% -0.16
Aspen Pharmacare Holdings -5.26% -0.13
China Mobile ADR -5.33% -0.11
Aboitiz Power -3.84% -0.10
Top Ten Holdings Portfolio Weight
MercadoLibre 3.4%
Bangkok Dusit Medical Services 3.3%
VF 3.2%
SM Prime Holdings 3.1%
Aboitiz Power 3.0%
Telekomunikasi Indonesia ADS 2.8%
Baidu 2.8%
Unilever 2.7%
KPJ Healthcare 2.6%
Clicks Group 2.4%

Asset Weighted Average Debt to Market Cap: 13.7%


Amana Participation Fund

As the Amana Funds' newest member, the Participation Fund closed out its first quarter since commencing on September 28, 2015. This Islamic investment income fund offers conventional bond-like attributes aimed to preserve capital while providing current income. The Fund's Investor Shares have provided a return of -0.70% since its inception.

At the end of the fourth quarter the Fund remained largely uninvested, preferring to invest slowly and conservatively in response to choppy market conditions during this startup phase. Over the upcoming first half of 2016 we anticipate being fully invested in a diversified portfolio of well managed companies offering income-producing securities consistent with Islamic investing principles.

As part of our investment strategy, we anticipate being overweight in US dollar-denominated securities, emphasizing sovereign sukuk issues on the longer end of the yield curve and corporate issues on the short end of the yield curve. This strategy permits our investors to obtain market rate income from liquid sovereign securities, the issuers of which possess the authority and ability to increase taxes and other revenue-preserving, credit-enhancing activities. On the short end of the yield curve, we tend to focus on corporate issuers. This positions the portfolio with higher yielding assets relative to sovereign issues as well as creates flexibility to invest into an anticipated higher yielding environment as these shorter duration investment certificates mature. We will target a weighted average duration in the four to six-year range.

As of December 31, 2015

Holdings Portfolio Weight
Saudi Elec Global Sukuk 6.3%
DIB Sukuk 6.2%
DP World Sukuk 4.4%
Hazine Mustesarligi Varl 4.2%
Petronas Global Sukuk 4.2%

Performance Summary

As of December 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) -2.86% 11.20% 8.98% 8.47% 1.13%
Amana Income Institutional Shares (AMINX)¹ -2.62% n/a   n/a   n/a   0.88%
S&P 500 Index 1.38% 15.13% 12.56% 7.30% n/a
Russell 1000 Value Index -3.84% 13.09% 11.27% 6.13% n/a
Amana Growth Investor Shares (AMAGX) -0.42% 11.73% 8.77% 7.85% 1.08%
Amana Growth Institutional Shares (AMIGX)¹ -0.21% n/a   n/a   n/a   0.83%
S&P 500 Index 1.38% 15.13% 12.56% 7.30% n/a
Russell 1000 Growth Index 5.67% 16.83% 13.53% 8.53% n/a
Amana Developing World Investor Shares (AMDWX)² -17.02% -6.00% -4.00% n/a   1.54%
Amana Developing World Institutional Shares (AMIDX)¹ -16.73% n/a   n/a   n/a   1.24%
MSCI Emerging Markets Index -14.92% -6.76% -4.80% 3.61% n/a

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Expense ratios shown are as stated in the Funds' most recent Prospectus dated September 28, 2015.

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

Income, Growth Fund, Developing World, and Participation Fund 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.

Shares of the Participation Fund held less than 182 calendar days are subject to a 2% early redemption fee.

Important Disclaimers and Disclosure

Performance data quoted represents past performance which is no guarantee of future results.

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: his 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 Dow Jones Industrial Average Index is a widely followed price-weighted index of 30 of the largest, most widely held US stocks.

MSCI EAFE Index is an international index focused on Europe, Australasia, and the Far East.

The TOPIX Index, also knows as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section (the largest companies) of the Tokyo Stock Exchange.

The FTSE Eurotop 100 Index represents the performance of the 100 most highly capitalized blue chip companies in Europe.