Q2 2020

Despite the economic carnage afflicting the global economy since the outbreak of the coronavirus pandemic, by the end of the first quarter, the stock market had already plumbed its greatest depths, with March 23 marking a nadir on the S&P 500 Index of 2,237.40. Over the course of the second quarter, while not recovering all the lost ground from the February peak, the market roared back a stunning 37% from the March low, and registered the best quarterly performance for the S&P 500 Index since the fourth quarter of 1998.¹ In our first quarter commentary, referencing the extreme volatility, we opined that “…the best course of action is to remain invested…attempting to time such moves will likely diminish portfolio values.”  Prescient advice. Investors are sometimes thrown a curve by near-term stock market performance that’s uncorrelated with economic conditions. In April, with businesses shuttering, unemployment soaring, retail sales collapsing, and travel nonexistent, the market staged a dramatic rebound. To an extent, the turnaround signaled that investors had come to terms with an unexpected and “novel” threat, as well as a willingness to look through the current disruption toward a normalized economy, spurred by hopes of a contained virus and businesses re-opening. More significantly, it reflected rapid fiscal and monetary action to support businesses and individuals through a $2 trillion stimulus bill (the CARES Act) enacted at the end of March, abetted by Federal Reserve action such as rate cuts, reserve ratio reductions, and a return to quantitative easing through (for all intents and purposes) unlimited purchases of Treasury bonds and government-backed mortgages. The bond buying was later extended to include even commercial paper.  As has been the case since the Global Financial Crisis (GFC), the “Fed Put” remains in play. Milton Friedman’s famous dictum that “Inflation is always and everywhere a monetary phenomenon” has a new corollary – stock market performance is often, if not always, a monetary phenomenon. 

We now face the conundrum of how to approach the second half of the year. Unsurprisingly, our advice stays the same; a position we do not take casually.  Poor policy decisions have accelerated the tragic progression of the coronavirus, and the moves among a number of states to reverse previous re-opening measures indicate the economy remains deeply in the woods. On June 30, Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, stated "We are now having 40-plus thousand new cases a day.  I would not be surprised if we go up to 100,000 a day if this does not turn around and so I am very concerned.”²

Disease spread of such a degree implies extended shutdowns and unavoidable concomitant damage to corporate profitability and to state and local budgets. Unlike the federal government, states and municipalities do not have the luxury of engaging in Modern Monetary Theory. Of the 50 states, 49 have balanced budget requirements³ and the unprecedented declines in tax revenues imply equally unprecedented budget cuts absent federal relief. According to the Federal Reserve, state and local expenditures accounted for 14% of US GDP as of January 2020.⁴

State budget distress carries significant ramifications for employment, education, healthcare, emergency services, and countless other activities.  Counterintuitively, and related to our point above concerning monetary phenomena and stock market performance, dire finances at the state and local level could lead to further federal monetary and fiscal stimulus that ultimately supports equity prices, especially given the dearth of attractive investment alternatives in today’s low-interest rate environment.

International Opportunities 

Many other countries, particularly those in Europe and Asia, have handled the coronavirus pandemic more competently than the United States, and transmission is diminishing.  Others, such as Brazil, have been similarly ham-handed with prevention.  Whether the former implies more attractive investment opportunities remains uncertain.  For some time, investors have noted the outperformance of US markets versus their international counterparts. Index comparisons, however, can be misleading.  In the chart below we compare the performance of the S&P 500; the S&P 500 absent Facebook, Apple, Amazon, Alphabet, and Microsoft; and the MSCI EAFE Index. 

As shown above, while the S&P 500 has led the way, stripping out the stocks named above leaves us with an S&P index that, while still outperforming international developed markets, has a much-reduced advantage.  For anyone who wishes to own a portfolio consisting only of five technology/social media stocks, that information would be useless.  For everyone else, the example illustrates that investment opportunities outside of the US may be just as attractive as domestic candidates.

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 June 30, 2020

Scroll right to see more » »

Scroll right to see more » »

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 a Fund’s most recent prospectus or summary prospectus, dated March 27, 2020, and incorporate results from the fiscal year ended November 30, 2019.     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%, Sextant Short-Term Bond at 0.60% and actual expenses of Sextant Bond Income at 0.65% through March 31, 2021. 

^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.  Its annualized since inception return as of March 31, 2020, was 2.95%.

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 MSCI ACWI Ex-US Index, produced by Morgan Stanley Capital International, measures equity market performance throughout the world excluding US-based companies.  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.  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™

Scroll right to see more » »

Scroll right to see more » »

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

© 2020 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 June 30, 2020.  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 to commentary:

¹ Elder, Bryce, Adam Samson, Joshua Oliver, and Hudson Lockett. Wall Street stocks seal best quarter since 1998, Financial Times, June 30, 2020.  https://www.ft.com/content/6d09858e-6dc8-4e74-bbcb-9f837e4aa7c8

² Ehrlich, Jamie and Claire Foran. Fauci warns Congress that new US coronavirus could raise to 100,000 a day, CNN, June 30, 2020.  https://www.cnn.com/2020/06/30/politics/fauci-redford-testimony-senate-coronavirus/index.html

³ State Balanced Budget Requirements, National Conference of State Legislatures, NCSL.org, 2020.  https://www.ncsl.org/research/fiscal-policy/state-balanced-budget-requirements-provisions-and.aspx

⁴ US Bureau of Economic Analysis. State and local government current expenditures, FRED Economic Data, June 25, 2020.  https://fred.stlouisfed.org/series/SLEXPND 

⁵ Sekera, Dave. Corporate Bonds Stand Out in Second Quarter, Morningstar, July 8, 2020. https://www.morningstar.com/articles/991119/article

⁶ Cox, Jeff. The Fed is buying some of the biggest companies’ bonds, raising questions over why, CNBC, June 29, 2020. https://www.cnbc.com/2020/06/29/the-fed-is-buying-some-of-the-biggest-companies-bonds-raising-questions-over-why.html

⁷ Wirz, Matt. Fed Backstop Fueled Corporate Bond Surge, The Wall Street Journal, June 30, 2020. https://www.wsj.com/articles/fed-backstop-fueled-corporate-bond-surge-11593515309

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), then weighting these values (multiplying each by the company’s percent share of total portfolio assets), 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.