Q4 2022

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In 2022, three consecutive years of highly remunerative stock market returns collided with persistent inflation, the Federal Reserve pushing rates sharply higher, and Russia’s invasion of Ukraine causing food and energy prices to soar.  These combined forces, abetted by high valuations, drove equities to their worst annual performance since 2008 and the Global Financial Crisis.¹  Since the end of World War II there have been only three years when the S&P 500 declined by a greater percentage than in 2022: 1974, following the previous year’s OPEC oil price hikes; 2002, following the 2001 Dot Com crash and amid growing tensions over possible war in Iraq; and 2008, as mentioned above.

How did the Amana Funds perform in this environment?  To paraphrase the old chestnut, when the going gets tough, the tough provide downside protection.  No investor enjoys a decline in value, but in 2022 the Amana Funds’ performance significantly mitigated the downdrafts that markets experienced.  That downside protection was provided not only by the equity Funds but also by the Participation Fund.  Fixed-income markets suffered one of the worst years in memory, but the sukuk investments of the Participation Fund proved resilient.

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For standardized performance of the Funds versus their benchmarks, see below.  For further details on Morningstar Ratings and Rankings, see below.

The equity Amana Funds outperformed despite the absence of investments in the fossil fuel complex. Energy was the only sector to provide a positive return in 2022.²  Amana's three equity Funds have held an environmental, social, and governance (ESG) mandate since 2017.  Our ESG mandates include avoiding issuers primarily engaged in fossil fuel extraction.  To understand how the Amana Funds avoided the worst of the market disruption, we return to first principles — both in terms of Islamic guidelines and our investing philosophy.  We invest only in well-established companies with experienced management, demonstrating skilled asset allocation leading to good returns on invested capital (ROIC), excellent cash generation, fortress balance sheets, and an identifiable and sustainable competitive advantage that can drive revenue and margin gains.  Additionally, our three equity Funds seek companies demonstrating superior ESG characteristics, minimizing environmental, social, and governance risks.

Let’s examine the positive effects of our focus on low-debt companies.  At the end of 2021, the US Corporate BBB (lowest tier of investment-grade bonds) effective yield was 2.60%.  By the end of 2022, the effective yield had more than doubled to 5.80%, which had obvious implications for interest expense and profitability.³  Furthermore, many believe there will be a recession in a 2023.  In such an environment when revenues and margins could come under pressure, are heavily or lightly indebted companies likely to be more resilient?

Another important element of our philosophy is the avoidance of speculation, which includes not investing in companies that haven’t been publicly listed for at least three years and not investing in unprofitable firms.  In 2020, several speculative stocks – Peloton, Square, Zoom, Beyond Meat, and most of all Tesla – strongly rallied.  We avoided all of them.  Day traders (or funds with much higher turnover than the Amana Funds) may be able to play these types of stocks, but in our opinion, they are unlikely to consistently succeed.  All the above-mentioned speculative stocks declined, and some teeter on the edge of bankruptcy.  In 2021, Tesla was ranked as the fifth largest company in the US.  As of the end of 2022 the stock had fallen over 70% and Tesla ranked as only the sixteenth largest company.⁴  Tesla provides insight regarding the benefits of minimizing ESG risk, especially in the governance silo.  Elon Musk has always been a loose cannon and Tesla has always been a governance debacle, but shareowners were especially punished in the wake of Musk’s tumultuous takeover of Twitter.  We prefer management focus.

Outlook

As we embark upon the new year, no question figures more prominently among investors than “What are your market expectations?”  Such queries carry greater urgency, given the significant decline in 2022 and recessionary worries in 2023.  In response to this question, we typically reply that we are not market prognosticators, preferring to focus on the long-term outlook for the stocks in which we invest.  Every four years, however, we arrive upon a market phenomenon with an unblemished multi-decade record of calling the market over the coming year – the Midterm Effect.  From 1945 to 2019, the one-year return of the S&P 500 has been positive in 19 out of 19 of the years following a midterm election.  For the same period, returns for the S&P 500 in the years following a midterm election averaged 16.28% compared to an average return of 7.99% in other years.

From 1942 until now, the S&P 500 has had 17 down years. However, in that time, there have been only three pairs of consecutive down years (1973-1974, 2000-2001, and 2001-2002).  Considering the market’s 2022 downdraft, this perhaps provides another reason for optimism regarding the prospects for 2023 and for remaining engaged with the markets.

Amana Income Fund

Amana Growth Fund

Amana Developing World Fund

Amana Participation Fund

Performance Summary

As of September 30, 2022

^A Expense ratios shown are as stated in the Funds' most recent Prospectus dated September 30, 2022.

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 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.  The Bloomberg Emerging Markets Hard Currency Aggregate Index is a flagship hard currency emerging markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.  This index includes the Bloomberg GCC USD Credit Total Return Index.  The JP Morgan Emerging Markets Global Core Index is composed of US dollar-denominated government bonds issued by emerging market countries. 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 December 31, 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 December 31, 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 “S&P 500 Historical Annual Returns.” Macrotrends. https://www.macrotrends.net/2526/sp-500-historical-annual-returns

² Dr. Yardeni, Edward, et al. Performance 2023; S&P 500 Sectors & Industries. Yardeni Research, Inc. January 12, 2023. https://www.yardeni.com/pub/peacockperf.pdf

³ “US Corporate BBB Effective Yield.” YCharts. https://ycharts.com/indicators/us_corporate_bbb_effective_yield#:~:text=US%20Corporate%20BBB%20Effective%20Yield%20is%20at%205.69%25%2C%20compared%20to,long%20term%20average%20of%205.24%25.

⁴ Vega, Nicholas. “Microsoft’s market cap grew more than $800 billion in 2021—here’s how it compares to the most valuable companies in the world.” CNBC, December 27, 2021. https://www.cnbc.com/2021/12/27/how-much-the-biggest-companies-grew-in-2021.html

⁵ Olawoyin, Oladeinde. “One-third of global economy may slip into recession in 2023 – IMF.” Premium Times, January 3, 2023. https://www.premiumtimesng.com/business/business-news/573778-one-third-of-global-economy-may-slip-into-recession-in-2023-imf.html

⁶ “Current Inflation Rates: 2000-2023.” US Inflation Calculator. https://www.usinflationcalculator.com/inflation/current-inflation-rates/

⁷ “Euro area inflation rate.” Rate Inflation. https://www.rateinflation.com/inflation-rate/euro-area-inflation-rate/

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.