Q4 2023

In the fourth quarter of 2023, the Investor Shares of the Amana Income Fund returned 8.01% and the Institutional Shares returned 8.06%. The S&P 500 returned 11.69% over the same period. For the 2023 calendar year, the Investor Shares returned 13.55% and the Institutional Shares returned 13.82%. The calendar year return for the S&P 500 was 26.29%.

The fourth quarter of 2023 saw US equity markets soar, largely fueled by optimism around artificial intelligence (AI), which particularly benefited the Tech giants. A standout performer for the Amana Income Fund was Nintendo, surging 24.96% amid strong holiday sales buzz. Another highlight was Taiwan Semiconductor, the world’s leading foundry, with a 20.23% return. These successes underscore the merits of our strategic international diversification. The largest contributor of the fourth quarter was Microsoft, which returned 19.34%.

Detractors to Amana Income Fund’s calendar 2023 performance included pharmaceutical companies Pfizer (-41.22%) and Bristol-Myers Squibb (-26.15%). Pfizer grappled with underwhelming results from its COVID portfolio, including poor uptake of its anti-viral treatment Paxlovid and waning vaccination rates. Bristol-Myers Squibb revised down revenue growth forecasts from new drugs that left investors disheartened.

The Federal Reserve appears to have pulled off a “soft landing” with an aggressive series of interest rate increases that brought down inflation without driving the economy into a recession. The central bank’s next moves will likely be neutral, followed by a series of interest rate cuts in 2024. Easing monetary policy, a healthy economy, and optimism about productivity growth fueled by advances in AI bode well for the market outlook. However, it’s prudent to temper our optimism and to be mindful of the market’s tendency to preemptively price in rosy forecasts in the wake of its strong 2023 performance and a US presidential election in November, which always brings in headline volatility.

The S&P 500 Index finished 2023 at 4,769.83, recouping nearly all of 2022’s losses and finishing within 1% of the record high set on January 3, 2022. For the fourth quarter of 2023, the Index returned 11.69%, a solid performance that was more evenly distributed across sectors and stocks than earlier in the year, allowing the Investor Shares of the Amana Growth Fund to outpace the Index with a 13.71% return. For the full year, the Investor Shares returned an attractive 25.66%, just shy of the benchmark’s return of 26.29%. While Technology stocks accounted for roughly 45.7% of Fund assets (broadly in line with growth indices), they contributed over 70% of Fund returns, followed by Health Care, Industrials, and Consumer Discretionary.

Technology dominated equity markets in 2023, representing eight of the Amana Growth Fund’s 10 Largest Contributors. Apple made the largest contribution to Fund returns for the year, despite appreciating less than most other stocks on the list, because it is the largest position in the Fund. Apple started 2023 with a position size of greater than 10% but ended the year smaller (yet still the largest position) due to the outperformance of several other holdings and almost $400 million of net positive inflows to the Fund. The top performing stock of the year was Advanced Micro Devices. While it failed to keep pace with Nvidia, AMD is likely to benefit from increasing demand for AI chips. At year-end 2023, Adobe’s acquisition plans were dashed when they and Figma abandoned their $20 billion deal because of opposition from European regulatory authorities. We believe the effect on Adobe’s outlook to be minimal. ASML and Taiwan Semiconductor were relatively modest Technology performers, but AI chips don’t get made without their efforts. The only non- Technology stocks to appear among the top performers were the diabetes and weight loss duo Novo Nordisk and Eli Lilly. Both investments are longtime holdings of the Fund, with Novo’s initial purchase dating back to 1997. They dominated global diabetes care for years, but the newest class of GLP-1 drugs has ushered in a suite of additional applications, including weight loss and cardiovascular health. While expensive versus the sector and their own history, no other major pharmaceuticals company can match their revenue and earnings growth potential for the next several years.

The stocks that detracted from returns in 2023 did not suffer significant declines. Several were strong performers in 2022’s sharply down market, with the exceptions of Estée Lauder and Corteva. We sold the Corteva position in the fourth quarter to take advantage of tax losses that allowed us to sell a portion of the Estée Lauder holding without realizing taxable gains. Estée Lauder appears over-exposed to China and Chinese tourism, while the valuation remains stretched despite last year’s decline, and we lack confidence in current expectations of a buoyant earnings recovery. Zoetis was sold when we determined that a portion of its business was not Islamic compliant. We have also been working down the Norfolk Southern investment, and we have added to Merck and Johnson Controls.

Taiwan Semiconductor was the one new entry into the Top 10 Holdings for the fourth quarter, while Church & Dwight was the only exit.

Early in 2023, we acknowledged that our underweight exposure to China could become a headwind as the country reopened after its COVID-related lockdowns. Still, we stuck to our course, believing that weak governance and limited property rights warranted continued caution. This reluctance to turn bullish on China, combined with focus on companies with sustainable competitive advantages and robust balance sheets, led the Amana Developing World Fund Investor Shares to return 13.24% for the calendar year, compared to 9.83% for the MSCI Emerging Markets Index. In the fourth quarter, the Investor Shares returned 8.85% versus the Index at 7.86%.

Technology stocks represented five of the 10 Largest Contributors to the Amana Developing World Fund for the fourth quarter. Stocks in the Materials sector showed strength, accounting for four of the top 10. A similar theme appeared in the full year results, where Technology represented seven of the top 10 and Materials represented two. Nvidia’s 239.02% return contributed an impressive 389 basis points (bps) to the Fund’s full year performance. Nvidia has been a mainstay in the news, as its pioneering technology powers generative artificial intelligence (AI) applications. As we’ve noted before, Nvidia is a unique developing market holding and an example of a US-headquartered company that is owned in the Fund because more than 50% of Nvidia’s revenues come from emerging markets. The mix of strong governance combined with emerging market growth underlies such investments.

The Amana Developing World Fund’s largest detractors were dispersed across multiple sectors and geographies. During the fourth quarter, Consumer Staples represented four of the 10 Largest Detractors, with the remaining six from a variety of sectors such as Technology, Consumer Discretionary, and Health Care. For the full year, detractors were even more varied, with positions in Consumer Staples, Technology, Consumer Discretionary, Materials, Industrials, Financials, and Real Estate. LG H&H was the weakest performer in the Fund for calendar 2023, with a -52.00% loss. One of the Korean cosmetics company’s historically most attractive sales channels was the constant stream of travelers shopping for luxury skincare at duty-free stores. However, China’s slow reopening led to a limited return to international travel for many Chinese citizens, and LG H&H suffered.

Here again, we recognize that at some point China will eventually rebound. We remain cautious, as the coming US presidential election is unlikely to ease trade and geopolitical tensions. Instead, we note the Organisation for Economic Co-operation and Development (OECD) forecasted that both Indonesia and India could see gross domestic product (GDP) increases above 5% in 2024 and 2025. By comparison, OECD countries are expected to see growth below 2% during these years. As large populations in India and Indonesia continue their ascent into the middle class, Taiwan and South Korea advance high-tech manufacturing even further, and South America supplies materials needed for electrification, we continue to see attractive opportunities across a variety of emerging markets.

In 2023, financial assets largely demonstrated favorable performance and inflation metrics declined. Some central banks signaled an early victory against rampant inflation. Considering the extraordinary measures that central banks took over the past two years in response to the pandemic, such celebrations may have some merit.

Global inflation metrics declined in 2023, in line with generally anticipated consensus views. This provided some global central banks with sufficient cover to take a wait-and-see approach to the fourth quarter of 2023. The Federal Reserve, in response to lower inflation prints in the US, took a similar wait-and-see stance. When the Fed held their meeting in December 2023, Chairman Jerome Powell surprised investors with the enticing possibility that the committee may reduce benchmark interest rates sometime in 2024. Market participants estimated three rate cuts in the first half of 2024, which would reduce interest rates by 75 basis points (bps).

Many investors have largely embraced the belief that the inflation “dragon” has been slain, but this may not be the reality. Over the last few years, inflation rates have reached levels not seen since the 1980s.¹ It is entirely possible that these inflationary pressures cooled temporarily and are hibernating in the face of recent monetary tightening policies.

The Fed’s indication of easing benchmark rates could potentially undermine policy measures employed over the past two years and reinvigorate aggregate demand and inflation. A working paper published by the International Monetary Fund (IMF) in September 2023 found that in the more than 100 inflation shock episodes that have occurred since the 1970s, inflation was resolved in under five years for only 60%. Even in those “successful” cases, resolving inflation took an average of more than three years. “Most unresolved [inflationary] episodes involved ‘premature celebrations’ where inflation declined initially, only to plateau at an elevated level or re-accelerate,” said the IMF. “Countries that resolved inflation had tighter monetary policy that was marinated more consistently over time, lower nominal wage growth, and less currency depreciation, compared to unresolved cases.”²

When it comes to inflation, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE), the six countries that comprise the Gulf Cooperation Council (GCC), have found themselves in a far better position compared to most developed countries. The average inflation rate in 2023 for the GCC is anticipated to reach 2.6%, below the projections for the United States of 4.1%.³ The difference in inflation rates can be attributed to different fiscal policies following the pandemic.

The GCC region has also benefited from supportive oil prices (despite experiencing volatility) in 2023. The price of oil, as measured by West Texas Intermediate (WTI), averaged $77.62 per 42-gallon barrel for 2023. The GCC region is projected to experience favorable economic growth, as measured by gross domestic product (GDP). As of year-end 2022, the GCC region averaged robust GDP growth of 7.9% while the US reported 1.9%. As of writing, year-end GDP growth projections for 2023 were 1.5% for the GCC region and 2.4% for the US. The combination of lower inflation and favorable GDP growth have been supportive for holders of sukuk.

Amana Participation Fund – Fourth Quarter Results

The Investor Shares of the Amana Participation Fund returned 3.05% and the Institutional Shares returned 3.10% for the fourth quarter of 2023. The FTSE IdealRatings Sukuk Index returned 4.91%, outperforming the Investor Shares and Institutional Shares by 186 bps and 181 bps, respectively. Over the trailing 12-month period, the Investor Shares returned 2.46% and the Institutional Shares returned 2.60%. The Index returned 5.61%, outperforming the Investor Shares by 315 bps and the Institutional Shares by 301 bps. The Fund’s Amana Participation Fund underperformance can be attributed to differences in its composition relative to the Index. The benchmark tends to retain a high concentration among a few issuers. At yearend of 2023, two issues in the Index were Indonesian and Saudi Arabian sovereign sukuk. Combined, these two issues represented 39.41% of the portfolio. Meanwhile, the Amana Participation Fund held Indonesian sovereign sukuk and Saudi Arabian government sukuk at a combined balance of just 10.83%.

At year-end 2023, the Investor Shares of the Amana Participation Fund reported a 30-day yield of 2.24% and the Institutional Shares reported a yield of 2.48%. The Fund reported a modified duration of 4.33 years and is diversified among 34 securities. Its investment objective is capital preservation and current income while being entirely invested in US dollar-denominated securities.

The top two performing issues during the fourth quarter were the Indonesian sovereign sukuk, returning 18.52%, and Saudi Electric with 15.30%. The two lowest performers were both sukuk issued by Malaysian utility operator, Tenaga, which declined -0.57% and -0.43%.