Q2 2023

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In our 2022 year-end commentary we noted the remarkably consistent track record of stock market gains in every year that followed a midterm election dating back to World War II. We also noted the rare instances of the US stock market declining over two consecutive years. History was setting up 2023 to be a good year and, reviewing the first half of 2023 performance, the track record appears likely to remain intact. Year-to-date, the S&P 500 rose a healthy 16.89%, while the more Tech-heavy NASDAQ Composite Index soared 32.32%. Such figures, however, belie a darker picture just below the surface, as index performance was driven by a handful of mostly mega-cap stocks: Alphabet, Amazon, Apple, Meta (Facebook), Microsoft, Netflix, Tesla, and Nvidia. Together these stocks account for 30% of the S&P 500 Index's market capitalization, up from 22% at the start of the year. As a market capitalization-weighted index, larger capitalization stocks have a greater effect on index performance. To see the result, we need only compare the performance of the S&P 500 Index to the performance of the S&P 500 Equal Weight ETF as a proxy for an equal-weighted S&P 500 Index, as shown in Heavyweights Rule.

Following the March collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse, the S&P Equal Weight ETF moved into negative territory, remaining lackluster until June 2023. Over the same period, the large-cap Tech stocks continued appreciating, receiving a boost in mid-May from Nvidia due to demand for Artificial Intelligence (AI) chips.

While Nvidia's year-to-date 189.54% appreciation helped pull the benchmark higher, a reversal could shave points off the S&P 500 Index while other stocks appreciate. The six-month performance gap of 9.44% between market capitalization and equal-weighted indices registered over the first half of 2023 ranks as the third-widest gap over the past 25 years. The widest gap was 10.71% in March 2000 during the height of the dot-com bubble, a period that bears more than a passing resemblance to the current AI frenzy. That March 2000 spread was wiped out and reversed over the following 15 months, as the collapse in online stocks dragged the Index down and obscured the solid performance of stocks that had been neglected during the dot-com bubble. Whether history will rhyme remains to be seen, but a longer-term view shows that the two versions of the S&P 500 rarely deviate more than a few percentage points from each other on an annualized basis.

Outlook

In early September of 1939, Germany invaded Poland, and Britain and France declared war on Germany. However, for eight months, there was minimal fighting; it wasn't until May 1940 when the German Panzerdivision rolled into the Low Countries and France that the war took off. The eight-month interregnum came to be known as "The Phoney War."¹ Market observers could be forgiven for thinking the same of the yet-unrealized recession that was assumed to be an inevitable consequence of the Federal Reserve's aggressive rate tightening in the wake of high post-pandemic inflation. Economists are generally a sunny lot, rarely forecasting downturns in advance of their arrival. For 2023, however, consensus strongly favored a global recession.² In the first half, European economies were certainly weak, while the removal of China's COVID-19 restrictions released a burst of activity that subsequently cooled to the point of spurring officials to take stimulative measures. Meanwhile, Japan demonstrated surprising strength, while the US economy soldiered on with first-quarter gross domestic product (GDP) growth of 2.0%, 339,000 new jobs in May, and an unemployment rate of 3.7.³ What now?

Just as May 1940 brought an end to the Phoney War, we cannot dismiss future economic contraction based on it not having arrived. Inflation remains elevated and earlier hopes of a Fed pivot have evaporated. Indeed, the Fed has indicated the possibility of two additional rate hikes by year-end, following the June pause. Higher-for-longer in terms of inflation and interest rates does not bode well for growth. And what of that genie of economic prognostication, the yield curve? While boasting an impressive record of predictive success, it provides little guidance regarding timing. A general rule of thumb looks for a recession to begin within a year of the curve inverting, although the lag has been as great as two years. Disconcertingly, the two-year and 10-year yield curves inverted for good almost exactly a year ago, while the Cleveland Fed currently estimates the probability of recession within one year at 79%.⁴

What this means for stock market returns remains anyone's guess, but so far, activity in 2023 indicates that bad economic news may be interpreted as good stock market news if investors believe lower rates are just around the bend. Valuations may prove problematic for the architects of this year's index gains, but most stocks performed meekly, as described above. It may be that investors have already discounted the risks of lower earnings for companies not involved in AI, creating an opportunity for the first-half wallflowers to move to the center of the dance floor.

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, 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 June 30, 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 June 30, 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 British spelling is generally used on both sides of the Atlantic, rather than the American "phony."

² "Chief Economists Say Global Recession Likely In 2023, But Pressures On Food, Energy and Inflation May Be Peaking." World Economic Forum. January 16, 2023. https://www.weforum.org/press/2023/01/chief-economists-say-global-recession-likely-in-2023-but-cost-ofliving-crisis-close-to-peaking/

³ "The Employment Situation – June 2023." Bureau of Labor Statistics. July 7, 2023. https://www.bls.gov/news.release/pdf/empsit.pdf

⁴ "Yield Curve and Predicted GDP Growth." Federal Reserve Bank of Cleveland. June 2023. https://www.clevelandfed.org/en/indicators-and-data/yield-curve-and-predicted-gdp-growth

⁵ "A Rocky Recovery." International Monetary Fund. April 11, 2023. https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023

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.