Q1 2023

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The New Year kicked off with an ebullient rush back into assets as equities, corporate debt, and Treasurys all caught a bid. In many ways, it looked like the S&P 500 rally that began in mid-October was set to continue after a brief pause for tax-loss selling in December. Buoying the narrative were a series of positive data points that suggested that the Federal Reserve was winning its war on inflation. Year-over-year (YoY) increases to the US Consumer Price Index (CPI) peaked at 8.9% in July and fell rapidly to 6.4% in December. Core inflation (excluding food and energy) peaked at 6.6% in September and then steadily decreased. Job gains were trending down while unemployment remained low. The Fed’s rare success — taming inflation without causing a recession — led some to describe the event as an “immaculate disinflation.” Investors bought into the narrative, and the S&P 500 rallied 6.28% in January.

Then came February and with it, January’s contrary data. Inflation wasn’t ready to roll over at the Fed’s behest. Core inflation, an important metric in the Fed’s determination of its success, remained stubbornly high. What’s more, in a classic market paradox where good news was actually bad, the US economy added 504,000 jobs, up from 239,000 in December.¹ With inflation sticky and likely to remain so due to tight labor conditions, markets began to reprice, expecting interest rates to stay higher for longer. The S&P 500, driven by these expectations, drifted lower for much of February. Add to this the failures of Silicon Valley Bank and Signature Bank, and by March 13, most of the S&P 500’s year-to-date gains had evaporated.

In a rush to quell depositor anxiety, the Fed and the Federal Deposit Insurance Commission (FDIC) engaged in a series of measures to backstop the banking system. Pulling a page from the pandemic playbook, regulators rapidly intervened, injecting liquidity into the market and causing the Fed balance sheet to grow by nearly $400 billion between March 8 and March 22.² It appears investors were confident in this backstop, and newfound liquidity rushed back into capital markets, pushing the S&P 500 to finish the quarter up 7.50%.

Outlook

In a world of fiat money, confidence is everything. So, should investors rest assured the worst is behind us, or be skeptical that another shoe has yet to drop? Those in the “worst is behind us” camp will suggest the series of bank failures in mid-March were idiosyncratic and can be chalked up to concentrated depositors, cryptocurrency exposure, and poor governance. The skeptics would suggest that a series of systemic issues underpinned these failures. These issues include the reality that banks were inundated with deposits at a time of modest loan demand, and one of their preferred and often considered “safest” assets, US Treasury bills, offered record-low yields. Investing new deposits in low-yielding securities embedded interest rate risk across the system. An inverted yield curve adds pressure to banks, whose core business is to borrow short and lend long. Despite a challenging environment for banks, these institutions have favored high-quality government-backed securities. Barring fleeting depositors, such assets should mature at par.

Whether the recent bank failures are a prelude to systemic shocks is unknown, and by the time clarity emerges, the opportunity to react will have passed. The longer that interest rates remain high, the more they’ll weigh on company profits. For the past decade, yields on “BBB”-rated bonds averaged 3.7%, jumping to 5.3% over the past year. As of March 31, 2023, these yields were 5.5%. Thus, any corporate refinancing will likely occur at materially higher interest rates. With 8% of all debt rated by S&P maturing in 2023 and another 10% maturing in 2024, higher interest rates alone are likely to present a headwind to corporate earnings.³

Compounding this challenge, a rapid fall in interest rates implies recession. Currently, consensus 12-month forward earnings estimates for the S&P 500 are holding around 4% and the Index trades in line with its 10-year average of 17.4x forward earnings. Given this outlook, the market doesn’t appear to be discounting a rapid slowdown in growth. This begs the question, who is right? The market with its moderate expectations, or the vocal prognosticators calling for recession? Time will tell, as it always does, and we see no advantage to speculating on short-term dynamics. Instead, as the market gyrates between expectations of irrational exuberance and irreparable impairment, we’ll continue to favor high-quality companies that can weather the storm through cycles.

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, 2023

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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 31, 2023, and incorporate results from the fiscal year ended November 30, 2022. Higher expense ratios may indicate higher returns relative to a fund’s benchmark.

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

^CEffective March 31, 2023, the management fee paid to Saturna Capital Corporation, the Fund's adviser, for providing services to the Fund is 0.50% of average daily net assets of the Fund. Prior to this date, the management fee consisted of a base fee at an annual rate of 0.50% of the Fund’s average net assets and a positive or negative performance adjustment of up to an annual rate of 0.20% (applied to the average assets at the end of each month), resulting in a total minimum fee of 0.30% and a total maximum fee of 0.70%.

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

^E The adviser has committed through March 31, 2024, to waive fees and/or reimburse expenses to the extent necessary to ensure that the Fund’s net operating expenses, excluding brokerage commissions, interest, taxes, and extraordinary expenses, do not exceed the net operating expense ratio of 0.75% for Sextant Global High Income Fund, 0.60% for Sextant Short-Term Bond Fund, and 0.65% for Sextant Bond Income Fund. This expense limitation agreement may be changed or terminated only with approval of the Board of Trustees.

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 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 Bloomberg US Aggregate 1-3 Year Index tracks bonds with 1-3 year maturities within the flagship Bloomberg US Aggregate Bond Index. The Bloomberg US Aggregate Bond Index is a broad-based, flagship benchmark that measures the investment-grade, US dollar-denominated, fixed-rate taxable bond market. 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, 2023

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

© 2023 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, 2023. 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 Economic News Release: “The Employment Situation -- March 2023.” US Bureau of Labor Statistics. April 7, 2023.https://www.bls.gov/news.release/empsit.nr0.htm

² “Total Assets (Less Eliminations from Consolidation).” FRED Economic Data. https://fred.stlouisfed.org/series/WALCL

³ “Credit Trends: Global Refinancing – Pandemic-Era Debt Overhang Will Add To Financing Pressure In The Coming Years.” S&P Global, February 7, 2023. https://www.spglobal.com/ratings/en/research/articles/230207-credit-trends-global-refinancing-pandemic-era-debt-overhang-willadd-to-financing-pressure-in-the-coming-ye-12629900

⁴ The Discount Window functions as a safety valve, relieving pressures in reserve markets. Credit extensions can help alleviate liquidity strains at a depository institution and in the banking system. The Discount Window also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress.

Important Disclaimers and Disclosure

This publication should not be considered investment, legal, accounting, or tax advice, or a representation that any investment or strategy is suitable or appropriate to a particular investor’s circumstances or otherwise constitutes a personal recommendation to any investor. This material does not form an adequate basis for any investment decision by any reader and Saturna may not have taken any steps to ensure that the securities referred to in this publication are suitable for any particular investor. Saturna will not treat recipients as its customers by virtue of their reading or receiving the publication.

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

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

Asset-weighted average debt to market capitalization:  This ratio represents the average debt to market capitalization of the portfolio. It is calculated by taking the debt to market capitalization for each company (its debt divided by its market capitalization), 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.