The Case for Global Bonds, 2nd Edition

22 Jun 2022

The Case for Global Bonds, 2nd Edition

White Paper

Constructing sustainable and risk-adjusted portfolios in a global context.

Globally reverberating shocks this past year demonstrate the wisdom of Greek philosopher Heraclitus who said that “the only constant in life is change.”

These words offer perspective at a time when volatility and change have affected almost everyone on the planet. Global financial markets are no exception as their shifting dynamics are influenced by demographic and economic trends, a changing climate, and the disruption caused by the COVID-19 pandemic. For investors, navigating these transformations and ascertaining the associated opportunities and risks can be challenging. Digging into the data, we find that investing in sustainable bonds, globally and across currencies, can offer an advantageous risk-adjusted return profile.

Current market trends point to emerging economies experiencing a higher rate of economic growth and a greater presence in the global markets, which ultimately means a larger contributing role in investors’ portfolios. Although most of the world’s population lives in emerging market countries, securities from these countries comprise only 16.5% of the global bond market.

Several of these economies may overtake developed economies in size over the next 30 years. As investors, the flexibility to invest in these regions will be key to value creation in bond portfolios. Global bond strategies provide this flexibility and can typically diversify investments across currencies. This diversification ability offers a compelling advantage over constrained strategies such as international funds, which invest only in non-US securities. A portfolio strategy that allocates among emerging market bonds or foreign currencies carries some risk, but a global bond allocation can offer compelling risk-adjusted returns that can be an excellent addition to overall asset allocation.

When combined with environmental, social, and governance (ESG) integration, a global bond strategy can be on the cutting edge of sustainable finance by investing in companies and sovereign nations that embrace increasingly better policies and provide unique opportunities for positive impact. With the whole world to choose from, the discussion of global debt cannot be separated from the discussion of sustainability — climate-related risks, water, and carbon emissions are all factors to consider. We look at where the markets are going — which asset classes, including bonds, equities, and currencies, show the best risk-adjusted returns — and then use ESG integration to find the best names within those markets. This strategy also affords investors the opportunity to put money to work where sustainable policies and debt can be particularly impactful.

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Global-Fixed Income Landscape

According to the Securities Industry and Financial Markets Association (SIFMA), as of December 31, 2020, the global bond market was worth a staggering $123.5 trillion dollars and experienced year-over-year growth of 16.5%, well above its three-year compound annual growth rate (CAGR) of 7.8%.¹ This increased growth rate can be attributed to countries around the world issuing debt to fund massive government-sponsored fiscal programs as a means of stabilizing their economies during the pandemic.

The outstanding stock of global debt is valued at $123.5 trillion, and 38.2% of that debt is sourced from the United States. This makes the US the largest bond market in the world, valued at $47.2 trillion. The EU is the second largest bond market, representing 20.4% of global debt, otherwise $25.2 trillion.² It is interesting to note that the EU with a population of 748.3 million, double that of the US, has a bond market that is almost half the size of the US market.

Investment prudence and wisdom tends to suggest that diversification is an important element in achieving long-term goals. While the US bond market is sizeable, an investment strategy focused only on US debt would ignore more than 60% of all bonds. Such an isolated approach limits investors’ options by reducing diversification opportunities that could help them achieve their long-term investment goals. Our objective in this paper is to help investors gain a better understanding of the global landscape and its risk and return characteristics.

A breakdown of the global fixed-income market is presented in Figure 1: Global Bond Market Outstanding. What stands out, from an investor’s perspective, is that emerging markets comprise only 16.5% of the total. This garners our interest for three reasons. First, more than 85% of the world’s population lives outside of North America and the EU.³ The US only represents 4.3% of the world’s population, and yet it has the largest share of debt outstanding.⁴ Second, a significant portion of global economic activity is taking place outside of the US and the EU. This activity is projected to represent the largest share of global gross domestic product (GDP) in the next few years. Third, emerging markets are often overlooked when creating a diversified fixed-income portfolio. As a result of their growing share of global economic activity, expanding populations, improvements in standard of living, and rising presence in the world’s debt markets, emerging markets should warrant investors’ attention.

A Quiet Tectonic Shift

The movement of geographic debt distribution demonstrates that the shift toward emerging markets has already begun. Figure 2: Distribution of Outstanding Global Debt shows that while the US has retained a dominant presence since 2006, averaging 38.8% of the world’s outstanding debt, the EU’s share has declined to 20.4%, down from its apex of 30.7% in 2009. In contrast, the debt issued by emerging markets has been steadily increasing; in 2006, emerging markets had issued 3.2% of the world’s outstanding debt, but by 2020, its share had grown to 16.5%, experiencing a five-year CAGR of 15.3%.

Rising economic activity explains, in part, the growth in emerging market debt. Figure 3: Regional GDP as a Percentage of Global GDP shows the regional share of global GDP over time. The share of GDP has shifted away from developed regions, such as the US and the EU, to emerging economies such as Asia. In 1970, the US and the EU’s global share of GDP was 35.9% and 24.3%, respectively. By year-end 2020, these shares had fallen to 24.7% and 18.1%, respectively. The US’s share of GDP declined 11.2% and the EU’s declined 6.2%. For the same 50-year period, China and East Asia & the Pacific both saw growth in their share of global GDP from 3.1% and 13.7% in 1970 to 17.4% and 32.0% in 2020, respectively.

In 2017, international accounting and consulting firm PwC published a study outlining how the global economy may look in the future. They incorporated population growth patterns, historical and forecasted GDP trends, government investment rates, developments in education, and socioeconomic patterns. While there is plenty of room for debate on what the future outcome will be, emerging market economies can be expected to move up the ranks relating to their share of global GDP. In their study, PwC used GDP Purchasing Power Parity (PPP) to compare country rankings. GDP comparisons using PPP are arguably more useful when assessing a nation’s domestic market, because PPP takes the relative cost of local goods, services, and inflation rates of the country into account, rather than using international market exchange rates, which may distort the real difference in per capita income.⁵

“It’s tough to make predictions, especially about the future,” said Yogi Berra. With this quip in mind, we refer to the data with a balanced view. The rankings in Figure 4: Emerging Markets Will Dominate the World's Top 10 Economies in 2050 (GDP at PPPs) show a material “shakeup” of the top 10 countries by 2050; emerging market economies are expected to overtake developed market economies.⁶

According to PwC, the world economy will double in size by 2042, growing at an annual average rate of 2.6% from 2016 to 2050. They expect global growth to be driven largely by emerging markets and developing countries, with the economies of Brazil, China, India, Indonesia, Mexico, and Turkey growing at an annual average rate of almost 3.5% over the next 30 years, compared to just 1.6% for Canada, France, Germany, Italy, Japan, the UK, and the US.

Figure 2: Distribution of Outstanding Global Debt

Figure 3: Regional GDP as a Percentage of Global GDP (1970-2020)

Figure 4: Emerging markets will dominate the world's top 10 economies in 2050 (GDP at PPPs)

	2016	2050
China	1	1	China
US	2	2	India
India	3	3	US
Japan	4	4	Indonesia
Germany	5	5	Brazil
Russia	6	6	Russia
Brazil	7	7	Mexico
Indonesia	8	8	Japan
UK	9	9	Germany
France	10	10	US
█	E7 economies	█	G7 economies

^{Sources: IMF for 2016 estimates, PwC analysis for projections to 2050}

Uncovering the Devil in the Details: Assessing Risk-Adjusted Returns

The future shape of the global bond market and GDP projections offer investors incentives to look worldwide for opportunities. However, evaluating the risk and return attributes of a global strategy is an important component of this analysis. The Sharpe ratio provides an especially powerful assessment of risk relative to returns. The ratio measures a security’s return compared to the risk-free rate, adjusted for the security’s per-unit of volatility or total risk. The higher the Sharpe ratio, the more attractive the risk-adjusted return.⁷

Figure 5: Global Asset Classes: Risk Relative to Returns compares the investment characteristics of emerging market debt and equities with those of the developed world using a basket of 29 different indices. The Sharpe ratios were calculated over a 12-year period, starting when most emerging market benchmark data began being compiled.

If these indices were investible, an investor who focuses only on US debt would be limited to just three of the top 10; meanwhile, a global investor would have access to all of the top 10 indices.

There are important lessons investors can learn in observing these risk-adjusted performance results. First, we can witness a performance “clumping,” a tendency for benchmarks to retain a similar relative ranking throughout the selected time periods. The benchmarks that obtained a risk-adjusted ranking in the top one-third of the group at the beginning of the period tended to retain this top-tier ranking over time, while the bottom one-third tended to retain their poor risk-adjusted results. While there is performance “creep” over the shorter periods where the equity benchmarks demonstrate an improvement of risk-adjusted results, many of the top global bond and sukuk benchmarks still retain their top-tier positions. Second, emerging market bonds originating from the Middle East and China retained among the highest risk-adjusted performance metrics, while local currency Latin American benchmarks demonstrated some of the poorest results.

Sharpe Ratio:

Developed by Nobel laureate William F. Sharpe, it helps investors evaluate a portfolio's return in terms of risk exposure. A higher Sharpe ratio indicates lower risk exposure relative to the return generated, while a lower ratio indicates relatively high-risk exposure. The Sharpe ratio is calculated by subtracting the risk-free interest rate (e.g., that of US Treasury bills) from a portfolio's return, then dividing by the standard deviation of the portfolio's returns

Among the top performers, emerging market-related fixed-income indices offered the highest risk-adjusted return. Specifically, the FTSE IdealRatings Sukuk Index, a benchmark entirely comprised of Islamic-compliant bond-equivalent securities referred to as sukuk, retained a top-tier performance across multiple time periods. Coming in second is the Bloomberg Barclays GCC USD Credit Total Return Index, including bonds and sukuk that originated from the Gulf Cooperation Council (GCC) region.⁸ These favorable characteristics can be attributed, in part, to the GCC’s attractive yield spread relative to US-domiciled securities while retaining high credit ratings. US fixed-income indices tended to retain favorable risk-adjusted performance characteristics throughout multiple time periods (in particular the Bloomberg Barclays US Corporate High Yield Total Return and Bloomberg Barclays US Corporate Bond Indices). This further supports the value and importance of exposure to these instruments, even in a low interest rate environment. Fixed-income securities, both US and non-US, can offer important diversification and return attributes for investors in all kinds of economic environments.

Readers can find the annualized return and standard deviation results for each selected period in Appendix I.

Figure 5 demonstrates the need for strong discernment in the global markets. There are a variety of factors that can affect the Sharpe ratio of some emerging market equity and emerging market currency-based indices. These benchmarks typically incorporate a large geographic region and many different economies around the world. Some of the poor performances can be attributed to higher risk premiums, greater sensitivity to foreign investment flows, or substantial differences in liquidity when compared to developed world markets. Additionally, emerging market economies tend to have greater dependence upon global commodity price trends. Examples include the MSCI Emerging Markets Equity Index and the Emerging Markets Currency Index.

Perhaps the most useful representation of risk versus return can be seen in Figure 6. Return is charted on the horizontal axis, and standard deviation as a measure of risk is represented on the vertical axis. We believe an ideal asset allocation would have a combination of lower risk/lower return assets such as Treasury bills, higher risk/higher return assets such as equities, and lower risk/higher return securities that would be accessible through a global bond strategy. The quadrant to avoid is higher risk/lower return.

An allocation to equities gives an investor access to securities with higher risk for the potential reward of a higher return. Over the trailing 10-year period ended December 31, 2021, the S&P 500 Index experienced the highest annualized return of 16.52% but with relatively high risk, as measured by standard deviation, coming in at 13.07% — ranking sixth among the 29 selected benchmarks. As the saying goes, success with equities can be best defined as “time in the market rather than timing the market.” Equities can experience pronounced volatility but can also offer opportunities for higher returns to those with the patience to withstand the swings in valuations. For example, if indices were investible and an investor missed the five highest performing days of the S&P 500 from 1980 through 2018, their overall return would be reduced by 35%. In fact, missing the 10 highest performing days for that period would cut the investor’s long-term results by more than half.⁹

One important takeaway, from a global bond perspective, is the difference in risk between emerging market equities and bonds. It’s understandable that risk-averse investors could be wary of these investments when both the MSCI Emerging Markets Equity Index and MSCI All Country World Equity Index had high rates of volatility. However, emerging markets' fixed income offered competitive returns with measurably less risk. The Emerging Markets Hard Currency Aggregate Corporate Index and the JP Morgan Emerging Markets Bond Index were some of the top performers on a risk-adjusted basis, as shown in the Sharpe ratio table (Figure 5). The ability to allocate a bond portfolio in the lower risk/ higher return and lower risk/lower return quadrants, therefore optimizing risk and return globally, can be a tremendous advantage for a global strategy. Emerging market debt can be an excellent way to get exposure to that higher return/lower risk quadrant, which can be used in combination with US bonds for an optimized portfolio.

Figure 5: Global asset classes: risk relative to returns

			Sharpe Ratio
Asset Class	Rank	Asset Class Benchmark	12-year	10-year	5-year	3-year
Global Sukuk	1	FTSE IdealRatings Sukuk Index	1.39	1.19	1.00	1.12
Global Bonds	2	Bloomberg Barclays GCC USD Credit Total Return Index	1.16	1.01	0.82	0.94
Global Bonds	3	Bloomberg Barclays China Aggregate Index (CNY Denominated)	1.11	0.89	1.04	1.19
US Equities	4	S&P 500 Index	1.06	1.22	1.12	1.41
US Bonds	5	Bloomberg Barclays US Corporate High Yield	1.00	0.96	0.70	0.80
US Bonds	6	Bloomberg Barclays US Corporate Investment Grade	0.98	0.81	0.71	0.86
Global Bonds	7	Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index	0.83	0.72	0.51	0.51
Global Bonds	8	Bloomberg Barclays Emerging Markets Hard Currency Aggregate: Other Government Related	0.83	0.80	0.71	0.69
Global Bonds	9	Bloomberg Barclays Emerging Markets Local Currency Government 10% Country Capped	0.81	0.62	0.60	0.46
Global Bonds	10	Bloomberg Barclays Emerging Markets Hard Currency Aggregate: Corporate	0.74	0.73	0.56	0.54
Global Equities	11	MSCI World Net Total Return USD Index	0.73	0.92	0.92	1.17
Global Bonds	12	Bloomberg Barclays EM Local Currency Universal Asia Total Return Index	0.72	0.67	0.94	0.93
Global Equities	13	MSCI ACWI Index	0.72	0.90	0.93	1.14
US Bonds	14	Bloomberg Barclays US Treasury Index	0.70	0.43	0.51	0.58
Global Bonds	15	JP Morgan EMBI Global Core	0.68	0.56	0.39	0.43
Global Bonds	16	Bloomberg Barclays Global Credit - United Kingdom TR Index Unhedged USD	0.52	0.57	0.56	0.60
Global Bonds	17	FTSE World Broad Investment-Grade Bond (WBIG) Index USD	0.40	0.28	0.52	0.43
Global Bonds	18	Bloomberg Barclays Global Agg - United Kingdom TR Index Unhedged USD	0.39	0.29	0.45	0.48
Global Bonds	19	Bloomberg Barclays Pan-European High Yield (USD) Total Return Index Unhedged US	0.34	0.48	0.41	0.34
Global Equities	20	MSCI Emerging Markets Index	0.24	0.32	0.55	0.53
Global Bonds	21	Bloomberg Barclays EM Local Currency Government 10% Country Capped	0.20	0.12	0.27	0.13
Global Bonds	22	Bloomberg Barclays Pan-European Aggregate Corporate TR Index Unhedged USD	0.19	0.27	0.32	0.20
Global Bonds	23	Bloomberg Barclays Pan-European Government Total Return Index Unhedged USD	0.16	0.23	0.33	0.17
Global Bonds	24	Bloomberg Barclays Global Aggregate ex USD Index	0.14	0.04	0.35	0.16
Global Bonds	25	Bloomberg Barclays Emerging Markets Latin America Local Currency Govt Country Capped Gross	0.12	0.03	0.12	-0.11
Global Bonds	26	MSCI Emerging Markets Currency Index	0.11	0.06	0.36	0.18
Global Bonds	27	Bloomberg Barclays Emerging Markets Local Currency Government Index: Americas	0.05	-0.05	-0.01	-0.21
Global Bonds	28	Bloomberg Barclays EM Local Curr Europe/Mideast/Africa Total Return Index	0.04	0.04	0.20	0.16
US Bonds	29	Bloomberg Barclays US Treasury Bills 1-3 Months	0.00	0.00	0.00	0.00

Source: Bloomberg

What are Sukuk?

Sukuk is the plural of sak, an Arabic word translated as deed, instrument, or legal document.Sukuk are financial certificates with characteristics similar to conventional bonds. Generally, sukuk:

have a stated maturity date;
offer a stated annual investment income rate, similar to a coupon offered by a conventional bond; and
may obtain a credit rating from well-recognized credit rating agencies, such as Moody’s and Standard & Poor’s.

It is important to note that while sukuk may share similar features with conventional bonds, unlike conventional bonds, they typically reflect an undivided beneficial ownership interest in an underlying asset, similar to a stock. The returns of the underlying asset provide the investment return, and sukuk holders share in the underlying asset’s profits as well as potential losses.

In this second edition, we have provided a matrix of 29 benchmarks, identifying their respective annualized performance and risk as measured by standard deviation over the trailing 10-year period ended December 31, 2021. This differs from the first edition, which captured the same information but over a 12-year period (2009-2020). When we compared this 10-year matrix to the prior edition, we noticed that equity benchmarks have experienced higher returns while fixed-income benchmarks have experienced more muted results. The higher equity performance can be attributed, in part, to the robust investment performance over the last two years due to the extraordinary global accommodative monetary and fiscal policies in response to the pandemic.

Investment benchmarks tend to revert to the mean; that is, there is a tendency for assets to converge to their respective long-term historical averages. However, there have been times when benchmarks experienced extraordinary returns. One such example includes the strong equity performance during the late 1990s that led to the dot-com bubble. In short, assets can experience favorable periods as well as challenging tenures.

Among this matrix of benchmarks, the FTSE IdealRatings Sukuk Index and Bloomberg Barclays US Treasury Bills 1-3 Months Index were the only two asset categories that realized a positive annual return between 2011 and 2021. The FTSE Sukuk’s worst performance was 0.26% in 2018, while the US Treasury Bills Index’s worst was a return of 0.03% in 2015. While their unique track records do not make any guarantees about future returns, they do demonstrate the unique investment characteristics of sukuk securities.

ESG Landscape in a Global Context

ESG integration is a critical component of a global strategy, and the conversation around the case for global bonds must include consideration of sustainability. This is especially true when choosing the best risk-adjusted returns from around the globe. Referring to Figure 6, we believe that ESG integration is critical to avoid the upper left quadrant of higher risk/lower return. This also enables an investor to focus on risk reduction in areas such as climate and governance while also taking advantage of opportunities in growing markets. A strong internal process for ESG integration is of paramount importance given the data challenges, changing markets, and lack of uniform standards governing what can be defined as “green” bonds, sometimes referred to as qualified proceeds-use bonds. Currently, only about 1% of total debt outstanding is specifically labeled as having a qualified proceeds-use. (Defined in Figure 7 as Green, Social, or Sustainable.)

Figure 7: Overall Global Bond Market details the qualified proceeds-use and currency breakdowns of the current bond market. Even within the small category of the sustainable bond market, US dollar-denominated bonds account for only 27.5% of total debt outstanding. If an investor is seeking bonds with sustainable use of proceeds, a global strategy would have access to a much larger pool of debt securities. Issuance in the space is growing rapidly, with both 2019 and 2020 seeing growth of more than 60%. Europe and the US account for most issuance, but we expect that green, social, and sustainable bonds will track the overall global bond market with emerging market economies issuing more debt with specific use of proceeds.

In the meantime, a sustainability-minded investor must look outside of the labeled sustainable bond market for investment opportunities, not only due to the relatively small size of the market, but also for the lack of consistency in standards for what constitutes a qualified proceeds-use bond. Even issuers of green bonds can have serious governance or social detractors that could ultimately impact their underlying creditworthiness and subsequent returns.

Figure 6: Asset Class Performance and Risk Attributes (December 2008 - December 2021)

Figure 7: Overall Global Bond Market and Currency Breakdown

Evaluating ESG Opportunities: Gender in a Global Landscape

ESG standards vary across the globe. Gender equality and gender-related disclosure have a foothold in nations such as the UK, where companies are required to disclose gender pay gaps. In the US, more companies are adding women to boards and acknowledging the research showing a positive link between gender representation and improved profitability.¹⁰ However, in many other parts of the world, this change is just starting and needs investment with specific gender equality goals in mind. In Cambodia, the literacy rate for women is only 75%, while the literacy rate for their male counterparts is more than 10% higher.¹¹ The US and other developed nations have literacy rates around 99% for both genders.¹² The opportunity for economic growth, better corporate governance, and improved climate for business likely will flourish alongside improvements in gender equality and equality in education.

Organizations such as Impact Investment Exchange Asia (IIX), a Singapore-based organization focused on the empowerment of women, the environment, and underserved communities, can provide an ESG investor with fixed-income impact opportunities and portfolio diversification benefits. These cutting-edge bonds offer institutional investors the ability to invest in securities that fund loans for woman-owned enterprises and micro-finance organizations in Cambodia, India, the Philippines, and Indonesia. These bonds offer diversification across geographies, beneficiaries, and organizations, as well as a partial credit guarantee from the US Agency of International Development. While many of these bonds face "junk bond" ratings, the opportunities they present can allow a global investor risk mitigation, impactful investment, and participation in furthering gender equality.

The GCC – Overlooked Opportunities in ESG

It is fair to assume that the growth of emerging market debt may not be on the radar for most investors. However, capital market growth, along with diversification opportunities, are available outside of the developed markets. Over the past decade, these debt markets have gained in size, depth, and liquidity. In fact, debt markets of regions such as the Middle East rival the size of some segments of the developed markets. By August 12, 2019, the size of Europe's high-yield market was estimated at €432 billion (~$485 billion).¹³ At the same time, the size of the GCC fixed-income market was $506 billion, with 12 US dollar-denominated securities representing 87% ($365 billion) of the total outstanding securities.¹⁴

The GCC region's attractiveness to institutional investors has played a part in facilitating growth in the region's debt market. Many of the GCC members retain credit ratings that are more commonly found in developed countries. The United Arab Emirates has an “AA” rating from S&P, on par with the US and the UK. Saudi Arabia is rated “A-,” only two notches away from China’s “A+.” ¹⁵ Relatively strong credit characteristics contribute to 14 of the appealing risk-adjusted return profiles discussed earlier. The favorable investment attributes have not gone unnoticed by global benchmark providers, such as JP Morgan. At year-end 2021, the GCC region represented 22.4% of the Emerging Market Bond Global Index and 18.1% of the Emerging Markets Bond Global Diversified Index, up from 2.1% and 6.2% at year-end 2018, respectively.¹⁶

Within this region there are compelling ESG opportunities relating to the environment and the transition toward a low-carbon economy. The region is known for its extremely hot summers, where temperatures can rise above 120° F (49° C)! Demand for air conditioning during the summer accounts for up to 70% of the overall electricity consumption in the UAE.¹⁷ The National Central Cooling Company PJSC, often referred to as Tabreed, offers a unique solution to reduce carbon emissions and energy demand. Tabreed builds and operates utility-sized central plants to cool water, which is then distributed through a dedicated network of insulated pipes to customers’ buildings, known as a cooling district. The company has a 30-year operating history and currently runs 86 cooling plants in five countries.¹⁸ As of year-end 2020, management reported a reduction in CO₂ emissions by 1.35 million tons, which is equivalent to removing 293,192 passenger vehicles off the road for an entire year.¹⁹

Conclusion

An allocation to global bonds offers investors an important opportunity for portfolio diversification and risk-adjusted returns. With 60% of the bond market located outside the US, the opportunities available to investors are greatly amplified in a global strategy. From a sustainability viewpoint, a global strategy also offers opportunities for impact in developing nations and unique ESG names. Positioning assets for the future of economic growth, while focusing on optimizing risk relative to return, is a hallmark of a global sustainable bond strategy.

Appendix I

Annual Benchmark Ranking				Performance Annualized by Interval				Standard Deviation
Rank	Asset Class Benchmark	Minimum	Maximum	12-year	10-year	5-year	3-year	12-year	10-year	5-year	3-year
1	MSCI Emerging Markets Index	-18.20%	78.92%	4.64%	5.84%	10.23%	11.28%	17.57%	16.38%	16.61%	18.55%
2	Bloomberg Barclays EM Hard Currency Aggregate: Corporate	-3.15%	56.03%	5.32%	4.95%	4.63%	5.68%	6.54%	5.95%	6.27%	7.77%
3	Bloomberg Barclays EM Local Currency Government 10% Country Capped	-11.72%	18.19%	2.51%	1.75%	3.48%	2.73%	10.06%	9.66%	8.61%	9.35%
4	Bloomberg Barclays EM Hard Currency Aggregate: Other Government Related	-2.08%	49.74%	5.75%	5.17%	5.07%	6.22%	6.32%	5.70%	5.54%	6.83%
5	Bloomberg Barclays EM Local Currency Government 10% Country Capped	-4.55%	9.21%	3.12%	2.69%	2.99%	3.21%	3.23%	3.36%	3.07%	3.65%
6	MSCI Emerging Markets Currency Index	-7.06%	13.90%	1.20%	0.93%	2.85%	2.41%	6.23%	5.61%	4.84%	4.90%
7	Bloomberg Barclays US Treasury Index	-3.57%	9.84%	3.06%	2.13%	3.07%	4.07%	3.65%	3.56%	3.81%	4.38%
8	Bloomberg Barclays US Treasury Bills 1-3 Months	0.03%	2.21%	0.50%	0.58%	1.08%	0.93%	0.22%	0.24%	0.26%	0.30%
9	Bloomberg Barclays US Corporate Investment Grade	-2.49%	18.68%	5.33%	4.69%	5.25%	7.59%	4.93%	5.06%	5.76%	7.03%
10	Bloomberg Barclays US Corporate High Yield	-4.47%	58.21%	7.33%	6.82%	6.29%	8.83%	6.81%	6.48%	7.37%	9.13%
11	MSCI World Net Total Return USD Index	-8.67%	29.99%	10.97%	12.68%	15.01%	21.68%	14.25%	13.21%	15.01%	17.30%
12	S&P 500 Index	-4.37%	32.37%	15.13%	16.52%	18.44%	26.03%	13.84%	13.07%	15.39%	17.42%
13	MSCI ACWI Index	-8.87%	35.48%	10.78%	12.46%	14.98%	20.98%	14.35%	13.23%	14.88%	17.13%
14	JP Morgan EMBI Global Core	-6.45%	28.78%	6.05%	5.26%	4.72%	6.34%	8.10%	8.27%	9.27%	11.30%
15	Bloomberg Barclays EM Local Currency Universal Asia Total Return Index	-3.08%	9.50%	4.36%	4.04%	5.31%	5.57%	5.37%	5.15%	4.46%	4.33%
16	Bloomberg Barclays Emerging Markets Local Currency Government Index: Americas	-22.24%	36.48%	1.16%	-0.17%	0.96%	-1.60%	14.31%	14.39%	13.98%	15.18%
17	Bloomberg Barclays EM Local Currency Europe/Mideast/Africa Total Return Index	-9.03%	19.74%	1.02%	1.06%	3.19%	3.21%	11.42%	10.61%	10.20%	10.51%
18	Bloomberg Barclays GCC USD Credit Total Return Index	-0.43%	33.54%	5.79%	5.21%	5.62%	7.87%	4.54%	4.58%	5.47%	6.74%
19	FTSE IdealRatings Sukuk Index	0.26%	27.13%	4.97%	4.48%	4.96%	6.80%	3.20%	3.27%	3.85%	4.71%
20	Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index	-4.12%	34.23%	5.90%	5.12%	4.56%	5.81%	6.46%	6.32%	6.78%	8.33%
21	Bloomberg Barclays Global Aggregate ex USD Index	-7.16%	10.55%	1.44%	0.81%	3.06%	2.45%	6.75%	6.18%	5.54%	5.80%
22	Bloomberg Barclays China Aggregate Index (CNY Denominated)	-5.17%	9.74%	4.93%	4.37%	6.22%	7.14%	3.97%	4.25%	4.92%	4.74%
23	Bloomberg Barclays Pan European Aggregate Corporate TR Index Unhedged USD	-9.10%	21.08%	2.24%	2.74%	3.69%	3.31%	9.31%	8.03%	7.98%	8.92%
24	Bloomberg Barclays Pan-European Government Total Return Index Unhedged USD	-9.75%	13.69%	1.82%	2.23%	3.35%	2.71%	8.22%	7.23%	6.80%	7.03%
25	Bloomberg Barclays Pan-European High Yield (USD) Total Return Index Unhedged US	-8.18%	92.67%	5.09%	5.87%	5.62%	5.80%	13.38%	10.99%	10.98%	12.68%
26	Bloomberg Barclays Global Agg - United Kingdom TR Index Unhedged USD	-5.45%	14.01%	3.53%	2.71%	4.51%	5.64%	7.76%	7.34%	7.57%	8.56%
27	Bloomberg Barclays Global Credit - United Kingdom TR Index Unhedged USD	-5.59%	24.95%	4.40%	4.43%	5.10%	6.49%	7.54%	6.72%	7.08%	8.32%
28	Bloomberg Barclays EM Latin America Local Currency Govt Country Capped Gross	-20.50%	35.00%	2.16%	0.99%	2.70%	-0.04%	13.63%	13.69%	13.26%	14.42%
29	FTSE World Broad Investment-Grade Bond (WBIG) Index USD	-5.42%	9.45%	2.29%	1.76%	3.24%	3.43%	4.50%	4.24%	4.05%	4.45%

Source: Bloomberg

About the Authors

Elizabeth Alm, CFA

Senior Investment Analyst & Portfolio Manager

Since 2018

Patrick Drum, MBA, CFA, CFP®

Fixed Income Lead and Portfolio Manager

Since 2014

Footnotes

¹ Kolchin, Katie, Ali Mostafa, and Justyn Podziemska. Capital Markets Fact Book, 2020. SIFMA. September 29, 2020. https://www.sifma. org/resources/research/fact-book/

² Ibid.

³ Al Gergawi, Mishaal, and Afshin Molavi. The 85 World. Emerge85, October 3, 2016. https://emerge85.io/Insights/the-85-world/

⁴ United States Population. Worldometers. https://www.worldometers.info/world-population/us-population/

⁵ Applications and Limitations of ICD Data. African Development Bank Group. http://www.afdb.org/fileadmin/uploads/afdb/ Documents/Publications/4-Applications%20and%20Limitations%20of%20ICP%20Data.pdf

⁶ The World in 2050. Price Waterhouse, February 2017. https://www.pwc.com/gx/en/research-insights/economy/the-worldin- 2050.html#downloads

⁷ Fernando, Jason. Sharpe Ratio. Investopedia. April 10, 2021. https://www.investopedia.com/terms/s/sharperatio.asp

⁸ The six members that form the Gulf Cooperative Council (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).

⁹ Houseman, Drew. Why Mistiming the Market Can Be Disastrous. The Simple Dollar, September 1, 2020. https://www. thesimpledollar.com/investing/stocks/tempted-to-sell-missing-just-a-handful-of-the-best-stock-market-days-can-tank-yourreturns/? platform=hootsuite#:~:text=Advocates%20of%20buy%2Dand%2Dhold,high%2C%20sell%2Dlow%20behavior.

¹⁰ Dixon-Fyle, Sundiatu, Vivian Hunt, Sara Prince, and Lareina Yee. Delivering Through Diversity, January 18, 2018. https://www. mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity

¹¹ Cambodia. UN: Women. https://data.unwomen.org/country/cambodia

¹² UNESCO Institute for Statistics. Literacy rate, adult female (% of females age 15 and above). The World Bank, September 2020. https://data.worldbank.org/indicator/SE.ADT.LITR.FE.ZS

¹³ Jessop, Simon, and Abhinav Ramnarayan. Demand for junk bonds grows, and so do liquidity worries. Reuters, August 12, 2019. https://cn.reuters.com/article/instant-article/idUKKCN1V217C

¹⁴ Bloomberg.

¹⁵ Credit Ratings. Trading Economics. https://tradingeconomics.com/country-list/rating

¹⁶ Sahu, Rakesh, and Bhogaita, Chavan. First Abu Dhabi Bank, GCC Fixed Income Chart Book, FY 2021 Review, January 5, 2022. https://www.bankfab.com/-/media/fabgroup/home/cib/market-insights/gcc-fixed-income-market-updated/gcc-fixed-incomepdf/ 20220105gccficb.pdf

¹⁷ Pamuk, Humeyra. UAE’s mission impossible: Cooling the desert. Reuters. July 13, 2011. https://www.reuters.com/article/uspower- emirates/uaes-mission-impossible-cooling-the-desert-idUSTRE76C1OI20110713

¹⁸ About Us: Our Story. Tabreed. https://www.tabreed.ae/about-us/

¹⁹ Tabreed eliminates over 1.35 million metric tons of CO2 emissions in 2020. Tabreed, March 17, 2021. https://www.tabreed.ae/ news/tabreed-eliminates-1-35-million-metric-tons-co2-emissions-2020/

Important Disclaimers and Disclosures

This material is for general information only and is not a research report or commentary on any investment products offered by Saturna Capital. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. To the extent that it includes references to securities, those references do not constitute a recommendation to buy, sell, or hold such security, and the information may not be current. Accounts managed by Saturna Capital may or may not hold the securities discussed in this material.

We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Saturna Capital deems reliable; however, Saturna Capital does not warrant the accuracy or completeness of the information. Investors should consult with a financial adviser prior to making an investment decision. The views and information discussed in this commentary are at a specific point in time, are subject to change, and may not reflect the views of the firm as a whole.

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.

Gender diversity on a corporate board or in executive leadership is not a guarantee that the value of an issuer's securities will increase, or that a security will outperform other securities.

Diversification does not assure a profit or protect against a loss in a declining market.

A Few Words About Risk

Investing involves risk, including possible loss of principal. Generally, an investment that offers a higher potential return will have a higher risk of loss. Stock prices fluctuate, sometimes quickly and significantly, for a broad range of reasons that may affect individual companies, industries, or sectors. When interest rates rise, bond prices fall. When interest rates fall, bond prices go up. A bond fund's price will typically follow the same pattern. Investments in high-yield securities can be speculative in nature. High-yield bonds may have low or no ratings, and may be considered "junk bonds."

In addition to the fixed-income market risks above, the Amana Participation Fund entails risks specific to investing in sukuk. Sukuk structures may be significantly more complicated than conventional bonds and often include a series of entities created specifically to support the sukuk structure. In addition, sukuk are largely created in or otherwise subject to the risks of developing economies, many of which have weak or inconsistent accounting, legal, and financial infrastructure. The structural complexity of sukuk, along with the weak infrastructure of the sukuk market, increases risks of investing in sukuk, including operational, legal, and investment risks.

Fund share prices, yields, and total returns will change with market fluctuations as well as the fortunes of the countries, industries, and companies in which it invests. Foreign investing involves risks not normally associated with investing solely in US securities. These include fluctuations in currency exchange rates, less public information about securities, less governmental market supervision, and the lack of uniform financial, social, and political standards. Foreign investing heightens the risk of confiscatory taxation, seizure or nationalization of assets, establishment of currency controls, or adverse political or social developments that affect investments.

The Amana Funds limit the securities they purchase to those consistent with Islamic and sustainable principles. The Saturna Sustainable Funds limit the securities they purchase to those consistent with sustainable principles. This limits opportunities and may affect performance.

Sharpe ratio: A ratio that measures risk-adjusted performance by subtracting a risk-free rate (such as that of the 10-year US Treasury bond) from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio can help investors determine if a portfolio’s returns are due to good investment decisions by the portfolio manager or a result of excess risk. A ratio of 1 or better is considered good, 2 and better is very good, and 3 and better is considered excellent.

While diversification does not guarantee against a loss in a declining market, it can help minimize the risk of the decline of a single market.

Index Definitions

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the Index because their inclusion would result in double-counting.

The Bloomberg Barclays US Treasury Bills 1-3 Month Index is designed to measure the performance of public obligations of the US Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. The Index includes all publicly issued zero coupon US Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, are rated investment-grade, and have $300 million or more of outstanding face value.

The Bloomberg Barclays US Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non- US industrial, utility, and financial issuers.

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.

The Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index is a flagship hard currency emerging markets (EM) debt benchmark that includes USD, EUR, and GBP-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. This includes the EM Hard Currency Aggregate: Corporate and the EM Hard Currency Aggregate: Other Government Related.

The Bloomberg Barclays Emerging Markets Local Currency Government Universal Index is the broadest Barclays benchmark tracking the performance of fixed-rate local currency EM debt. Classification as an EM is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classifications. This includes the Bloomberg Barclays EM Local Currency Universal Asia Total Return Index and the Bloomberg Barclays EM Local Currency Europe/Mideast/Africa Total Return Index.

The Bloomberg Barclays Emerging Markets Local Currency Government Index is a flagship index that measures the performance of local currency EM debt. Classification as an EM is rules-based and reviewed annually using World Bank income group, International Monetary Fund (IMF) country classification and additional considerations such as market size and investability. This includes the Bloomberg Barclays Emerging Markets Local Currency Government Index: Americas.

The Bloomberg Barclays 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 includes the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index. This Index includes the Bloomberg Barclays GCC USD Credit Total Return Index.

The Bloomberg Barclays Global Aggregate ex USD Index is a measure of investment-grade debt from 24 local currency markets. This multi-currency benchmark includes Treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded. This includes the Bloomberg Barclays Global Aggregate ex USD Index.

The Bloomberg Barclays China Aggregate Index tracks the performance of the CNY-denominated fixed-income market. The China Aggregate Index was launched in March 2004, with an inception date of January 1, 2004. It contains fixed-rate Treasury, government-related (including policy banks), and corporate securities that are listed on the China Interbank market. This includes the Bloomberg Barclays China Aggregate Index (CNY Denominated).

The Bloomberg Barclays Pan-European Aggregate Index tracks fixed-rate, investment-grade securities issued in the following European currencies: EUR, GBP, NOK, DKK, SEK, CHF, CZK, HUF, PLN, RUB, and SKK. Inclusion is based on the currency of the issue, and not the domicile of the issuer. This includes the Bloomberg Barclays Pan-European Aggregate Corporate TR Index Unhedged USD and the Bloomberg Barclays Pan-European Government Total Return Index Unhedged USD.

The Bloomberg Barclays Pan-European High Yield Index measures the market of non-investment grade, fixed-rate corporate bonds denominated in the following currencies: euro, pounds sterling, Danish krone, Norwegian krone, Swedish krona, and Swiss franc. Inclusion is based on the currency of issue, and not the domicile of the issuer. This includes the Bloomberg Barclays Pan-European High Yield (USD) Total Return Index Unhedged US.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment-grade debt from 24 local currency markets. This multi-currency benchmark includes Treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging markets issuers. This includes the Bloomberg Barclays Global Agg - United Kingdom TR Index Unhedged USD and the Bloomberg Barclays Global Credit - United Kingdom TR Index Unhedged USD.

The FTSE Sukuk Index measures the performance of global Islamic fixed-income securities, also known as sukuk. Investors cannot invest directly in the Index.

The FTSE WorldBIG Bond Index is a multi-asset, multi-currency index, which provides a broad-based measure of the global fixed-income markets.

The JP Morgan EMBI Global Core Index is composed of US dollar-denominated government bonds issued by emerging market countries. The Index is a broad, diverse US dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries. This includes the Bloomberg Barclays Global Credit - United Kingdom TR Index Unhedged USD.

The MSCI All Country World Index is produced by Morgan Stanley Capital International (MSCI). It is a broad measure of equity market performance throughout the world. Investors cannot invest directly in the Index.

The MSCI Emerging Markets Index, produced by Morgan Stanley Capital International, measures equity market performance in over 20 emerging market countries.

The MSCI Emerging Markets (EM) Currency Index tracks the performance of 25 emerging market currencies relative to the US dollar.

The MSCI World Net Total Return Index Futures are cash settled upon expiration. The underlying index is the MSCI World Net Total Return Index denominated in USD. This index covers approximately 85% of the free float-adjusted market capitalization across the World Developed Markets equity universe (large and mid-cap).

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.