Q2 2015 • June 30, 2015 | Saturna Capital

 

 

Navigating Today's Volatile Markets

 

Environment

The market environment in the US was subdued in the second quarter with the S&P 500 rising a mere 0.28% and the Dow Jones Index dropping -0.29%. The Russell Value and Growth Indices gained 0.11% and 0.12%, respectively. Only the NASDAQ Index registered a meaningful change, gaining 2.06%. The same was true in Europe with the MSCI EAFE Index rising less than 1%. The continued weakening of the Japanese yen spurred the Nikkei onto a 3.55% gain in US dollar terms, while Hong Kong's Hang Seng Index rode China's coattails to a 7.24% rise. All of that, however, occurred before quarter-end, which marked the return of volatility. China's Shanghai Composite Index had soared nearly 60% from the start of the year through its peak on June 15, but from that date through July 8 it plummeted over 30% only to rebound 11% the following two days after the government adopted market support measures wholly contrary to the concept of free and open trading. It's interesting that market-stabilizing measures were unnecessary while the index defied both gravity and financial common sense during its rise.

The Chinese market roller coaster distracted attention from the continuing Greek saga concerning the country's future in the eurozone. The prime minister called a surprise referendum, which further surprised when the Greeks offered a resounding "no" to the question of whether they should accept further austerity in return for financial assistance. Just when a Greek exit from the eurozone (Grexit) appeared inevitable, the government returned to the Troika (The European Commission, the European Central Bank, and the International Monetary Fund) with a package of measures largely indistinguishable from the package rejected by Greek voters. Perhaps a glimpse over the abyss convinced the government it ought to reconsider.

As expected, the first quarter US GDP concerns we discussed in April have largely faded from view. It remains to be seen whether record-breaking temperatures and drought will have the same deleterious effect on economic output as arctic temperatures and overabundant snowfall.

European economies show signs of recovery. While a Grexit poses risks, Nobel laureate Paul Krugman points out that the Greek economy is roughly the same size as the greater Miami area and is unlikely to pose major economic risks to Europe.¹ Banks would certainly suffer, but governments will find it much easier politically to support domestic financial institutions than a perceived profligate Greek government.

Outlook

It can be argued there are two major questions facing global investors today and one sideshow:

  1. Will Greece exit the euro?
  2. When will the Fed start raising rates?
  3. What will happen with the markets in China?

In our view the first question points more to opportunity than risk. We view a Grexit and any associated European market turmoil as an opportunity to increase exposure to the continent given our belief that the economic fallout would be manageable.

The second question has been a source of endless speculation with recent developments pushing back the earlier consensus expectation of a September rate hike. Federal Reserve crystal ball gazing is not our stock-in-trade, but we recognize the importance of a return to normalized monetary policy. Any rate hike will almost certainly lead to short-term market weakness in the US and elsewhere, but the strengthening economy signaled by higher rates should be a longer-term positive for corporate activity.

We don't believe the gyrations of Chinese stock markets are important in the context of global economic performance. In fact, it can be argued that they're not even that important in terms of Chinese economic performance given the small number of market participants relative to the population and the fact that consumption (the economic activity most directly influenced by stock market wealth effects) remains a small part of the Chinese economy at roughly 36%.²

Further volatility, however, may provide an opportunity to invest in China-related businesses at significantly lower prices. We are currently focused on Hong Kong domiciled and listed companies due to better corporate governance.

 

Sextant Growth

For the quarter ended June 30, the Sextant Growth Fund (SSGFX) returned -1.42% versus the S&P 500's 0.28% gain and a 0.50% increase for Morningstar's Large Growth category. After a strong 2014, this year has been disappointing thus far. In an interesting reversal of fortune, the economic sectors and several securities in the Fund that added the most value in 2014 have been among the greatest detractors in 2015. 

For example, in 2014 the Fund's exposure to Industrials added more value than any of the other 10 sectors in the Russell 1000 Growth Index. However, our Industrials overweight versus the benchmark — although it has been reduced — has been harmful in 2015.

Delta Air Lines is our best example of a security's rise and fall within this relatively brief period: last year, Delta was the portfolio's star — the top in a class of over 70 securities. However, in the quarter just ended Delta was the portfolio's #2 detractor.

Another factor in the June 2015 quarter came from not participating fully in the market. During the period, a relatively large capital infusion raised the Fund's average cash holding to 11%, although we decreased it to 7.1% by the end of June.

Of course, we take portfolio performance seriously, and we have concluded that investors would be better served if the portfolio were repositioned. Therefore, in 2015 we have sold Information Technology stocks — particularly hardware, storage, and semiconductor names — as well as a few troubled Industrials companies.

The proceeds from these disposals have been used to purchase the shares of less cyclical and more consistent growth companies in which we have been more confident. Among Financials, the Fund added MasterCard, Signature Bank, and SVB (Silicon Valley Bank) Financial.

We also have added the shares of consumer-oriented growth companies including Under Armour, Walt Disney, Cabela's, and Nike. We have shifted our focus within Information Technology away from client/server computing firms, which have ruled the personal computer era, to others that embrace new themes such as Splunk in Big Data analytics.

Thus far in 2015 among the greatest negative impacts to America's Industrials and Transport companies, which had done so well in 2014, have been the persistent weakness in oil and the continued strength in the US dollar, which are related. We have few direct investments in Energy, but most of the Rust Belt has some indirect exposure, including a few names held in the Sextant Growth Fund. Furthermore, the dollar's strength makes America's exporters less competitive, and it decreases sales reported in US currency when translating business conducted abroad in weaker local currencies.

Maybe the price of oil has troughed as have the fortunes of the Energy companies. Also, maybe now half way through 2015 we have felt the hardest blow from the dollar's strength. However, if current economic and businesses conditions are the "new reality," then our aggressive repositioning of the once Industrial and Information Technology-dominated Sextant Growth Fund may help its performance.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Gilead Sciences 19.93% 0.35
Starbucks 13.83% 0.17
Under Armour, Class A 11.92% 0.11
Abbott Laboratories 6.48% 0.10
SVB Financial Group 10.47% 0.09
Stanley Black & Decker 10.87% 0.07
Fastenal 2.48% 0.06
Emcor Group 2.83% 0.06
United Parcel Servicem, Class B 3.88% 0.05
Signature Bank 10.45% 0.05
Ten Largest Detractors Return Contribution
Medivation -11.45% -0.27
Delta Air Lines -8.44% -0.26
Power Solutions International -15.97% -0.25
Lowe's -9.73% -0.20
Union Pacific -11.48% -0.18
BlackRock -4.95% -0.16
National Oilwell Varco -17.53% -0.14
Boeing -6.97% -0.13
BorgWarner -5.82% -0.11
Biogen -4.15% -0.11
Top Ten Holdings Portfolio Weight
Apple 4.1%
Facebook, Class A 3.7%
FLEETCOR Technologies 3.1%
BlackRock 3.0%
Ashland 2.9%
Delta Air Lines 2.5%
TJX Companies 2.4%
Gilead Sciences 2.3%
Fastenal 2.3%
Johnson Controls 2.3%
 

Sextant International

After a strong start to the year the Sextant International Fund and the MSCI EAFE both moderated in the second quarter with the Fund slipping -0.19% and the index rising 0.84%, bringing their respective year-to-date returns to 4.69% and 5.88%. From a sector perspective the Fund performed poorly in Consumer Discretionary, Industrials, and Materials, while enjoying strong returns in Health Care, Information Technology, and Telecommunications. Health Care has worked well for us this year, with Novo Nordisk appearing among the top contributors for the second consecutive quarter. Information Technology featured four of our top ten contributors, including Argentina-based MercadoLibre, a uniquely strong Latin American performer.

Regionally, Europe was the strongest contributor by far, followed by Japan and China, while Latin America and Australia were weak.

Stock markets do not move in a linear fashion, which was made clear with the performance of several of our holdings during the quarter. BASF, Toyota Motor, Wolters Kluwer, and Pearson were all top contributors in the first quarter and among the 10 largest detractors in the second. As long-term investors we are less concerned with quarter-on-quarter price gyrations than with the continuing investment thesis for the companies. In each of the four mentioned above we remain confident in their outlooks. The same cannot be said of Copa Holdings, a Panamanian-based airline that has suffered from the economic downturns in Brazil, Argentina, Venezuela, and Columbia.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Dassault Systemes ADS 9.03% 0.36
Mitsubishi ADR 16.08% 0.31
Novo Nordisk ADS 2.29% 0.27
Nice Systems ADS 4.62% 0.23
Telenor 10.37% 0.22
ASML Holding 3.80% 0.21
MercadoLibre 15.74% 0.20
Unilever ADS 3.74% 0.12
Sinopharm Group 10.04% 0.11
Nidec ADS 11.72% 0.11
Ten Largest Detractors Return Contribution
Copa Holdings, Class A -17.41% -0.55
Wolters Kluwer -6.94% -0.42
BASF ADR -8.05% -0.33
Toyota Motor ADS -4.39% -0.21
Pearson ADS -10.14% -0.20
Australia & New Zealand Banking ADS -8.62% -0.19
Fomento Economico Mexicano ADS -3.97% -0.11
SK Telecom ADR -8.89% -0.08
Potash Corp. Of Saskatchewan -2.85% -0.04
Cenovus -3.91% -0.04
Top Ten Holdings Portfolio Weight
ASML Holding 6.6%
Novartis ADR 6.5%
Wolters Kluwer 5.9%
Nice Systems ADS 5.6%
Novo Nordisk ADS 5.1%
Dassault Systems ADR 4.8%
Toyota Motor ADS 4.7%
Belmond,  Class A 4.2%
BASF ADR 3.9%
Toronto-Dominion Bank 3.7%
 

Sextant Core

The Sextant Core Fund posted a total return of -2.18% for the quarter ended June 30, lagging the benchmark Dow Jones Moderate Portfolio Index by -1.57%. Weakness in biotech stocks, along with poor performance among Transportation names, largely contributed to the underperformance.

While Biotech stocks in particular have exhibited significant volatility in recent months, we have confidence in the fundamentals of positions held. Medivation, for example, saw weakness following a lackluster presentation at the American Society of Clinical Oncology. However, the company's key product, Xtandi, holds great promise in our opinion.

Industrials performed poorly as Transportation stocks, such as Canadian National Railway, LATAM Airlines, and Delta Air Lines, were weak. 3M also declined in value, though this followed a strong total return performance in 2014. The Fund reduced its weight in 3M during the quarter.

Financials performed reasonably well, though newly added REIT Health Care Property detracted from this sector's performance. REITs in general are sensitive to movements in interest rates, and benchmark rates rose during the quarter with the 10-year Treasury yield rising from 1.87% at the beginning of the quarter to 2.35% at its end. We view health care REITs as having solid growth prospects over the long term despite interest rate headwinds.

The Fund remains overweight the Energy sector versus the benchmark in the equity portion of the portfolio. We see Energy as one of the few areas of the market where investors can find pockets of value. The Fund also remains underweight the Financials, Information Technology, and Consumer Discretionary sectors, all of which outperformed the S&P 500 Index in the quarter. Financials outperformed with broad strength throughout the banking sector. Conventional wisdom points to bank margins expanding following an expected increase in the federal funds rate. While we agree, we think the Treasury curve will be biased toward flattening. Because bank interest margins are sensitive to long/short spreads, we see margin gains as limited and largely already baked-in to current valuations.

The Fund's fixed income allocation returned -1.17%, outperforming the benchmark by roughly 0.61%. The Fund increased its credit profile over the past several months, generating positive selection effects from corporate and US municipal debt as the key drivers of performance. Considering the fact that corporate spreads widened noticeably in the quarter and the fact that the Fund remains significantly overweight corporate bonds, we are pleased with the result.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Williams Companies 14.85% 0.16
Xilinx 5.13% 0.06
Express Scripts Holding 2.50% 0.05
Novo Nordisk ADS 2.57% 0.04
Phillips 66 3.20% 0.04
PNC Financial Services Group 3.15% 0.04
Statoil ADS 2.96% 0.02
ADT (4.125% 06/15/2023) 0.96% 0.01
Wilmington Trust (8.5% 04/02/2018) 0.57% 0.01
Boardwalk Pipelines (5.50% 02/01/2017) 1.06% 0.01
Ten Largest Detractors Return Contribution
Medivation -11.52% -0.24
SK Telecom ADR -8.89% -0.17
Lowe's -9.69% -0.16
Qualcomm -9.05% -0.13
3M -5.71% -0.12
NRG Energy -8.66% -0.12
Sempra Energy -8.61% -0.10
Stanford University (4.013% 05/01/2042) -8.15% -0.10
Chubb -5.40% -0.09
Tacoma WA Electric System Revenue (5.966% 1/1/2035) -5.48% -0.08
Top Ten Holdings Portfolio Weight
Republic of Chile Bond 2.5%
Fannie Mae Bond 2.3%
Chubb Equity 2.2%
Bellsouth Capital Funding Bond 2.2%
Nestle ADS Equity 2.1%
Express Scripts Holding Equity 2.0%
Medivation Equity 2.0%
PepsiCo Equity 1.9%
Procter & Gamble Equity 1.8%
Novo Nordisk ADS Equity 1.7%
 

Sextant Global High Income

The Sextant Global High Income Fund returned -0.58% in the second quarter of 2015 and completed the period with $8 million in total assets, including 8.1% in cash and income receivable.

Total Returns Q2 2015 12-month Return
Sextant Global High Income Fund -0.58% -7.23%
S&P Global 1200 Stock Index 0.56% 1.77%
Bloomberg Global High Yield Corporate Bond Index 1.07% -4.14%
Morningstar World Allocation Category -0.68% -2.34%

Although the Fund performed in line with its peer group (Morningstar World Allocation) during the quarter, its performance over the past year has been poor, weighed down by its equity investments in energy and raw materials, Europe, and emerging markets, as well as distressed debt. In general, these are the areas where we have actively added exposure over the past 12 months, and particularly so in the first half of this year. The Fund now has roughly two-thirds of its assets invested in some combination of these themes.

Twelve months ago, high-yield spreads had reached their lowest levels so far this cycle, and equity returns and valuations across sectors or geography indicated few truly attractive investment opportunities. Perhaps only emerging markets stocks in a few countries had bucked the trend. But during the past 12 months we witnessed a plunge in the price of oil and raw materials along with the stocks of companies that produce them. International equity benchmarks — both in developed and emerging markets — underperformed the S&P 500 by a wide margin, and a number of foreign currencies weakened significantly against the US dollar.

Our stock investments in some of these beaten-down areas have, so far, proven to be early. But we believe our strategy of choosing companies with resilient balance sheets, high quality assets, capable management, and sustainable dividends with attractive yields offers a compelling risk-reward tradeoff compared to equity markets as a whole.

During the second quarter, the Fund established new equity positions in Anglo American, BHP Billiton, Braskem, Potash, and Statoil. BHP Billiton also spun off shares of a new company, South 32, after which we added to the position. These companies, in combination, produce and sell a diverse range of natural resources and operate in nearly every corner of the globe. The Fund also purchased local-currency denominated sovereign debt of Brazil, to take advantage of the attractive interest and exchange rates in that country.

The Fund fully liquidated positions in Daimler, Malayan Banking, Reitmans, Sibanye Gold, Unilever, and Vodafone during the quarter.

As of June 30, 2015

Ten Largest Contributors Return Contribution
Ukraine Government (9.25% 07/24/2017) 25.63% 0.38
New York Community Bancorp 11.48% 0.23
Whistler Blackcomb Holdings 11.02% 0.16
Rent A Center (6.625% 11/15/2020) 6.67% 0.15
Braskem ADS 11.67% 0.10
San Miguel (4.875% 04/26/2023) 3.72% 0.09
CNOOC ADR 2.76% 0.07
Hopewell Highway Infrastructure 3.26% 0.06
Reitmans, Class A 5.38% 0.06
Unilever 3.41% 0.06
Ten Largest Detractors Return Contribution
BASF ADR -8.05% -0.21
Anglo American ADR -3.64% -0.17
Puerto Rico Aqueduct & Sewer Revenue (5.00% 07/01/2019) -20.44% -0.17
GlaxoSmithKline ADS -8.58% -0.15
Grupo Bimbo (4.875% 06/27/2044) -5.57% -0.13
CCR -5.58% -0.10
Statoil ADS -4.03% -0.07
Goodrich Petroleum (8.875% 03/15/2019) -2.74% -0.06
Royal Dutch Shell ADS, Class A -3.01% -0.06
Banco Santander ADS -3.69% -0.06
Top Ten Holdings Portfolio Weight
Federal Republic of Brazil Bond 2.9%
BASF ADR Equity 2.6%
CNOOC ADR Equity 2.5%
Rent A Center Bond 2.5%
San Miguel  Bond 2.4%
Braskem ADS Equity 2.4%
Microchip Technology Equity 2.4%
Novartis ADR Equity 2.3%
Total ADS Equity 2.3%
NY Community Bancorp Equity 2.3%
 

Footnotes:

¹ Krugman, Paul. Greece's Economy Is a Lesson for Republicans in the U.S. The New York Times, July 10, 2015. http://www.nytimes.com/2015/07/10/opinion/paul-krugman-greeces-economy-is-a-lesson-for-republicans-in-the-us.html

² Roach, Stephen. Why the Stock Meltdown Doesn't Spell Doom for China. Slate.com, July 8, 2015. http://www.slate.com/articles/business/moneybox/2015/07/china_stock_meltdown_why_its_actual_economy_will_be_just_fine.html

 

Performance Summary

As of June 30, 2015

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Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year Expense Ratio
  GrossA Net
Sextant Growth (SSGFX) 6.95% 15.37% 14.37% 8.16% 0.96%B 0.95%
S&P 500 Index 1.38% 15.13% 12.56% 7.30% n/a
 
Sextant International (SSIFX) -4.66% 5.14% 5.05% 5.78% 0.78%B 0.77%
MSCI EAFE Index  -3.82% 12.44% 10.02% 5.60% n/a
 
Sextant Core (SCORX)C -1.64% 5.97% 7.07% n/a   1.10%B 1.10%
Dow Jones Moderate Portfolio Index 1.25% 9.15% 9.59% 6.45% n/a
 
Sextant Global High Income (SGHIX)D -7.23% 4.37% n/a   n/a   1.31%B 0.90%
S&P 500 Global 1200 Index 1.77% 14.56% 13.53% 7.15% n/a
Bloomberg Global High Yield Corporate Bond Index -4.14% 6.20% 7.93% n/a   n/a
 
Sextant Short-Term Bond (STBFX) 0.67% 0.91% 1.19% 2.64% 1.19%B 0.75%
Citi USBIG Govt/Corp 1-3 Year Index 0.88% 0.90% 1.12% 2.81% n/a
 
Sextant Bond Income (SBIFX) 1.71% 2.15% 3.88% 4.10% 1.17%B 0.90%
Citi US Broad Investment-Grade Bond Index 1.87% 1.83% 3.31% 4.53% n/a

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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 Month-end Performance. 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, gross expense ratios shown are as of a Fund's most recent prospectus or summary prospectus, dated March 27, 2015, and incorporate results from the fiscal year ended November 30, 2014. Higher expense ratios may indicate higher returns relative to a Fund's benchmark. The Adviser has voluntarily capped actual expenses of Sextant Short-Term Bond at 0.75% and actual expenses of Sextant Bond Income and Sextant Global High Income at 0.90% through March 31, 2016.

Restated to reflect a reduction in the Advisory and Administrative Services base fee and a reduction in the maximum rate of the performance adjustment, as approved by the Board of Trustees on March 17, 2015. Please see the Statement of Additional Information for the actual dollar amount of fees paid to the adviser for the most recent fiscal year.

C Sextant Core Fund began operations March 30, 2007.

D 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 MSCI EAFE Index is an international index focused on Europe, Australasia, and the Far East. 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 Citi USBIG Govt/Corp 1-3 Year Index is a broad-based index of shorter-term investment grade US government and corporate bond prices. The Citi US Broad Investment-Grade Bond Index is a broad-based index of medium and long-term investment grade bond prices. Investors cannot invest directly in the indices.

 

Important Disclaimers and Disclosure

This report is intended only for the information of the reader and is not to be used for or considered as an offer, or the solicitation of an offer, to sell or buy any securities or other financial instruments of any kind, including without limitation, any mutual fund or other product offered, sponsored, created, or managed by Saturna Capital Corporation or its subsidiaries or affiliates ("Saturna"). This report is not intended for distribution to, or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country, or other jurisdiction in which such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Saturna to any registration or licensing requirement within such jurisdiction.

This document should not be considered as providing investment advice or services, or any service offered by Saturna. Saturna may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. Saturna will not treat recipients as its customers by virtue of their reading or receiving the report.

Nothing in this report constitutes investment, legal, accounting, or tax advice or a representation that any investmentor strategy is suitable or appropriate to a particular investor's circumstances or otherwise constitutes a personal recommendation to any investor. Saturna does not offer advice on the tax consequences of any investment.

All material presented in this report, unless specifically indicated otherwise, is under copyright to Saturna. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Saturna. Unless otherwise indicated, all trademarks, service marks, and logos used in this report are trademarks or service marks of Saturna.

The information in this report was obtained from sources Saturna believes to be reliable, and Saturna believes the information and opinions in the material are accurate and complete as of the date of this material. However, information and opinions contained herein will change over time and without notice. Saturna has no obligation to update or amend any information or opinions at any time. Saturna makes no representations as to the accuracy or completeness of this material, nor does it have any responsibility to ensure that any other materials, including any containing materially different information, are brought to the attention of any recipient of this report.

Under no circumstances shall Saturna, its employees, or any affiliate be responsible for any investment decision by any recipient. This material is distributed on condition that it will not form the sole basis for any investment decision by any recipient. Any recipient who is not a market professional or institutional investor should seek the advice of an independent financial adviser prior to making any investment based on this report or for any necessary explanation of its contents.

Saturna does not provide tax, legal, or accounting advice. Investors should consult their own tax, legal, and accounting advisers before engaging in any transaction. In compliance with IRS requirements, recipients are notified that any discussion of US federal tax issues contained or referred to herein is not intended or written to be used for the purpose of (A) avoiding penalties that may be imposed under the Internal Revenue Code; nor (B) promoting, marketing, or recommending to another party any transaction or matter discussed herein.

Past performance does not imply or guarantee future performance, and no representation or warranty, express or implied, is made regarding future performance. The price, value of, and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of foreign securities and financial instruments is subject to exchange rate fluctuation, which may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs — the values of which are influenced by currency volatility — effectively assume this risk.

The Dow Jones Industrial Average (Dow or DJIA) index is a widely followed price-weighted index of 30 of the largest, most widely held U.S. stocks.

The Nasdaq Composite Index measures the performance of more than 5,000 U.S. and non-U.S. companies traded "over the counter."

The MSCI EAFE Index is an index known by an acronym for the Europe, Australasia, and Far East markets produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization.

The Nikkei 225 Stock Average Index is a price-weighted average of the 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

The Hang Seng is a free-float capitalization-weighted index of companies selected from the stock exchange of Hong Kong representing the Commerce and Industry, Finance, Utilities, and Properties sectors.

The Hang Seng China Enterprises Index is a free-float capitalization-weighted index comprised of H-shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index.

The Shanghai Composite Index is a freefloatweighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges (China).

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 go up. 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.