Q2 2024

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Sextant Mutual Funds Q2 2024 Commentary

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It's said that history doesn't repeat itself, it rhymes. Comparing the first half of 2024 with that of 2023 demonstrates impressive poetry. Over the first six months of 2023, the S&P 500 Index returned 16.89%. For the six-months ended June 30, 2024, the S&P 500 Index returned 15.29%. As was the case in 2023, index returns have been concentrated primarily among Technology stocks, especially those with opportunities in generative artificial intelligence (AI). In the first quarter of 2023 Nvidia led the way, appreciating by a stunning 189.54% and continued its dominant run in 2024 soaring 149.50%. Meanwhile, the other mega-cap stocks that drove 2023 returns have largely repeated their performances with Microsoft, Amazon, Alphabet, and Meta (Facebook) appreciating from just under 20% for Microsoft to over 40% for Meta. After a weak first quarter of 2024, Apple has managed to stage a recovery, returning 9.68% in the six-months ended June 30, 2024, while Tesla has been the outlier shedding 20.36%.

Additionally, the mega-cap Technology stock dominance has again far outpaced the remainder of the market, as shown by the equal-weighted S&P 500 Index returning a mere 4.96% in the first half of 2024 against 6.93% in 2023. The chart below illustrates the ever-growing gap between the two indices. Indeed, since the market bottom in mid-April, the market cap weighted index has again been off to the races while the equal-weighted version treads water.

In the final quarter of 2023, signs emerged that the breadth of performance may improve but those hopes were dashed on the rocks of persistent inflation and higher-for-longer interest rates. Expectations for as many as six rate cuts at the start of the year have moderated to the point that we may not see the first reduction until 2025. As a result, many company stocks have fared poorly. Of the 11 sectors in the S&P 500 Index, six declined over the first half of 2024. In order of descending performance, they were Health Care, Consumer Discretionary, Real Estate, Financials, Energy, Industrials, and Materials. Meanwhile, Technology, Communications Services (Alphabet and Meta), Utilities, Consumer Staples, and Consumer Discretionary registered gains, although the latter two barely squeaked into positive territory. Utilities may seem surprising, but the AI gold rush has completely upended previous projections for the growth in electricity demand due to the surge in power consumption for data centers and AI training.

Outlook

With generative AI driving stock prices, index returns, and capital expenditures, it makes sense to take a step back and try to come to a view about what's really happening. What are the opportunities for monetization, and do they justify the vast sums being invested? As long-term investors, we need to balance near-term business and price momentum with long-term prospects.

We are not AI experts, but we have had opportunities to test its utility in a professional setting and, despite its relative immaturity, have found significant productivity enhancements in a variety of applications. Several departments within Saturna Capital adopted AI tools, including marketing, human resources, and investments, with each picking up productivity gains. These gains fall into the 'faster-better-cheaper'¹ category rather than the 'killer app' category'² – it is still very much early days in the development of AI technology.

Many likely consider AI as having started when OpenAI launched ChatGPT in November 2022. But several years of work went into the release, with OpenAI having been founded in 2015. Rather than the years devoted, we focus on the incredible progress made over that time.

A report recently published by former OpenAI researcher Leopold Aschenbrenner noted that in 2019 the information provided by ChatGPT-2 was roughly comparable to what one might expect from a preschooler. By 2020, it had improved to an elementary schooler. GPT-4 brought us to the level of a bright high school student in 2023. Today, the investment devoted to building ever-larger AI training models, while AI researchers work on improving their algorithms and "unhobbling" models means that within a short time GPT-X could be the equivalent of a university-level research engineer and by 2028 as good as an AI engineer.³

If these projections are accurate, the question of monetization answers itself. As of January 2024, Microsoft has over 400 million paid Office 365 subscriber seats, according to Satya Nadella on the Fiscal Year 2024 Second Quarter Earnings Conference Call.⁴ How many of those seats would be willing to pay a nominal monthly subscription to have a university-level research assistant sitting at their beck and call? Let's say half. If that were the case and each of those seats were willing to shoulder a monthly charge of $85, Microsoft would double its 2023 revenue. For comparison's sake, $85 is roughly three times the average hourly rate for a doctoral-level university assistant, while the subscriber would have that assistant at her beck and call 24/7.

We cannot state with certainty AI evolution but there's a long history of underestimating the spread of transformative technologies. Over the past 50 years desktop computers, cellular phones, and streaming services all suffered their share of naysayers concerned about complexity, cost, or utility yet all ultimately grew to scale, providing enormous benefits to society.

We believe AI will follow this path, as do the big tech companies that are committing tens, if not hundreds, of billions of capital investment dollars in the near future. Thinking back to the dot-com bubble, how much of this capital expenditure will be productive and how much will be misguided? Excess capacity is bad for those companies (and their investors) that created it and good for companies (and their investors) that benefit from low-cost capacity.⁵ Our investments are determined to evolve with the industry as we seek long-term beneficiaries of the development and adoption of AI.

Sextant Growth Fund

Sextant International Fund

Sextant Global High Income Fund

Sextant Core Fund

Sextant Short-Term Bond Fund, Sextant Bond Income Fund

The Sextant Short-Term Bond Fund returned 0.89% in the second quarter of 2024 while the Bloomberg US Aggregate Index returned 0.07%, and the Bloomberg US Aggregate 1-3 Year Bond Index returned 0.95% for the same period. For the trailing 12-month period, the Fund returned 4.15% relative to 2.63% for the Bloomberg US Aggregate Index, and 4.92% for the Bloomberg US Aggregate 1-3 Year Bond Index.

The Sextant Bond Income Fund returned -0.16% for the second quarter of 2024. The FTSE USBIG Bond Index returned 0.13% and the Bloomberg US Aggregate Index returned 0.07% for the same period. For the trailing 12-month period, the Fund returned 1.84% and the FTSE USBIG Bond Index returned 2.66% and the Bloomberg US Aggregate Index returned 2.63%. The primary reason for the underperformance was due to the Fund's relative longer duration.

Market Overview

Over the second quarter of 2024, the bond market has been driven largely by how economic data may inform the timing of potential rate cuts by the Federal Reserve. Markets have experienced higher volatility surrounding positive economic data, which may delay cuts. Despite volatility during the second quarter of 2024, the Treasury curve was relatively close to where it began. For example, the 10-year started the quarter at 4.31%, and ended at 4.39%. However, 10-year yields rose to a high of 4.70% mid-April when volatility peaked. Investors should pay attention to political elections in 2024 as 64 countries, including the European Union, representing nearly half of the world's population will be holding elections.⁶ These elections have already introduced volatility into the global markets, and we expect more volatility to follow in the months to come.

Sextant Bond Income Fund

The primary reason that the Sextant Bond Income Fund underperformed the over the second quarter was the longer duration relative to the Bloomberg US Aggregate Index. At quarter-end the Fund had an effective duration of 7.29 years while the FTSE USBIG Index and the Bloomberg US Aggregate Index had effective durations of 6.01 years and 6.18 years, respectively. Following this pattern, the shorter corporate bonds in the Fund also had the highest total return. The Fund's best performing security during the quarter was the 2047 State Street floating rate bond, which has a duration of 0.15 years and returned 2.32%. The lowest performing bond was also the longer bonds in the Fund, the 2052 Treasury bond, which returned -2.33% for the quarter.

Sextant Short Term Bond Fund

The Sextant Short-Term Bond Fund and Bloomberg US Aggregate 1-3 Year Bond Index had relatively similar performance this past quarter, with a differential of only 6-bps, while the Fund outperformed the Bloomberg US Aggregate Index by 82-bps. The primary drivers of performance over the second quarter were bonds with maturities within one year. The Fund's best performing bond was the 2024 VF Corporation returning 1.59%. The lowest performing bond was the 2029 Verizon, returning 0.02%. Duration in the Sextant Short-Term Bond Fund continues to be shorter than the benchmarks, at 1.35 years relative to 6.01 years for the Bloomberg US Aggregate Index, and 1.9 years for the Bloomberg US Aggregate 1-3 Year Bond Index.

As of June 30, 2024

Sextant Short-Term Bond Fund
Top 10 Holdings	Portfolio Weight
Treasury Bill due 08/08/2024	8.68%
US Treasury N/B (2.375% 05/15/2027)	5.63%
United States Treasury Note (2.25% 10/31/2024)	5.46%
US Treasury N/B (1.50% 02/15/2025)	5.38%
United States Treasury Note (2.625% 12/31/2025)	5.33%
US Treasury Bill due 7/18/2024	4.58%
Florida Power & Light (2.85% 04/01/2025)	3.78%
United States Treasury Note (2.875% 04/30/2025)	3.61%
Bank of America (3.50% 04/19/2026)	3.56%
Koninklijke KPN (8.375% 10/01/2030)	3.19%

Sextant Bond Income Fund
Top 10 Holdings	Portfolio Weight
United States Treasury Bond (4.25% 05/15/2039)	7.44%
United States Treasury Bond (3.375% 11/15/2048)	4.50%
United States Treasury Bond (5.375% 02/15/2031)	4.19%
Apple (4.50% 02/23/2036)	3.37%
Microsoft (4.20% 11/03/2035)	3.30%
Intel (4.00% 12/15/2032)	3.27%
Home Depot (5.875% 12/16/2036)	3.14%
US Treasury N/B (2.875% 05/15/2052)	2.91%
Burlington Northern Santa Fe (5.05% 03/01/2041)	2.90%
Praxair (Linde AG) (3.55% 11/07/2042)	2.75%

Performance Summary

As of June 30, 2024

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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.

^ABy regulation, expense ratios shown are as stated in the Funds' most recent prospectus or summary prospectus, dated March 29, 2024, and incorporate results from the fiscal year ended November 30, 2023. Higher expense ratios may indicate higher returns relative to a fund's benchmark.

^BZ 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, 2025, 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 S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. 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 Bond 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. The S&P Global 1200 Index is a global stock market index covering nearly 70% of the world's equity markets. 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. 60% / 40% S&P Global 1200 Index / Bloomberg US Aggregate Index blends the S&P Global 1200 Index with the Bloomberg US Aggregate Index by weighting their total returns at 60% and 40%, respectively. The blend is rebalanced monthly and results reflect the reinvestment of dividends gross of foreign withholding taxes. 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, 2024

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

© 2024 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, 2024. 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 McCurdy, Howard E. "Faster, Better, Cheaper: Low-Cost Innovation in the U.S. Space Program." Johns Hopkins University Press, October 29, 2003. 

² Downes, Larry, et al. "Unleashing the Killer App: Digital Strategies for Market Dominance." Revised Edition. Harvard Business Review Press. March 1, 2000. 

³ Aschenbrenner, Leopold. "Situational Awareness: The Decade Ahead." June 2024. https://situational-awareness.ai/ 

⁴ "Microsoft Corporation (NASDAQ:MSFT) Q2 2024 Earnings Call Transcript." Yahoo Finance. February 1, 2024. https://finance.yahoo.com/news/microsoft-corporation-nasdaq-msft-q2-160938899.html 

⁵ Cahn, David. "AI's $200B Question." Sequoia, September 20, 2023. https://www.sequoiacap.com/article/follow-the-gpus-perspective/ 

⁶ Ewe, Koh. "The Ultimate Election Year: All the Elections Around the World." Time Magazine. December 28, 2023. https://time.com/6550920/world-elections-2024/ 

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 duration is a measure of a fund's sensitivity to changes in interest rates and the markets. A fund's modified duration is a dollar-weighted average length of time until principal and interest payments must be paid. Longer maturities typically indicate greater sensitivity to interest rate changes than shorter maturities. Effective duration differs from modified duration in that it accounts for the optionality embedded in call options and other security specific covenants that can change expected cash flows as the result of the movement of interest rates. Longer durations tend to indicate greater sensitivity to interest rate changes than shorter durations.

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.

About the Authors

Scott Klimo CFA^®
Chief Investment Officer
Portfolio Manager, Sextant Growth Fund

Chris Paul MBA, CFA^®
Senior Investment Analyst
Deputy Portfolio Manager, Sextant Growth Fund

Bryce Fegley MS, CFA^®, CIPM^®
Senior Investment Analyst
Portfolio Manager, Sextant Core and Global High Income Funds
Deputy Portfolio Manager, Sextant Bond Income and International Funds

Elizabeth Alm CFA^®
Senior Investment Analyst
Portfolio Manager, Sextant Bond Income and
Short-Term Bond Funds

Levi Zurbrugg MBA, CFA^®, CPA^®
Senior Investment Analyst
Portfolio Manager, Sextant Core Fund
Deputy Portfolio Manager, Sextant Global High Income and Short-Term Bond Funds

Dan Kim CFA^®
Senior Investment Analyst
Portfolio Manager, Sextant International Fund