Q4 2025 Equity and Fixed-Income Quarterly Outlook

Dan Kim:
All right. I hope everyone enjoyed the holidays and you're off to a good start this year. I'm Dan Kim, director of research at Saturnia Capital. Thanks for joining our first quarterly Market Outlook webinar. So today we have joining us Scott Klimo, our chief investment officer, and Elizabeth Allen, portfolio manager of our fixed income products. We're going to have Scott kick us off with some performance highlights on our equity strategies.

Some of the key drivers that drove that performance and how we're positioning our portfolios heading into the new year. And then Elizabeth is going to do the same on fixed income. Afterwards, we will have time for some Q&A. So if you have any questions, just type them into the Q&A chat window, and we'll do our best to answer as many as we can.

And please take note of these important disclosures.

And with that, Scott, we'd love to hear your thoughts on equities.
 
Scott Klimo:
Great. Thanks, Dan. Happy New Year, everyone. Thank you for joining us. Before the outlook, we're just going to give a little bit of a rundown of of how last year went, how 2025 went. It was a pretty good year for equity markets. The S&P 500 was up a little under 18%. The Russell 1000 growth index was a little over 18%.

And the Russell 1000 value index was up about 15.7%. So that's the third consecutive year of double digit returns in United States across broad market indices. Which is obviously fantastic for those of us who are who are saving and investing. But it was, it was a little bit of a rough ride on a quarter by quarter basis.

So in the first quarter, we saw a significant sell off. The market fell about 20% from mid-February through through early April. Primarily, that was the result of fears about tariffs and the potential impact of tariffs on inflation and interest rates and how that might affect, the stock market. And that selloff really gained pace after the so-called liberation Day when, when the various, tariff rates were announced.

However, the the market reaction caused a pretty quick reversal on the part of the on the part of the administration. And, and caused the, Financial Times Robert Armstrong to coined the phrase taco for Trump boys chickens out. We'll see if that continues into 2026. But, as a result of that reversal in the, in the tariff, aggressiveness, shall we say, the market embarked on a, a very aggressive rebound from from April through, the remainder of the second quarter.

That was really driven by the tech stocks, kind of the same AI stocks that we saw experienced weakness during the sell off, rebounded quite aggressively. Interestingly, the summer continued to be very good. You know, there's an old stock market phrase sell in May and go away. And that certainly was not the case in, in the summer.

And so we saw solid returns in the summer, even into September. You know, September, if you go back to 1950, September is the only month of the year that has an average negative return. So everybody thinks about October because of the, the October crash in 29, the October crash in 87. But September is really the month that that often has the most difficulty.

And still we had a solid performance here in September. And what's even more interesting is that that happened despite the fact that the Federal Reserve being somewhat concerned about the impact of tariff tariffs on inflation, did not raise rates or did not cut rates. There was a lot of, jawboning, certainly from the administration about how rates were too high.

But they held their ground being data dependent. As the fed chairman, Jerome Powell likes to say. But the market's still moved up, despite that. And also, it was interesting to see that we saw quite a diversification of returns rather than being entirely focused on the technology. Stroke A.I. stocks. There was a very broad market, move move higher.

The only sector, the only S&P 500 sector that didn't rise over that period was real estate. Everything else was up. And then in the third quarter or excuse me, then in the fourth quarter, the Federal Reserve decided that the inflation didn't seem to be appearing and they were getting, getting a little bit concerned about the job market.

And so we had three consecutive rate cuts, in, in the, in the fourth quarter. And interestingly, despite that, the performance of the market was rather modest. We up about 2.5% or something in that neighborhood in the fourth quarter. Which obviously when you look at an S&P 500, up about 18%, that was that was pretty modest.

 So very strong. Second and third quarter. But then a little bit of, of a moderation in the fourth quarter. Other things that I think are important to mention is that US equities, although nice, nice year, high double digits, lagged global markets by the widest margin since 2009. So Europe ex the United Kingdom was up about 36%.

Japan's topic's was up 27% and emerging markets were up 34%. A big part of that those are dollar returns. And these markets did very well in local currency. But contributing to the performance from the perspective of a US dollar investor is that the dollar weakened. Considerably, about 10% over the course of the year against a basket of, of currencies of its trading partners.

And that was the weakest performance that we've seen since 2017. It was particularly weak against the euro, somewhat weak against the pound, flat against the Japanese yen, and actually strengthened a little bit, against our our friends to the north in Canada like we saw in 2023 and 2024, very concentrated returns. So the top ten stocks contributed nearly half the return of the S&P 500.

And the top ten now account for 40% of the weight of the S&P 500. So a pretty significant concentration in terms of both performance and and just the index itself. And then of course, one other asset class that I'll just mention briefly, precious metals, they did better than all of the markets. Gold was up 60% plus silver, I think was was even even stronger than that.

Dramatic, over 100% dramatic appreciation of silver. Platinum. What does that tell us? There seems to be some concerns about about potential U.S. risk, potentially with regard to the debt position. I'm going to stop on that and let let Elizabeth discuss that in greater detail when it gets to her, point. But it was just interesting to note that that that asset class, performed the way it did as far as our individual funds are concerned.
Amana Growth was pretty much in line with the S&P 500, a little bit below the, the, Russell 1000 Growth Index. As you might expect, tech was was a big contributor to the performance of the fund. And also a little a contributor, but also a little bit of a, of a drag on relative performance, because we had a couple of stocks that didn't perform very well.

Adobe has been I think investors have been somewhat challenged by the effect of AI on Adobe. And so we're actually in a position of an a process of reducing our position in that, service. Now is, as a software firm that we actually are very committed to, but it had a difficult, 2025 after a very, very strong 2024.

But we still think that ServiceNow is one of the companies that will be a beneficiary of taking everything from AI, applying it to their products and making it of of greater use, to companies that perhaps can't figure out how to make best use of that themselves. So that's a position that we remain committed to. We also had very strong performance from our semiconductor value chain, starting with ASML, based in the Netherlands, which makes the photography machines that make chips, TSMC, Taiwan Semiconductor, which makes the chips themselves with those ASML lithography machines and then the the various semiconductor design firms like Broadcom, Nvidia, AMD, Broadcom.

In fact was the single largest contributor to fund returns in 2025. Another important sector for us is healthcare. We underperformed a little bit because of Novo Nordisk. I'm sure you've all heard of the GLP ones were Govi etc.. But Lilly really, out executed Novo. And so that stock underperformed. And I mean Novo has the distinction of being the longest held position in amount of growth.

We've owned it since 1997. Over that time, it's performed, outperformed dramatically versus any index. And so a little bit of a rough year. But we've also seen this in the past and it's recovered. So we continue to to hold the stock. Our other healthcare pharmaceutical names AstraZeneca, AbbVie, Lilly were all tremendously strong. So overall a pretty good year for for amount of growth.

And and looking forward to 2026, which we'll talk about a little bit more later. Amount of income. A little bit behind the S&P 500, but well ahead of the Russell value index. So a good performance from that income, particularly in the fourth quarter. One of the things that contributes to the performance is it's got a fairly large tech exposure.

We own Cisco Broadcom Microsoft, Taiwan Semiconductor. Some people may ask, you know, why are these stocks in an income fund? They don't. With the exception of Cisco, they don't offer particularly attractive dividend yields. But the thing is, is that when we bought them, they did, Broadcom Microsoft TSMC they had very attractive dividend yields when we purchased the stock.

But their performance has been so strong that it's outpaced the the increases in the dividends. And so there's yields have come down. So it's a little bit of a tension between well we want to enjoy this appreciation. Or do we want to maybe take some profits and, and look for higher yielding stocks to replace those with. That's something that Monem Salam.

The portfolio manager of the amount of income fund will be. We'll be thinking about and working out over the coming months. Health care was was very strong, the strongest performing sector for amount of income. They don't have Novo Nordisk but does have a large position in Eli Lilly, which is up some 39% in 2025. So very solid position from healthcare, industrials, lagged a little bit.

A couple of stocks, particularly UPS was a bit weak. Well we had strong performance from Johnson Controls and and Rockwell Automation. One of the things that that held back the fund a little bit was the staples sector. So it was actually the worst performing sector in the fund. And all of the positions, with the exception of Unilever, actually declined.

That's not an an entirely surprising thing because it was a risk on year. And staples are obviously risk off. And we're going to be looking at those positions quite closely. But we also keep in mind the capital preservation aspect of the fund. And when the market eventually turns on artificial intelligence, you know, we expect that these are the sorts of stocks will outperform and and provide that capital preservation that, that is so important.

Finally, with the amount of developing world, the strongest performing fund up nearly 20%, but a little bit weak relative to the benchmark, which was up about 30%, the MSCI Emerging Markets benchmark. The primary reason for the strong performance, emerging markets in general did well, but China in particular did very well. It was up 31%. It's a very large portion of the benchmark.

We have not invested in China for several years. We we took a decision that there was just too much, too many unknown unknowns. As a former defense secretary once said, and that was actually the result of you recall, Alibaba was planning to list a financial company, Ant Financial, in Hong Kong, and then Jack Ma started making some comments.

The CEO of Alibaba, making some comments about how important he was and CEOs were relative to the Chinese Communist Party. And certain people like XI Jinping did not take very well to that. And the listing in Hong Kong was pulled, and it just made it very clear that there are factors, apart from corporate considerations, that drive performance in China.

So we decided to pull out. We are looking at getting back in, China does have several world class companies. BYD and EVs, Huawei and Communications, Baidu and internet. And I shell me in and cell phones and actually cars now. So they have some great companies and they're also developing a formidable biopharmaceutical industry. So we will be we are planning to, to travel to China to, to visit some of these companies.

And it may be something that we look to access, more in the future. So that's up for the wrap up. Looking forward to 2026 AI, artificial intelligence. It's clearly the elephant in the room. We have exposure throughout the semiconductor value chain. As I discussed earlier with with the amount of growth, ASML in particular has been has been moving very aggressively this year as investors have realized that not only do you need the GPUs for the large learning models, but you also need the memory chips for the inference aspect of of AI.

And ASML, of course, makes the machines to make memory chips as well. So that's been doing very well. Also positive for TSMC. Probably the biggest concern with with AI right now one is valuations. Another one is this issue of circular finance. So for example Oracle announced a 300 billion increase in their in their order book back in August with their results.

And it turned out that that was as a result of orders from open AI. Questions immediately arose as to how open AI was going to pay for that. And then Nvidia made a $100 billion investment in an open AI well, of course, Oracle buys the chips from Nvidia to support the data centers that it has the contract with open AI.

So people have begun to raise, a few questions about this and cash, which which for a long time has been an afterthought in technology, given the strength of technology, balance sheets and cash generation has come to the fore. And so we've seen that in the performance divergence of Google with a very strong cash, performance versus companies like meta, Facebook and Oracle, which have been weaker in the fourth quarter as people are a little bit concerned about about that position.

There's a lot of talk about valuations, a lot of focus on the mag seven versus the 4.93, the X 493. But I think something that's important to to keep in mind is it's not just the mag seven. Walmart not exactly a tech stock. I don't think it's trades on 43 times earnings, or a Costco, you know, very similar to Walmart, a little bit different with the membership model.

But Costco trades on 43 times earnings. So health care is something or excuse me. So so pharmaceuticals valuation is something that, that we are concerned about. And then I just was saying healthcare and pharmaceuticals because my next process was we still think that looks very good. Nice earnings prospects, very good cash generation, still attractive dividend yields in many cases and and valuations that that are a fraction Eli Lilly accepted which trades at something like 35 times earnings valuations that remain very attractive going forward.

So I think that 2026 is something that, you know, we're looking at pretty optimistically. I would also take a quotation out of the book of of legendary investor, of the Fidelity Magellan Fund, Peter Lynch, who said that more money has been lost planning for or anticipating corrections than in corrections themselves. So, as always, were proponents of staying invested, going through the market's ups and downs, because over the long term that's going to put you in the best position.
 
Dan Kim:
All right. Thank you for that Scott. And I love that positivity. So let's keep it going. Next up is Elizabeth with her insights on fixed income.
 
Elizabeth Alm:
Thank you very much. And thankfully in the bond market there's a lot of positivity to share, both in the fourth quarter and in 2025 as a whole. Bond market saw really strong returns with the Bloomberg US aggregate, up over 7% for 2025 and the Bloomberg Global aggregate up over 8% for the year. And the last quarter of the year pretty much reinforced the themes that we saw in 2025 overall.

So we had elevated yields and robust investor demand, creating exceptional performance for bonds with strength that we saw across sectors. And just in summary, emerging markets outperformed. We saw credit spreads tighten a lot over the year. And they were particularly resilient despite a lot of the economic volatility that we saw. And of course the Treasury yield curve moves in the structural steepening of the curve.

So we saw performance driven by the belly of the curve. And of course finally the end of quantitative tightening and a move of the fed to calibrated easing. So diving into details on each one of those emerging market debt really emerged at this year. And this quarter's top performer. So the asset class benefited from pretty much a Goldilocks scenario.

You had a weakening US dollar early easing cycles from Em central banks and growth in key economies like Brazil and Mexico. And as Scott mentioned, the primary driver was currency strength in emerging market currencies. He had mentioned that the US dollar fell 10% over the year. And that's the steepest decline that we've seen since around 2009. And this weakness was particularly beneficial for unhedged dollar investors holding Em currency assets.

Just as one example, the Mexican peso appreciated more than 15% relative to the US dollar over the year, with the peso denominated Bloomberg sleeve of the the global aggregate, rising over 20% return for the full year. So very strong driver of bond performance. I would say the second driver of the M fundamental strength was just the growth prospect.

So unlike developed markets, they were grappling with elevated fiscal concerns, policy uncertainty, many emerging markets, particularly in Latin America and Asia, they benefited from strong economic growth, improving inflation trajectories and really attractive real yields. But I would say finally, we're really drove, performance in the bond market was just this structural shift in the investment landscape. You saw the Federal Reserve begin to cut rates.

We had three rate cuts in September. And what made US dollars attractive relative to E.M. currencies that compressed. So we started to see higher returns in emerging market assets relative to develop market equivalent. And for us, in terms of our fund management, that's where our attention was focused. Our sustainable bond fund, which does hold unhedged foreign currency. We have an overweight to the Mexican peso in other Latin American currencies.

And that was the primary driver of our outperformance both in the fourth quarter and 2025 as a whole. For the full year, we outperformed the benchmark by more than 200 basis points, largely driven by those currency movements. Another theme that we saw was credit spread tightening. So corporate credit markets delivered exceptional performance driven by technical demand resilient fundamentals.

But what was interesting is that credit spreads compressed both in investment grade and high yield spreads compressed generally. I saw that credit rated triple B and double B where some of the top performance. We just saw solid credit fundamentals and default rates are near their historic lows, and there's just an extraordinary appetite for yield among both institutional and retail investors.

Although well spreads were tight across the market, we still found opportunities, to get some, extra spread in the market. For example, the amount of participation fund really benefited from the yield pickup that we can find in the cook market, for example, we're able to get additional spread for similarly rated sovereigns in corporates relative to the US market.

When we go to the SA cook market. For example, if you look at a rated sovereign of Saudi, you can get about a 60 basis point pickup relative to U.S. treasuries and also a B several basis point pickup relative to eight rated U.S corporates. So that's definitely advantageous for our positioning in the cook market industry. We can't talk about 2025 or the fourth quarter of the year without talking about the curve steepening.

 2025 is really unique in that the belly of the curve drove performance. So we're talking about maturities around between 3 to 7 years. And this really differs from the 2023 or 2024 or even the markets in 2022, where you had either long or short duration or short end of the Treasury curve drive performance. So this broke that pattern, and the, 3 to 7 years really did drive performance.

And this was aided by the steepening yield curve. To provide an example, the spread between two year and ten year treasuries rose 20 basis points just in the last two months of the year. And long end of the Treasury curve actually rose slightly in terms of yields, providing a more negative performance. This suggests the market has concerned about the long term economic growth of the U.S, and the short end was driven by the fed policy.

In those three rate cuts, I would say the 5 to 7 year maturity was the sweet spot. We got about 40 to 80 basis points of yield pickup compared to short term treasuries. But then we avoided some of the duration, risk and interest rate risk of bonds outside of ten years. In terms of the amount of participation fund we did outperform, our benchmark for the quarter.

And a lot of this was that the participation Fund has a material overweight to the belly of the curve relative to the Bloomberg Global aggregate in terms of the full year, the amount of participation fund, had slightly less performance than the Bloomberg Global egg. Although performed very strongly, the participation fund only holds the US dollar securities so didn't benefit from some of those currency movements in the peso or the euro.

And then finally, the the fourth quarter really marked a shift of Federal Reserve policy. And the emergence of some shadow quantitative easing or some liquidity injections into the market. So a new theme emerging was really this transition from the Federal Reserve from restriction to calibrated easing. As Scott had mentioned, the fed executed three rate cuts beginning in September.

And now they're having a their rate range is 3.5 to 3.75. But what's interesting is the final cut in December was actually quite contentious. It only passed the 9 to 3 vote. So this is the highest level of dissent that we've seen since 2019. And you can tell the policymakers are really wrestling with the dual risks of a softening labor market and sticky but above target inflation.

So while the credit markets were seeing really strong performance, the fourth quarter did see the plumbing of the financial system start to suffer. Just to, to point out an example, the Federal Reserve's quantitative tightening program reduced the balance sheet by $2 trillion by 2022. That's a huge extraction of liquidity into the market. And when the market's starting to face scarce liquidity, this can be a problem for the central bank.

So this can actually force short term rates up, weakening the Federal Reserve's control of monetary policy. So by October November, we did see start to see signs of stress for liquidity in the market. For example, overnight repo rate spiked above the Fed's target range. And this is absolutely a warning sign that the liquidity in the market, is scarce.

And that it's also a signal that the fed needs to act or they should act. And indeed they did. So after realizing market liquidity was starting to suffer. They had a swift operational pivot in the fourth quarter to inject liquidity. And they did this in several different ways, a multi-pronged approach. They ended quantitative tightening. So as of December 1st, they officially stopped, the balance sheet runoff transitioning from passive tightening to stabilization.

But they also did other things, for example, providing, regulatory relief, which enabled banks to hold more treasuries and would encourage more Treasury buying in the market. They also started to purchase, short term bills, about $40 billion a month, for the reserve management program and also encouraged the use of their standing repo facility. This basically does is provide attractive overnight financing rates for banks.

And they pretty much encourage this use by removing counterparty limits to make the use of this facility unlimited for institutions. And all of these things together functioned as a liquidity injection by purchasing Treasury bills, including encouraging that repo facility usage, the fed actually expanded their balance sheet and injected reserves into the banking system without officially calling it quantitative easing.

So by the end of 2025, the fixed income landscape in the US had been structurally altered. The era of excess liquidity seems to be coming to an end. We had, yield curve that have structurally steepened and credit spreads remain resilient despite economic volatility. And then we had emerging markets really shine as the quarter in year's top performer, the Bloomberg Em bond index was up over 12% for the year.

But for bond investors, the environment heading into 2026 really is one of nuance. So with these tight credit credit spreads, it does make security selection paramount. And so we're going to be really careful in terms of which bonds that we buy, but also looking for opportunities for spread pick up around the world in the Participation Fund. We are continuing to watch our issuers in the GCC that offer very strong credits for that yield pick up.

In terms of emerging markets, while we are unsure that the dollar will continue its weakness, there are still a lot of opportunities in US dollar denominated emerging market debt that offer attractive returns with very safe, credit. For and in terms of the Federal Reserve policy changes, it does prove that their market needs excess liquidity in the system to be more resilient.

But it does show dependance on central bank liquidity to digest, increasing supply of U.S debt.

And, just in terms of 2022, 26 success, fixed income investing will require active securities selection, willingness to adjust portfolios as the macro environment unfolds. And while a lot of the opportunity may be more under-covered just in terms of valuations are very rich right now, yields are attractive but not exceptional. But economic uncertainty remain. So we're continuing to be cautious, investing in high quality issuers and continuing to focus on that belly of the curve to, to take advantage of the, steepness in the Treasury rate market.
 
Dan Kim:
All right. Thank you, Elizabeth. Very insightful. A lot of good content in there. We're going to shift over to Q&A. So I see some of you have been populating the the chat, so thank you for that. Why don't I kick it off by asking Scott? You kind of touched on this, in your, presentation, but, I mean, markets have been on such a tear for for three years now.

Are you concerned with valuation or are you seeing any areas more at risk than others?
 
Scott Klimo:
Well, we're always concerned about valuation. I think the thing that's that's a little bit different. And people have been been drawing some parallels, between the.com era and what we're experiencing right now with, with artificial intelligence. But, major, major difference between that is that the companies that are driving the, the AI, phenomenon and that are enjoying the, the fairly lofty valuations are incredibly profitable.

Nvidia is what's their margin, 70% something in that neighborhood. So we're not talking about Pets.com here. Or something of that nature. So there's a tremendous amount of earnings and cash that are behind, the valuations that, that we see in the market. And, and I, I also just want to step back to the, the point about three years of, of consecutive double digit returns.

You know, a lot of people don't, don't realize this because it happened a long time ago. But, you know, in the 1980s the market was up every single year, including dividends, was up every single year from 1982 through 1989. And then in the 90s, the market increased every year from 1991 through 1999, things, you know, so nine years in a row, nine consecutive years of positive returns.

So the fact that we've had three years of, of, of solid returns does not imply anything about 2026, 2026 will will stand on its own merits. And currently the merits seem to be pretty solid. I mean, the economy is doing pretty well. I mentioned that there have been some concerns about about, unemployment, about the job market, but that seems to be holding up.

Inflation is, let's call it steady. It's maybe not coming down as quickly, but it's steady. So, you know, the outlook is is actually pretty favorable.
 
Dan Kim:
All right. Good stuff. I got one for Elizabeth. And with so many moving parts, with inflation, with tariffs and so many differing opinions, what what's your outlook for inflation and, and also sort of the accompanying fed policy in reaction.
 
Elizabeth Alm:
Yeah, absolutely. A lot of in terms of consensus on inflation, a lot of the talk is that the big inflation shock is behind us, but still getting around 3% core inflation back to 2% is absolutely going to be hard here. I would say that structural forces matter. We do have some deflationary drivers policy tightening already in the system calling goods prices, some normalization of the supply chain, softer labor markets for example.

But then we'll have inflationary drivers. So higher tariffs and trade frictions could drive it higher persistent fiscal deficits and energy transition costs. So in terms of that big shock being behind us, central banks, especially the fed are inclined to ease, but with some important constraints. Obviously, they don't want to reignite inflation. You have high public debt and big deficits, could argue for real rates that are positive but not deeply negative over the cycle.

And there's also a range of macro outcomes. So in terms of a realistic 2026 path, I would say this, shows a more modest number of rate cuts from the already restrictive levels. So leaving, policy somewhat consistent. Currently the market is showing two rate cuts next year. But the data will obviously drive the Fed's actions.

There is some showing three. But if we look at 2025 as an example, rate cuts seem to be a lot fewer and far between than the market was expecting. And in terms of what that implies for our bond positioning and duration, we are slightly neutral to that belly of the curve, taking advantage of that steep yield curve and the roll down opportunities.

Obviously for, you know, quality with spreads already tight, we're obviously going to be looking for any, opportunities, but also be wary of, you know, asymmetric risks or sector risks specifically and obviously looking for inflation hedges. If we see inflation start to tick up more than anticipated. So there could be some role for for tips or floating rate exposures.
 
Dan Kim:
Also good stuff. Thank you for that. And then I got another another one for you, Elizabeth. Very popular. So the question is, with rising gold prices, what does that mean for real returns and bonds? And also the liquidity of sovereign bond markets.
 
Elizabeth Alm:
Well, in terms of the rising of price of gold, we do see ultimate yields being continuing to be you know, higher than they were during what we like to call the yield famine, where yields are near zero. We don't think we're going near there. But in terms of the liquidity for the sovereign bond markets, it very much depends on where we are investing in the world.

Obviously, if we see a major reversal in the US dollar or if we see a lot of strength that could and negatively impact emerging economies. But generally, the liquidity from our perspective is relatively good on the whole. The U.S. Treasury issuance, we did see the highest use on record of that, repo facility offered by the fed on the last year.

We saw it draw $76 billion, very much showcasing a lack of liquidity generally in the system. I do think that the fed is going to continue to have to support the liquidity in the market to support the forthcoming Treasury issuance.
 
Dan Kim:
Got it. Thank you for that. Well, lots of really good questions in here. I'm going to jump around a bit and, ask Scott. What's one assumption embedded in today's market perception that you're most skeptical of going into 2026?
 
Scott Klimo:
Wow. One perception. I mean, I can't I can't really speak for the market in terms of what perception it has. I mean, I, I think that the, that the core perception in the market remains that, that I will continue to be a driver of activity. And I think that I actually I'm not skeptical about that. I'm, I'm, I'm think that's probably going to be true and going to be the case in 2026.

And, and the reason is that that one of the things that I think we need to understand is that I is very much it's it appears a power law type of, of of industry, of business by which the winners take most of the spoils. So kind of like Google and search, or Apple and cell phones and you may say, oh, there's other companies that sell more cell phones and Apple and yeah, there are, but nobody has a bigger piece of the profit pool than Apple does.

And so I seems to me to be one of those, one of those industries that if you come out on top, you're going to get the, the, the majority of the benefit. And as a result of that, there's a very clear incentive for everybody to try to be the one that comes out on top. So I think we're going to continue to see this this investment in in the learning models in the data centers and, and more and more in inference as people figure out ways to, to use AI to enhance productivity.

And I think that's that's going to be a key thing. I don't think it's necessarily so much of, of a profitability, enhancement in terms of generating more dollars. I think it's more of a productivity, aspect and getting better returns on the dollars that you do generate. So, you know, I think, as I indicated, I'm, I'm fairly optimistic about 20, 26.

And I and I'm not terribly skeptical about, about any, I think significant market theme at this point.

Dan Kim:
Good. Yeah. So I kind of a follow up question, for that. So beyond semiconductors, with this whole AI thematic, where do you see the most compelling second order beneficiaries that aren't fully priced yet?

Scott Klimo:
Aren't fully priced in, you know, something that's that's that's interesting. Perhaps people don't appreciate it, as much with the amount of income and amount of growth fund is that we do have the opportunity to invest overseas. So approximately 20% of each fund is invested in in foreign companies. So an amount of growth, as I mentioned, ASML, TSMC, and one of the things that we've had success out in, in 21 of the things that we did have success at in 2025 was uncovering some overseas companies that had, that were adjacent to AI development and, and making some very attractive investments in those.

So an example would be Fuji Koura in Japan, which is a company that makes very, very high bandwidth optical cables that are necessary for connecting all of the various, GPUs within a data center. And that stock, performed tremendously well last year. So, so those types of industrial or or kind of, support industries, you know, not the dominant ones, like the orthography and chip foundry and design, but the more of the supporting industries, I think it was discovered pretty quickly in industrials.

I mean, we've had exposure to companies like Trane Technologies and Johnson Controls, which are involved in cooling for several years. And so we were in position to benefit from that. Everybody's kind of on top of that. Utilities performed very well last year. Everybody's kind of figure that one out. And so this is why we've been looking offshore and have had some, some good success finding these, these types of businesses.
 
Dan Kim:
I couldn't have answered it better myself. So thank you for that. Scott. So, Elizabeth, with, the sharp decline in the US dollar concerns around long term US growth and debt, at one point, does this shift become from a cyclical trend to a more structural one? So the classic bond vigilante, question.
 
Elizabeth Alm:
That is a fantastic question. Then. I think a lot of that depends. So in terms of the US dollar, we could see a slowdown to the decline in the US dollar for a number of factors. For example, if U.S growth accelerates or if the fed delivers fewer rate cuts, then and I'm currently priced, or if the fed pauses easing while other central banks continue cutting.

That being said, there are some structural elements here that could be changing, right? So we do have fiscal deficits continuing 1.8 trillion still, for, you know, currently, you do have increase in the amount of, of debt that we expect to be issuing. So it does provide an ongoing structural challenge with more debt. And also, with potential issues of growth.

So in terms of when it becomes structural versus versus temporary, that's a great question. One that we we also continue to to evaluate.
 
Dan Kim:
Good stuff. Scott, I think this one is for you more kind of the operational side. What what's the main reason that there were no capital gains distributions for amount of growth, institutional funds for 2025?
 
Scott Klimo:
Well, as you know, we have a very low turnover strategy. And so we try diligently to avoid, capital gains and those distributions. But another reason is that we do have a service that allows us to, in the event of redemptions in the fund, it allows us to meet those redemptions through, a redemption in-kind. So rather than simply selling the stock and realizing the gain, we deliver the stock to, to, an outside firm that then provides the liquidity to, to meet the redemption and that it's really mimicking the process that you have with ETFs.

And so that allows us to avoid, the capital gains distributions and the tax implications that those carry.

Dan Kim:
Got it. Thanks for that Scott.

Scott Klimo:
And turn let's just at one end turnover you know single digit turnover. So there wasn't that much turnover to generate capital gains in the first place.

Dan Kim:
Exactly. Exactly. And then there's a question does amount of growth and income funds include gains and losses from fixed income markets like bonds and credit institutions? That would be no.
 
Scott Klimo:
No, no, there's no well, obviously, being Sharia compliant, the only thing we could potentially invest in would be cook. And but there are no sukuk holdings in either fund.

Or potentially Maryborough or something like that.

Dan Kim:
But yeah.

Scott Klimo:
Not currently.

Dan Kim:
Okay. And there's a couple more of these housekeeping questions. Is Monis still holding to Islamic investment criteria? Yes, absolutely. If you want more information you can go to amount of funds.com to to check out our investment criteria. And then also will Amana consider offering an ETF? If yes, could we convert the mutual fund to ETF without a tax event.

Scott Klimo:
So the answer to the first question is yes, we are considering it. We're looking into it. It's it's a complicated process. And so it involves operations legal compliance management trading of course. So we are looking at it as far as the second question, I'm afraid that's outside of my skill set. I have no idea. You know, I would kind of think probably not, simply because why would the U.S government want to give up the opportunity to realize some tax gains?
 
Dan Kim:
Yeah. Makes sense. And then, the last quick one are the bonds offered by Amana following the Islamic investment criteria.
 
Elizabeth Alm:
Absolutely. I can answer that. So every, security held within the amount of participation fund is, certified halal under Islamic law. So they are all sukuk or Rabiya deposits that are, you know, definitely in line with shared principles.
 
Dan Kim:
Perfect. Thank you for that. And then, Scott, healthcare was your highest performing sector and remains one of your favorite allocations. What risks or developments could invalidate the stance on health care investments over the next cycle?

Well, I don't think it was the highest performing sector. It was it it was it performed solidly. As I mentioned, we did have one drag on healthcare performance, which was Novo Nordisk. But, you know, a lot of the risks that, that, that pharmaceuticals face, they face this year primarily on tariffs. And it's, it's interesting that, the various tariff, threats, for lack of a better word, have caused pharmaceutical companies to invest aggressively in the United States.

I mean, we've seen, companies, Novartis, $20 billion, AstraZeneca, $25 billion, Lilly $25 billion. I mean, all sorts of companies have been investing, have announced plans for major, investments in the United States. And that goes a long way to defraying the the risks of the tariffs and the various agreements that companies have come to with the administration in terms of pricing for Medicare, stroke, Medicaid, drugs.

So a lot of those risks are kind of in the rearview mirror, which I think is one of the reasons that that pharmaceuticals performed as strongly as they did, in 2025 and, and in the fourth quarter, as I said, valuations, I think remain very, very attractive. The sector overall is trading at about 16 times. Lilly is an outlier, as I mentioned, yields their their 2 to 3% dividend yields.

They generate tremendous amounts of cash. Their their capital expenditure needs are fairly limited. R&D of course, is is a big line item in the expense bill. And, and but that's something that they get to write off. And so they get a tax benefit from that. So pharmaceuticals is generally an attractive high return on invested capital business that that we don't see a lot of of landmines in the future.

Demographics are in favor of it as populations age. There are still some serious unmet needs that companies are working on. Alzheimer's would probably be at the top of that list. And we've seen what can happen when you when you finally introduce into the market a drug that that that addresses a previously unmet need, like the weight loss drugs, sales just go through the roof.

I mean, there's there's huge amount of demand. So I think that that's it remains, an attractive sector for us. And I guess one last thing that I would just want to add. Sorry, this is dragging on, but one last thing I would add is that Europe has has become, a less and less attractive pharmaceutical market over time.

And CEOs of European pharmaceutical companies have become bolder. And in calling that out, and the European governments seem to have kind of realized that, you know what? We don't get to just ride on the coattails of the prices that Americans pay to drive drug development. We're going to have to do something. And so I think you are going to see an environment where European prices not only does the United States come down a bit, but we see European prices moving up somewhat, making that a more attractive market, particularly the UK, which has been very unattractive.

The market going forward and that'll be that'll be obviously a major positive for the pharmaceutical companies as well.
 
Dan Kim:
Awesome. Thanks for that, Scott. We're kind of running out of time here, but, Elizabeth, is the fed creating reserves to fund US deficits inflationary, with sort of the emerging inflation in Japan as an example?

Elizabeth Alm:
Definitely balance sheet expansion can be inflationary if they substantially loosen the financial conditions, raise asset prices, or boost credit spending at a time when the economy is already at or near full at or near full capacity in terms of what they are currently doing, I don't believe it's having a huge impact on inflation at the moment. They're really keeping it to, stabilizing and supporting the plumbing and the liquidity of the economy.

Now, if this were to change, if they were to officially start easing and, start to expand their balance sheet material materially, that's really when we would start to take a second look and evaluate how that's going to play on inflation.
 
Dan Kim:
Make sense. Thank you. Okay. We're going to have to squeeze in one last question. Thank you. You guys are awesome with all these questions. Really appreciate that. So with geopolitical tensions rising globally, how is Eterna adapting its investment strategy and risk framework to manage uncertainty while continuing to generate long term returns?
 
Scott Klimo:
I mean, I think that the answer to that question is, is really comes down to the type of of investments that we make. Our risk control does not rely on, on quantitative processes in terms of factor exposures or tracking errors or things of that nature. We really focus on buying high quality, competitively strong, highly cash generative companies.

So the fact that the investments that that we select our number one have strong balance sheets. So our our debt to total market, our total debt to market capitalization ratio limit is 33%. But in in actuality it's more like 12. Something in that neighborhood is less than half of what the cap is so very strong balance sheets, strong cash generation, dominant in many places.

Competitive positions. Quality management. Governance is something that's that's very important to us. And so these are the companies that when you have, a liquidity disruption or something of that nature, they tend to be they tend to outperform. Now geopolitical risk is something that that nobody can predict exactly what's going to happen. And it's not something, you know, I'm not going to all of a sudden put the fund into 20% cash, because I think there might be some chance of a problem somewhere in the world.

So we just have to kind of live through those those, those disruptions. But I would again, you know, thinking back to the Peter Lynch quote, preparing for for corrections tends to be a value destructive exercise. I mean, you look at the fact that over the last 100 years, the US equity market has provided a 9% annualized return despite World war, despite the Great Depression, World War two, Korea, Vietnam, the inflation of the 70s, the oil shock, the global financial crisis, the.com crash, and still 9% a year, which is is pretty good.

So it's certainly not something that I think we can adjust our portfolio to try to anticipate because it's so it's so exogenous. It's so unpredictable. Trump decides to take Greenland. How would I, would I adjust the portfolio in anticipation of that? I have no idea. So we just try to stick to our knitting in terms of the types of qualities that we buy and, and be in it for the long term.

Dan Kim:
All right. Good answer. And, that's all the time we have for, today. Thank you so much for all your engagement and participation. This was fantastic. And also, we're going to be sending out the actual commentaries in a couple of weeks, so please keep your eyes open for them. And again, thanks for joining our webinar and, hope to see you guys next time.

 
Scott Klimo:
Thank you.

 
Elizabeth Alm:
Thank you.