Q2 2016 • June 30, 2016 | Saturna Capital

 

 

Navigating Today's Volatile Markets

 

Q2 2016 Highlights:

Conditions in global capital markets are unprecedented:

  • US interest rates continue to plumb new lows
  • European and Japanese sovereign and commercial bonds migrating into negative territory
  • Civilian Labor Force Participation Rate declines as Boomers start to retire
  • Demographic shifts may point to lackluster economic activity for several years

Environment

Nobody told me there'd be days like these 
Strange days indeed – most unusual, mama

John Lennon – Nobody Told me

If John Lennon were alive today, he would be 76 years old and likely not very worried about the future returns on his investment portfolio. For the rest of us, conditions in global capital markets are more concerning and truly unprecedented, particularly within fixed income. The bull market in US Treasurys that began in late 1981 has continued into 2016, driving rates to the lowest levels since the Civil War.

As of the end of the second quarter the US 10-year Treasury yielded 1.47% and the 30-year a mere 2.30%. Bond prices were pushed even higher (and yields, therefore lower) in the wake of the United Kingdom's vote to leave the European Union on June 23. Unless inflation averages less than those percentages over the next 10 and 30 years, real returns on the bonds will be negative. Over the 12 months through May the US Consumer Price Index increased 1% — so far, so good. ¹

The situation elsewhere is even more dramatic, not to mention historically unprecedented, with roughly $10 trillion of negative-yielding European and Japanese sovereign bonds. The entire term structure of Swiss bonds, all the way out to 50 years is currently negative.² Bloomberg estimates that nearly 30% of the global government bond market trades on a negative yield.³ Even corporate bonds have seen yields pushed below zero.²

Investors might reasonably ask, "Why would I invest in something that's guaranteed to pay back less money than I put in?"

US 10-Year Treasury Bond Yields

Perhaps you have no alternative. Central banks, insurance companies, and pension funds are all required to hold bonds for various purposes. Perhaps you believe that the currency of the country offering the negative yields will strengthen relative to your currency. This is likely a contributing factor to the Swiss phenomenon. It's also reasonable that, for example, an Italian investor might purchase eurobonds from another country with negative yields because she believes Italy will eventually exit the eurozone. As alluded to above, there is also a key difference between real and nominal yields. If you expect an extended period of deflation and that the deflation rate will exceed the negative yield on your bonds, you will still be making a positive real return despite the nominal loss.

Explaining the phenomenon is one thing; understanding the implications is something altogether different. Take, for example, gold. Unless you have a specific industrial or adornment use, gold is not a productive asset. It does not pay a dividend or a coupon. In fact, if you have enough of it, storage and insurance will cost you money. Today, however, one might reasonably ask how that makes it different from any number of European and Japanese sovereign bonds. There are obviously implications for other assets as well, such as property. One might think, and the Fed model would argue, that sinking bond rates also imply higher equity valuations, but the European and Japanese stock markets have not conformed to that expectation.

Outlook

Central banks have taken a public beating for their bond-buying programs, but options are limited and key variables are beyond their control. We believe the most important to be demographics. Countries across the developed world are aging and older people tend to consume less. At the same time working populations are contracting, and even overall populations are in decline. In the United States, which has attractive demographics compared to Europe and Japan, the Civilian Labor Force Participation Rate has slipped from the peak of 67.3% in 2000 to 66% on the eve of the Global Financial Crisis to 62.7% today,4 primarily due to demographics as the first Baby Boomers turned 65 in 2011. Economies expand through increases in the workforce and labor productivity, but the former is in decline, while the lackluster private investment climate caps improvements in the latter.

Eventually demographics will take care of themselves as the aged cohort departs the scene.

The US Census Bureau reported last spring that Millennials have now passed Boomers as the largest living generation.5 That doesn't help much in the near term, but by 2035 or so the situation should be looking brighter. That still leaves us with a 20-year gap of likely desultory economic activity, low interest rates, and possibly lower returns on financial assets than we have seen in recent decades.

 

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 September 30, 2016

Ten Largest Contributors Return Contribution
Medivation 30.02% 1.00
Amazon.com 20.55% 0.45
BlackRock 7.20% 0.23
Ashland 4.14% 0.22
JP Morgan Chase 5.73% 0.18
Ecolab 6.66% 0.16
Stanley Black & Decker 6.23% 0.15
RPM International 6.11% 0.15
Johnson Controls 6.23% 0.13
Lowe's 4.89% 0.12
Ten Largest Detractors Return Contribution
Signet Jewelers -33.40% -1.01
Alaska Air Group -28.56% -0.71
Apple -11.71% -0.63
Harman International -18.95% -0.43
Nike, Class B -9.94% -0.35
Alphabet, Class A -7.78% -0.30
CVS Health  -7.23% -0.26
Microsoft -6.59% -0.19
Allergan -7.09% -0.15
Starbucks -3.98% -0.14
Top Ten Holdings Portfolio Weight
TJX Companies 5.2%
Apple 4.6%
Starbucks 4.5%
Facebook, Class A 4.2%
Alphabet, Class A 4.0%
Nike, Class B 3.8%
CVS Health 3.4%
RPM International 3.3%
Stanley Black & Decker 3.1%
Ecolab 3.1%
 

Sextant International

The Sextant International Fund continued its positive year, gaining 0.64% in the second quarter, bringing the first half return to 2.97%. The MSCI EAFE Index dropped -1.19% in the quarter and has shed -4.04% year-to-date. The Fund's positive performance has largely been achieved by avoiding minefields that have dented benchmark returns.

The first and largest of those minefields has been the Financial sector, which was the worst performing EAFE sector in the first half of the year, accounting for almost all of the benchmark's negative returns. Banks in Europe, Australia, and Japan have all faced difficulty. Our exposure is well below 50% of the benchmark weight, while one of our positions is Canadian Toronto-Dominion Bank, which far outperformed the sector.

The other minefields have been geographic with several European countries, including Spain, Italy, Austria, the United Kingdom, and Germany performing poorly. We are absent Italy and Austria and significantly underweight the other countries. On the other hand, we are nearly four times the benchmark weight in the Netherlands, which has been one of the best performing developed international markets year-to-date. 
Avoiding losers helps but winners are also required. Novartis, like domestic US Health Care, recovered strongly in the second quarter. MercadoLibre is an emerging markets stock (based in Argentina) that has done extremely well since the market bottomed last February. French oil major Total and its Norwegian counterpart Statoil have benefited from the rebound in oil prices this year.

Spain has performed poorly, illustrated by the appearance of Banco Santander and Telefonica among our largest detractors during the quarter. The former has been sold from the portfolio as the continuing descent of European sovereign rates into negative territory presents tremendous challenges for the banking sector. Turkcell has suffered from the disruption in Turkey, combined with increasing competition in the market and governance issues. As a result, we have eliminated the positon.

As of June 30, 2016

Ten Largest Contributors Return Contribution
Novartis ADR 13.90% 0.59
Unilever ADS 6.90% 0.35
MercadoLibre 19.50% 0.33
Wolters Kluwer 3.38% 0.28
BASF ADS 5.92% 0.25
Total ADS 7.44% 0.21
Belmond, Class A 4.32% 0.18
Shire ADS 7.09% 0.18
BCE 5.10% 0.17
Statoil ADS 12.73% 0.17
Ten Largest Detractors Return Contribution
Copa Holdings, Class A -22.09% -0.65
Toyota Motor ADS -6.04% -0.30
Dassault Systemes ADR -3.20% -0.22
Telefonica ADS -11.16% -0.22
Turkcell Iletisim Hizmetleri ADR -13.07% -0.15
Fomento Economico Mexicano ADS -3.24% -0.13
Carrefour ADS -7.39% -0.10
Koninklijke Philips -9.49% -0.08
Banco Santander ADS -9.32% -0.07
NICE ADS -1.20% -0.06
Top Ten Holdings Portfolio Weight
Wolters Kluwer 7.9%
ASML Holding 6.3%
NICE ADS 5.7%
Dassault Systemes ADR 5.7%
Unilever ADS 5.4%
Toronto-Dominion Bank 5.1%
Novartis ADR 4.9%
BASF ADS 4.6%
Belmond, Class A 4.3%
Fomento Economico Mexicano ADS 4.1%
 

Sextant Core

For the quarter ended June 30, 2016, the Sextant Core Fund returned 3.04% versus 2.19% for its Morningstar category peer group. A key factor impacting performance of equities in the quarter was the recovery in the Energy sector following crude oil's price rally from the high $20s to the high $40s. This profoundly changes the calculus for energy firms going forward. The Fund was overweight the sector relative to its benchmark leading to relative outperformance. Also helping to beat the benchmark was the Fund's overweight in Consumer Staples names and focus on income-oriented names in other sectors such as Utilities, REITs, and Health Care. Falling interest rates tend to be positive catalysts for these stocks.

Equities

Our biggest return contributor, Williams Companies, is a midstream energy company that benefited from the relief rally in crude oil, propelling the stock up 38.49%. In a similar vein, Devon Energy's stock price rebounded. Many of the other names contributing to this quarter's performance were stable, dividend-paying enterprises such as health care REIT Welltower and health products company Johnson & Johnson.
Detracting from performance was Allergan, which saw its merger with Pfizer scuttled due to a change in tax inversion rules aimed at preventing America's largest health care company from moving its tax domicile abroad. Recently added, Apple struggled following news that it had been sued in China for allegedly infringing a copyrighted design by Baili, a Chinese device maker. Two banks in our portfolio also struggled, with Skandinaviska Enskilda and PNC Financial Services both seeing future profitability under pressure as interest rates fall.

Fixed Income

Treasury yields continued to fall in the second quarter with the benchmark 10-year Treasury yield sitting at 1.49% on June 30. Looking back to the start of the year, yields have fallen 78 basis points from an already low yield of 2.27% as of December 31, 2015. With falling yields pushing up prices, bonds have done well for the Fund's investors. The rally in commodities positively impacted many so-called commodity currencies and associated spreads resulting in a 6.01% total return in the quarter for a position in New Zealand government debt. The commodity rally also helped to tighten spreads on a Chilean government bond position as well. This helped propel the fixed income portion of the Fund to outperform its benchmark in the quarter.

Subdued equity market returns over the last twelve months along with the continued slide in Treasury yields reveal the hallmarks of an environment that does not appear to be offering investors significant reward relative to risk taken.

A diversified portfolio and a focus on income-oriented value assets aim to help mitigate the effects of this increasingly hostile investment environment.

As of September 30, 2016

Ten Largest Contributors Return Contribution
Williams Companies 38.49% 0.6
Medivation 31.14% 0.50
Devon Energy 32.33% 0.23
Akorn 21.06% 0.23
Express Scripts Holding 10.35% 0.20
NextEra Energy 10.99% 0.18
Nestle ADS 6.86% 0.17
Welltower 11.13% 0.17
Bellsouth Capital Funding 
(7.875% 02/15/2030)
8.16% 0.16
Johnson & Johnson 12.90% 0.14
Ten Largest Detractors Return Contribution
Allergan -13.78% -0.26
Apple -12.55% -0.21
Delta Air Lines -24.93% -0.20
Skandinaviska Enskilda Banken -10.00% -0.16
Phillips 66 -7.64% -0.12
Biogen -7.11% -0.12
Bayerische Motoren Werke -17.03% -0.09
PNC Financial Services -3.18% -0.05
Abbott Laboratories -5.46% -0.05
Canadian National Railway -1.25% -0.01
Top Ten Holdings Portfolio Weight
Federal Farm Credit Bank Bond 2.7%
Lowe's Equity 2.6%
Nestle ADS Equity 2.5%
Republic of Chile Bond 2.4%
Bellsouth Capital Funding Bond 2.1%
Apple Equity 2.1%
Express Scripts Holding Equity 2.1%
PepsiCo Equity 2.0%
Williams Companies Equity 2.0%
Medivation Equity 2.0%
 

Sextant Global High Income

The Sextant Global High Income Fund returned 6.03% in the second quarter of 2016, and ended the period with $7.4 million in total net assets, which included 11.3% in cash.

The Fund turned in a second consecutive quarter of solid performance, supported by rebounds in emerging markets debt and equity securities and natural resources equity investments initiated in 2015. The quarter was not without turmoil. On June 23, a majority of British voters surprised the world by casting ballots in favor of the so-called "Brexit" referendum to leave the European Union. This outcome stunned financial markets, and led to the Fund experiencing its worst one-day (-3.54%) and two-day (-4.79%) declines since its inception. However, the Fund recovered much of the lost ground during the final three days of the quarter, gaining 3.94%.

The two biggest contributors to the Fund's return during the quarter were investments in Brazil: the stock of toll-road operator CCR, which returned 32.79%, and a Brazilian-real denominated government bond that returned 27.42%. The Fund held 8.8% of its investments in Brazilian issuers at the end of the quarter, which was the largest weight of any country besides the US.

The biggest detractors to portfolio performance in the quarter were financial institutions. Spain-based Banco Santander (-14.42% during the quarter) and Swedish bank Skandinaviska Enskilda (-10.00% in the quarter) both plunged in reaction to the Brexit surprise; we subsequently sold the former from the Fund due to our increased concern about systemic risk in the European Union.

Looking forward, the British vote in favor of Brexit suggests a turning point away from a decades-long trend of global integration. Leaders and parties that advocate nationalist and populist agendas are gaining support in many countries following the global financial crisis and nearly eight years of lackluster economic growth that have been especially hard for the poor and middle class. That such weak growth has only been possible through vast amounts of coordinated global monetary policy interventions is all the more disconcerting because it is hard to see a credible policy path toward a higher growth equilibrium that doesn't bring along a high risk of side effects or unintended consequences from whatever unconventional means are employed. And should we face another financial crisis and/or recession, the limits of monetary policy face a severe test insofar as they are likely to require global coordination by unelected technocrats at central banks and to encounter substantial nationalist and populist retrenchment.

With these concerns in mind, and with developed market bargains becoming scarce, we believe an increasingly cautious and prudent approach is warranted.

As of September 30, 2016

Ten Largest Contributors Return Contribution
Federal Republic of Brazil (8.5% 01/05/2024) 27.42% 0.63
CCR 32.79% 0.53
Anglo American ADR 24.42% 0.35
Braskem ADS 16.67% 0.35
Royal Dutch Shell ADS 16.13% 0.32
Outerwall (6.00% 03/15/2019) 9.45% 0.28
Rent A Center (6.625% 11/15/2020) 11.08% 0.27
Statoil ADS 12.73% 0.27
Novartis ADR 13.90% 0.27
Elizabeth Arden (7.375% 03/15/2021) 61.83% 0.26
Ten Largest Detractors Return Contribution
Mexico Bonos Desarrollo (6.5% 06/10/2021) -6.20% -2.49
Banco Santander ADS -14.42% -0.24
Apollo Global Management, Class A  -10.18% -0.22
Whistler Blackcomb Holdings -9.92% -0.2
Skandinaviska Enskilda Banken, Class A -10.00% -0.17
Orange ADS -2.82% -0.07
Potash Corp Of Saskatchewan -3.09% -0.06
GAP (5.95% 04/12/2021) -2.23% -0.04
Iberdrola Int'l Perpetual (5.75% 02/27/49) -1.56% -0.03
Goodrich Petroleum (8.875% 03/15/2019) -4.33% 0.00
Top Ten Holdings Portfolio Weight
Jefferies Group Bond Bond 3.5%
Burlington Northern Santa Fe Bond 3.2%
Outerwall Bond 3.1%
Microchip Technology Equity 2.7%
Federal Republic of Brazil Bond Bond 2.7%
Mexico Bonos Desarrollo Bond 2.7%
Grupo Bimbo Bond 2.7%
San Miguel  Bond 2.7%
Rent A Center Bond 2.6%
Itau Unibanco Holding ADS Equity 2.5%
 

Sextant Short-Term Bond
Sextant Bond Income

2016 could mark the apex of the market's confidence in central bank interventionist policy. While the Fed's bond-buying program, known as quantitative easing, and hyperlow interest rates remain influential forces in bond returns, they continue to disappoint their proponents as a means to boost growth and counter disinflation. The Bank for International Settlements, an organization representing 60 central bank members, and the International Monetary Fund have again lowered their global growth forecasts. The US Federal Reserve Bank has lowered the US equilibrium "natural rate" of interest as well.

The relentless optimism of central bankers in the imminent arrival of economic growth and higher inflation paired with analysts' incessant warnings about collapsing bond prices continue to obscure the fact that US bond markets are having another great year. The Sextant Bond Income Fund returned 6.79% over the last year and 3.65% in the last three months. The Sextant Short-Term Bond Fund returned 1.69% for the last year and 0.64% over the last quarter.

While US economic fundamentals improved modestly, trends in Europe and Asia continued to moderate. Quantitative easing continues in Japan and Europe. With relatively higher US yields and a firm US dollar, Japanese and European investors are compelled to place more assets in US corporate and US Treasury bonds, driving US bond yields to near record lows.

Chronic slow growth, weakening long-term inflation expectations, flattening yield curves, and a persistent yield famine continue to dominate the US risk premium landscape. The dismissal of India's central bank Governor Rajan, the impeachment of Brazil's President Rousseff, and Great Britain's exit from the European Union added to the "risk-off" market sentiment. As the amount of sovereign and corporate bonds trading at negative yields exceeds 10 trillion US dollars, the appeal of US bond markets continues to grow worldwide.

As of September 30, 2016

Sextant Short-Term Bond
Top Ten Holdings Portfolio Weight
US Treasury Note (2.25% 7/31/2018) 4.0%
Murray Street Trust 1-Goldman Sachs (4.647% 03/09/2017) 3.9%
Jefferies Group (8.50% 07/15/2019) 3.9%
LaClede Gas (2.00% 08/15/2018) 3.9%
Lexmark Corp (6.65% 06/01/2018) 3.7%
Cintas Corp No. 2 (6.65% 06/01/2018) 3.7%
Broadridge Financial Solutions (6.125% 06/01/2017) 3.6%
International Game Technology (7.50% 06/15/2019) 3.5%
Oracle (5.75% 04/15/2018) 3.5%
General Electric Capital (5.625% 09/15/17) 3.4%
Sextant Bond Income
Top Ten Holdings Portfolio Weight
US Treasury Bond (5.375% 02/15/2031) 6.8%
US Treasury Bond (6.25% 5/15/2030) 4.1%
Cincinnati Financial (6.92% 5/15/2028) 3.8%
Becton Dickinson (6.70% 08/01/2028) 3.7%
Puget Sound Energy (7.02% 12/01/2027) 3.7%
Merck & Co. (Schering) (6.50%12/01/2033) 3.5%
EMC (3.375% 6/01/2023) 3.5%
Boeing (6.125% due 02/15/2033) 3.4%
Johnson & Johnson (4.95% 5/15/2033) 3.3%
Blaine Co. ID SCD #61 Hailey (5.25% 08/01/2020) 3.2%
 

Footnotes:

¹ United Stated Department of Labor Bureau of Labor Statistics Economic News Release, July 15, 2016. 
http://www.bls.gov/news.release/cpi.nr0.htm

² Platt, E., Jackson, G. Corporate bonds join the negative yield club, Financial Times, June 2, 2016. 
http://www.ft.com/cms/s/0/e1a7dca0-285c-11e6-8ba3-cdd781d02d89.html#axzz4GPQzAHUs

³ Buttonwood, Why investors buy bonds with negative yields, The Economist, February 9, 2016. 
http://www.economist.com/blogs/economist-explains/2016/02/economist-explains-6

4 United Stated Department of Labor Bureau of Labor Statistics 
http://data.bls.gov/timeseries/LNS11300000

5 Fry, R. Millennials overtake Baby Boomers as America's largest generation, Pew Research Center Fact Tank, April 25, 2016. 
http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/

 

Morningstar Sustainability Ratings™

As of June 30, 2016

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Sextant International Fund

 

Sextant Core Fund

SSIFX Morningstar Sustainability Rating - High SCORX Morningstar Sustainability Rating - High
Among 712 Foreign Large Blend Funds Among 818 Allocation 50% — 70% Equity Funds
 

Sextant Short-Term Bond Fund

 

Sextant Global High Income Fund

STBFX Morningstar Sustainability Rating - Above Average SGHIX Morningstar Sustainability Rating - Low
Among 497 Short-Term Bond Funds Among 470 World Allocation Funds
 

Sextant Growth Fund

  The Sextant Bond Income Fund has not yet received a Sustainability Rating.
SSGFX Morningstar Sustainability Rating - Average
Among 1,467 Large Growth Funds

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

The Morningstar Sustainability Rating and the Morningstar Portfolio Sustainability Score are not based on fund performance and are not equivalent to the Morningstar Rating ("Star Rating").

© 2016 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.

Morningstar Sustainability Ratings and Portfolio Sustainability Scores are as of May 31, 2016. The Morningstar Sustainability Rating™ is intended to measure how well the issuing companies of the securities within a fund's portfolio are managing their environmental, social, and governance ("ESG") risks and opportunities relative to the fund's Morningstar category peers. The Morningstar Sustainability Rating calculation is a two-step process. First, each fund with at least 50% of assets covered by a company-level ESG score from Sustainalytics receives a Morningstar Portfolio Sustainability Score™. The Morningstar Portfolio Sustainability Score is an asset-weighted average of normalized company-level ESG scores with deductions made for controversial incidents by the issuing companies, such as environmental accidents, fraud, or discriminatory behavior. The Morningstar Sustainability Rating is then assigned to all scored funds within Morningstar Categories in which at least ten (10) funds receive a Portfolio Sustainability Score and is determined by each fund's rank within the following distribution: High (highest 10%), Above Average (next 22.5%), Average (next 35%), Below Average (next 22.5%), and Low (lowest 10%). The Morningstar Sustainability Rating is depicted by globe icons where High equals 5 globes and Low equals 1 globe. A Sustainability Rating is assigned to any fund that has more than half of its underlying assets rated by Sustainalytics and is within a Morningstar Category with at least 10 scored funds; therefore, the rating it is not limited to funds with explicit sustainable or responsible investment mandates. Morningstar updates its Sustainability Ratings monthly. Portfolios receive a Morningstar Portfolio Sustainability Score and Sustainability Rating one month and six business days after their reported as-of date based on the most recent portfolio. As part of the evaluation process, Morningstar uses Sustainalytics' ESG scores from the same month as the portfolio as-of date.

The Funds were rated on the following percentages of Assets Under Management:

Sextant International Fund    79%
Sextant Core Fund                  64%
Sextant Growth                       92%
Sextant Short-Term Bond       56%
Sextant Global High Income  57%

The Morningstar Portfolio Sustainability Scores and Morningstar Sustainability Ratings are new and it is anticipated that Morningstar will issue the scores and ratings monthly. The Funds' portfolios are actively managed and is subject to change, which may result in a different Morningstar Sustainability Score and Rating.

 

Performance Summary

As of June 30, 2016

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Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year Expense Ratio
  Gross¹ Net
Sextant Growth (SSGFX) -7.68% 7.94% 7.92% 5.62% 0.90% 0.90%
S&P 500 Index 3.99% 11.62% 12.09% 7.42% n/a
 
Sextant International (SSIFX) -7.59% 1.66% -0.47% 3.14% 1.05% 1.04%
MSCI EAFE Index  -9.72% 2.51% 2.14% 2.05% n/a
 
Sextant Core (SCORX)² 0.59% 4.18% 3.76% n/a   1.02% 1.01%
Dow Jones Moderate Portfolio Index 1.73% 6.16% 5.90% 5.63% n/a
 
Sextant Global High Income (SGHIX)³ -1.55% 2.80% n/a   n/a   1.06% 0.89%
S&P 500 Global 1200 Index -2.08% 7.38% 7.05% 5.14% n/a
Bloomberg Global High Yield Corporate Bond Index 1.95% 3.43% 4.90% n/a   n/a
 
Sextant Short-Term Bond (STBFX) 1.69% 1.46% 1.05% 2.72% 1.21% 0.75%
Citi USBIG Govt/Corp 1-3 Year Index 1.52% 1.16% 1.06% 2.77% n/a
 
Sextant Bond Income (SBIFX) 6.79% 4.84% 4.40% 5.02% 1.03% 0.90%
Citi US Broad Investment-Grade Bond Index 5.98% 4.04% 3.76% 5.22% 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.

1 By regulation, gross expense ratios shown are as stated in a Fund's most recent prospectus or summary prospectus, dated March 29, 2016, and incorporate results from the fiscal year ended November 30, 2015. 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, 2017.

2 Sextant Core Fund began operations March 30, 2007.

3 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

Performance data quoted represents past performance which is no guarantee of future results.

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.

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.