Q1 2022

Pestilence, War, Inflation, Hunger, Disruption

Born in 1946, I’ve seen times this challenging only once before, in 1968 − the Vietnam War, China’s Cultural Revolution, and unrest almost everywhere.  The markets were volatile then too, before starting an extraordinarily long period of gains.

It’s spring 2022, after two years and 500 million COVID-19 cases.  A vaccine miracle permitted most countries to break free of massive pestilence not seen since 1919.  Sufficient vaccines for a surplus exist from Western pharmaceutical manufacturers, but consequences persist.

While historians have expanded their primary studies from Western civilization since 1945, much of the world remains centered on Europe and its 750 million persons.  The peaceful collapse of the Soviet Union in 1991 made pundits wonder if liberalization, globalization, and a single superpower meant the end of history.  Sadly, not so.  On February 24, 2022, Russia assaulted its neighbor Ukraine with a vicious war to capture territory by the violent killing of thousands of people, driving millions from their homes.  Staunch Ukrainian defenders essentially wiped out the Russian battalions attacking Kyiv.  An initial armistice may provide a few cities of rubble and cadavers for the Russians, and dubious peace guarantees for the remainder of Ukraine.

The war highlights unpreparedness, and Europe’s systems of finance, energy, and food totter.  Fewer than half the world’s population was alive in 1981, when inflation was last at today’s increasing levels.  Weakened by the debt incurred to fight COVID-19, financial systems have scant room to respond.  Oil and gas production and transportation face big price increases, fostered by mistakes such as Europe’s naive reliance on Russian exports and fantasies that shutting down nuclear plants and pipelines would have no consequences.  US consumer spending is weakening, tempered by the price increases.  A ceasefire in Ukraine will help control inflation, but the effects of quickly rising interest rates in the US and Europe as well as production, health, and housing disruptions in China work the other way.  You may not recall, but real estate prices tumble when 30-year mortgages touch 17% interest, as happened in 1981.

The pandemic and weather, plus shortages of labor, fertilizers, shipping, and equipment, pushed a UN food price index up 40% over the last two years.  Much of the grain for the Middle East and North Africa was exported through the Black Sea.  With mines and Russian warships now along the Ukrainian coast, neither freighters nor insurance for these exports is available.  Brave civilians and soldiers are holding out in Ukraine’s Alamo — Mariupol — but lack of food may force submission.  The UN World Food Programme announced this week that the higher cost of food means they must cut their distributions to areas of conflict or stress.  Instances of food nationalism, panic buying, and extreme weather also cut the food supply.

Diseases, shortages, wars, and sanctions create disruption and refugees.  Riots — over living costs as well as freedoms — were widespread in 2010 and 2011.  Now, Bloomberg estimates 70 million Chinese people are either in or about to face COVID lockdowns.  Households there suffer, with food being the big concern.  Shanghai, the world’s largest container port and a megacity of 25 million people, is locked down tight.  In another population disruption, one in 10 Ukrainians left the country in just six weeks, and an estimated one in two children no longer live safely at home.

Opportunity

Known as the British Imperial Century, the first global era of liberalism and trade began with France’s defeat in 1815 and ended in 1914.  Ensuing inflation, depression, climate disruption, starvation, and a second round of global war finally ended in 1945.  The Bretton Woods Conference of 1944, sparked by the leadership of British economist John Maynard Keynes, agreed upon the rules that kept Europe at peace under American protection for my entire life.

The era of American dominance is over, and what comes next is unclear.  Europe has made astounding changes in the last few weeks and appears to now agree that it must unite and bring Ukraine through its horrors. President Zelenskyy and his country have the grit to see off the Russians. NATO is both secretly and openly supporting Ukraine, while the EU brings their refugee women and children to safety.  Overly dependent on energy and trade with Russia and China, only a few countries are still blocking more EU sanctions on Russia for its war crimes.  Countries like Sweden, Finland, Ireland, and Switzerland now agree their old concepts of neutrality are out of date.

Whether Putin knows it or not, he’s not going to win this war.  It’s being fought on many levels, including hackers, drones, and special forces. In a smart twist to counter disinformation and gain trust, Ukraine, the US, and the UK are publicly sharing verified intelligence.  Stupidly, the West has let Russia and its ex-KGB leader disrupt the world with poisonings, repression, election meddling, threats, cyberterrorism, and corrupting oligarchs.  Nastier Russian weapons, from rockets to germs, could still be employed.  What Russia doesn’t have is the leadership, troops, or logistics to take and hold occupied territory.  Russia didn’t gain its expected easy win, and its retreating forces now look capable of losing the entire gamble.  Ukraine wasn’t prepared for a fight in 2014 and gave up Crimea and the Donbas region.  This time, Russia looks underprepared, and may have to now give them up.

The war marks the beginning of Cold War II, between the Western democracies and autocratic Asian empires – this time led by China.  In the absence of Western protest, Russia has re-dominated its past territories of Belarus, Kazakhstan, and Transnistria, plus parts of Georgia and Azerbaijan.  Hungary and Serbia favor Russia, and its influence grows in Iran, Yemen, Lebanon, and Syria.  Forty countries, representing most of the world’s population, did not vote against Russia’s invasion in the UN General Assembly.  China has been unopposed in its illegal occupation of various islets in the South China Sea, and is relentlessly expanding its naval, air, and nuclear missile forces.  So, effectively, ends the dream of the UN as the world’s guarantor of peace.  Other long-term attempts for collaboration rather than confrontation are also ending, such as the joint development of space.  Fear of the nuclear Russian bear is roiling from Finland through the Baltics and a long-subdued Germany down to Turkey.  Finally, NATO democracies from the US to the tiny Baltic states are boosting their defense expenditures.

History is moving.  A willingness to prepare, fight, and die for peace is again proven as the way it is achieved.

Lower-risk, long-term investments such as quality large-cap equities generally conquer inflation and uncertainty.  Companies owning commodities and other hard assets are especially attractive.  While it can be fun, speculative frenzies and whizbang promotions almost always disappoint.

Nicholas Kaiser President, Amana Mutual Funds Trust 7 April 2022

Sextant Growth Fund

Sextant International

Sextant Global High Income

Sextant Core Fund

Sextant Short-Term Bond Fund, Sextant Bond Income Fund

Performance Summary

As of March 31, 2022

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Performance data quoted represents past performance, is before any taxes payable by shareowners, and is no guarantee of future results.  Current performance may be higher or lower than that stated herein.  Performance current to the most recent month-end is available by calling toll-free 1-800-728-8762 or visiting www.sextantfunds.com.  Average annual total returns are historical and include change in share value as well as reinvestment of dividends and capital gains, if any.  The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.  Shares of a fund may only be offered for sale through the fund’s prospectus or summary prospectus.

^A By regulation, expense ratios shown are as stated in the Funds' most recent prospectus or summary prospectus, dated March 30, 2022, and incorporate results from the fiscal year ended November 30, 2021. Higher expense ratios may indicate higher returns relative to a fund’s benchmark. The adviser has voluntarily capped actual expenses of Sextant Global High Income at 0.75% and actual expenses of Sextant Short- Term Bond at 0.60% through March 31, 2023.

^B Z Shares of Sextant Growth and Sextant International Funds began operations June 2, 2017.

^C Sextant Global High Income Fund began operations March 30, 2012.

The S&P 500 Index is an index comprised of 500 widely held common stocks considered to be representative of the US stock market in general.  The NASDAQ Composite Index measures the performance of more than 5,000 US and non-US companies traded "over the counter" through NASDAQ.  The MSCI EAFE Index is an international index focused on Europe, Australasia, and the Far East.  The MSCI ACWI Index, produced by Morgan Stanley Capital International, measures equity market performance throughout the world.  The S&P Global 1200 Index is a global stock market index covering nearly 70% of the world's equity markets.  The Bloomberg Barclays Global High Yield Corporate Bond Index is a rules-based, market-value weighted index engineered to measure the non-investment grade, fixed-rate, taxable, global corporate bond market.  The Dow Jones Moderate Portfolio Index is a broad-based index of stock and bond prices.  The FTSE Gov./Corp. Investment Grade Index 1-3 Years is a broad-based index of shorter-term investment-grade US government and corporate bond prices.  The FTSE US Broad Investment-Grade Bond Index is a broad-based index of medium and long-term investment-grade bond prices. When available, Saturna uses total return components of indices mentioned.  Investors cannot invest directly in the indices.

A fund's 30-Day Yield, sometimes referred to as standardized yield, current yield, or SEC yield, is based on methods of computation prescribed in SEC Form N-1A.  Calculated by dividing the net investment income per share during the preceding 30 days by the net asset value per share on the last day of the period, the 30-Day Yield provides an estimate of a fund's investment income rate, but may not equal the actual income distribution rate.

Morningstar Ratings™

As of March 31, 2022

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Performance data quoted herein represents past performance and does not guarantee future results.

© 2022 Morningstar®. All rights reserved.  Morningstar, Inc. is an independent fund performance monitor. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely.  Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

^A Morningstar Ratings^™ ("Star Ratings") are as of March 31, 2022. The Morningstar Rating^™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history.  Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes.  It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance (not including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics.  The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

% Rank in Category is the fund’s percentile rank for the specified time period relative to all funds that have the same Morningstar category.  The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100.  The top-performing fund in a category will always receive a rank of 1.  Percentile ranks within categories are most useful in those categories that have a large number of funds.

Unshaded stars indicate extended performance.  Extended performance is an estimate based on the performance of a fund's oldest share class, adjusted for fees.

The Sextant Growth and Sextant International Funds offer two share classes – Investor Shares and Z Shares, each of which has different expense structures.  

Footnotes:

¹ Mackenzie, Michael. "Treasury Bondholders Look for Reprieve From Worst Loss on Record." Bloomberg, March 31, 2022. https://www. bloomberg.com/news/articles/2022-03-31/treasury-bondholders-look-for-reprieve-from-worst-loss-on-record?sref=ykxFN1EN

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The information in this publication was obtained from sources Saturna believes to be reliable and accurate at the time of publication.

All material presented in this publication, unless specifically indicated otherwise, is under copyright to Saturna. No part of this publication may be altered in any way, copied, or distributed without the prior express written permission of Saturna.

Asset-weighted average debt to market capitalization:  This ratio represents the average debt to market capitalization of the portfolio. It is calculated by taking the debt to market capitalization for each company (its debt divided by its market capitalization), weighting these values (multiplying each by the company’s percent share of total portfolio assets), and then totaling the weighted values.

Effective maturity and modified duration are measures of a fund’s sensitivity to changes in interest rates and the markets. A fund’s effective maturity is a dollar-weighted average length of time until principal payments must be paid. Longer maturities typically indicate greater sensitivity to interest rate changes than shorter maturities. Modified duration differs from effective maturity in that it accounts for interest payments in addition to the length of time until principal payments must be paid. Longer durations tend to indicate greater sensitivity to interest rate changes than shorter durations. Call options and other security-specific covenants may be used when calculating effective maturity and modified duration.

A Few Words About Risk

The Growth Fund may invest in smaller companies, which involve higher investment risks in that they often have limited product lines, markets, and resources, or their securities may trade less frequently and have greater price fluctuation than those of larger companies.

The International Fund involves risks not typically associated with investing in US securities. These include fluctuations in currency exchange rates, less public information about securities, less governmental market supervision, and lack of uniform financial, social, and political standards.

The Core Fund involves the risks of both equity and debt investing, although it seeks to mitigate these risks by maintaining a widely diversified portfolio that includes domestic stocks, foreign stocks, short and long-term bonds, and money market instruments.

Investment in the Global High Income Fund entails the risks of both equity and debt securities, although it seeks to mitigate these risks through a widely diversified portfolio that includes foreign and domestic stocks and bonds. Issuers of high-yield securities are generally not as strong financially as those issuing higher quality securities. 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.”

The risks inherent in the Short-Term Bond and Bond Income Funds depend primarily on the terms and quality of the obligations in their portfolios, as well as on bond market conditions. When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. Bonds with longer maturities (such as those held by the Bond Income Fund) usually are more sensitive to interest rate changes than bonds with shorter maturities (such as those held by the Short-Term Bond Fund). The Funds entail credit risk, which is the possibility that a bond will not be able to pay interest or principal when due. If the credit quality of a bond is perceived to decline, investors will demand a higher yield, which means a lower price on that bond to compensate for the higher level of risk.