Q3 2015 • September 30, 2015 | Saturna Capital

 

 

Navigating Today's Volatile Markets

 

Q3 2015 Highlights:

Despite the lack of a "Grexit" and no Fed rate hike, markets across the globe fell in Q3 2015.

  • Slowdown in China
  • Emerging markets maelstrom
  • Japan halted and Europe battered
  • Carnage in US markets
  • Mixed earnings results

Environment

At the end of last quarter, we suggested global equity markets faced two potential risks: a Greek exit from the eurozone and the US Federal Reserve's first rate hike. Neither came to pass, yet stock markets around the world took a battering. Investors believed that a possible Fed rate hike would wreak havoc on countries engaged in excessive overseas borrowing, which hit emerging markets especially hard. The slowdown in China exacerbated fear in countries that depend on exporting commodities, such as Brazil, South Africa, and Indonesia. In Brazil, South Africa, Turkey, Thailand, Malaysia, Indonesia, and others, questionable governance and sinking currencies did nothing to help the situation. As a result of these headwinds, the Institute of International Finance (IIF) stated in its most recent report that net capital flows for global emerging markets will be negative in 2015 for the first time since 1988.¹ The IIF projects net outflows to reach $541 billion for the year. Making matters worse, residents of the various countries are shipping their money overseas at record rates. According to the IIF, domestic outflows from emerging markets may surpass $1,000 billion in 2015. Such conditions may entice the most adventurous investors, but we are inclined to wait for some stability in commodity prices and the opportunity to assess the effects of the first rate rise.

Emerging markets were not alone in receiving punishment. For some time, we have voiced our skepticism surrounding Japan's revitalization plan known as "Abenomics" in homage to Prime Minister Shinzo Abe. While the Japanese stock market took off on a tear in the first part of the year as a result of significant yen depreciation, that came to a screeching halt in the third quarter with the Nikkei Index dropping -11.79% in US dollars. A sharp drop in the inflation rate and a reported decline in second quarter GDP growth contributed to the reversal of fortune.

Despite escaping the immediate fallout of a "Grexit," European markets were also battered during the quarter with the Bloomberg Euro 500 Index dropping -7.96% in US dollars. Performance worsened further on revelations of diesel emissions fraud perpetrated by Volkswagen that sent its share price down roughly 35% over the back half of September.

Finally, we arrive at the US, which did not escape the carnage. The Russell Growth, Russell Value, S&P 500, and Nasdaq Indices fell between -5.29% and -8.39% during the quarter with growth at the low end of the decline and value at the high end. Higher benchmark exposure to Energy and Financials in the Value Index contributed to the discrepancy between the two styles.

Outlook

Last summer, conventional wisdom pointed to a September lift-off for the Fed. Economists and market strategists no longer agree that the Fed will take action by year-end. Dollar strength appears to be taking the wind out of manufacturing sails. Recent employment figures have been disappointing, including a resumption in the decline of the labor participation rate. At the same time, sinking commodity prices and stagnant wage growth are not the typical ingredients of higher inflation.

Civilian Labor Force Participation Rate

Trimmed Mean PCE Inflation Rate

Equity markets generally cheer a diminished risk of rate hikes, at least in the short term. They also cheer improving earnings, and here the picture has been positive — with an important caveat. Of the 499 companies in the S&P 500 that had reported second quarter earnings by the end of September, 69% exceeded consensus expectations versus a long-term average of 63%.² That sounds pretty good until we realize that aggregate second quarter earnings increased only 1.2% year-on-year. Expectations were clearly modest. Further muddying the picture, only 48% of the companies reported sales that exceeded analyst consensus, well below the long-term average of 60%, and below the previous four quarters' average of 56%. Companies have done a good job managing expenses, but cost-cutting in an environment of weakening sales is not a recipe for secular earnings expansion.

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S&P 500: Q2 2015 Earnings vs. Expectations
Sector Above % Match % Below % Surprise Factor % Reported Total # Index Total #
Consumer Discretionary 73% 10% 18% 6% 84 84
Consumer Staples 70% 11% 19% 3% 37 37
Energy 60% 10% 30% 4% 40 40
Financials 61% 11% 28% 4% 87 88
Health Care 93% 5% 2% 7% 55 55
Industrials 73% 9% 18% 4% 66 66
Materials 61% 14% 25% 5% 28 28
Technology 71% 10% 19% 3% 68 68
Telecom Services 60% 0% 40% 4% 5 5
Utilities 52% 7% 41% 4% 29 29
S&P 500 69% 10% 21% 4% 499 500

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Source: Thomson Reuters

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S&P 500: Q2 2015 Revenue vs. Expectations
Sector Above % Match % Below % Surprise Factor % Reported Total # Index Total #
Consumer Discretionary 52% 0% 48% 0% 84 84
Consumer Staples 39% 0% 61% -2% 36 37
Energy 49% 0% 51% 5% 39 40
Financials 60% 0% 40% 2% 85 88
Health Care 69% 0% 31% 1% 54 55
Industrials 29% 0% 71% 0% 66 66
Materials 29% 0% 71% -1% 28 28
Technology 57% 0% 43% 0% 67 68
Telecom Services 20% 0% 80% 0% 5 5
Utilities 24% 0% 76% -5% 29 29
S&P 500 48% 0% 52% 0% 493 500

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Source: Thomson Reuters

 

Sextant Growth

In the third quarter, Sextant Growth Fund narrowed its underperformance gap versus the S&P 500 and the Russell 1000 Growth Index. That said, the quarter was a poor one for stocks in general, with the Fund returning -7.07%, the S&P 500 -6.44%, and the Russell 1000 Growth Index -5.29%. The Fund's Morningstar Large Growth peer category averaged a -6.69% return during the quarter.

As you may recall from last quarter's update, we have been culling the portfolio of stocks poorly positioned for the current and forecasted 2016 market, economic, and geopolitical environment. Within the Technology sector we continued to sell cyclical hardware, storage, and semiconductor stocks, such as Qualcomm, Western Digital, Agilent, Keysight, and Microchip Technology.

Also shown the door were shares of "Rust Belt" companies, such as Fastenal, Union Pacific, Polaris, Johnson Controls, BorgWarner, Power Solutions International, HARMAN International, and Boeing. The unfortunate common denominators in these names are their manufacturing exposure, often with a link to oil and gas, and their high proportion of foreign sales hurt by the rising US dollar.

We continued to add to secular growth stories within Technology such as Tableau Software, Facebook, Splunk, and Akamai. Another focus has been the Consumer Discretionary sector, particularly investments in powerhouse global brands like Nike, Walt Disney, Starbucks, Home Depot, and Under Armour. If you are keeping score, the top three "most valuable brands" in the world according to Forbes are Apple, Microsoft, and Alphabet (formerly Google). Their total brand value is calculated to be $280.2 billion. These stocks all figure prominently in the Fund.

Lastly, we increased our exposure to Financials because we wish to be at least equal weight versus our benchmark as interest rates inevitably rise in the US. These investments include SVB Financial, Signature Bank (ranked as "America's Best Bank" by Forbes), FLEETCOR, and JPMorgan Chase.

The Fund added value by intentionally holding an average 9.7% cash during a poor period for equities.

National Oilwell Varco has been eliminated from the portfolio, and Power Solutions has been reduced to only a 0.30% position.

As of September 30, 2015

Ten Largest Contributors Return Contribution
Alaska Air Group 23.62% 0.35
Facebook, Class A 6.91% 0.29
Nike, Class B 16.06% 0.27
Under Armour, Class A 16.52% 0.25
Delta Air Lines 9.54% 0.24
TJX Companies 8.26% 0.19
Starbucks 6.93% 0.12
Costco 7.33% 0.11
Welltower 4.44% 0.06
Lowe's 3.34% 0.05
Ten Largest Detractors Return Contribution
Power Solutions International -57.63% -0.70
Medivation -25.06% -0.56
Apple -11.66% -0.47
FLEETCOR Technologies -11.33% -0.45
Biogen -22.23% -0.45
Blackrock -13.40% -0.41
Gilead Sciences -15.80% -0.36
SVB Financial -18.84% -0.36
National Oilwell Varco -17.83% -0.35
Hain Celestial Group -21.65% -0.34
Top Ten Holdings Portfolio Weight
Facebook, Class A 5.3%
FLEETCOR Technologies 3.8%
Apple 3.8%
Delta Air Lines 2.9%
BlackRock 2.7%
TJX Companies 2.7%
Ashland 2.6%
Starbucks 2.5%
Under Armour, Class A 2.3%
CVS Health 2.3%
 

Sextant International

Developed international markets were spared none of the carnage seen in the third quarter as the MSCI EAFE Index dropped -10.19%, bringing the year-to-date return to -4.91%. The Sextant International Fund fell -10.74% during the quarter and is down -6.56% year-to-date. From a sector perspective we performed relatively well in Consumer Discretionary and Energy, while faltering in Health Care, Industrials, and Materials.

All regions experienced negative returns with Asia-Pacific significantly weaker than Western Europe. Fortunately, we are underweight the region in general, and Australia, Japan, and Singapore in particular, which all declined by double-digits. In Western Europe we are also underweight, while our stock returns were better than the benchmark leading to a less negative contribution to Fund returns. Unfortunately, poorly performing out-of-benchmark investments in Canada and Latin America offset the benefits of underweight positions in those regions.

Despite the weakness in Health Care overall, Danish diabetes specialist Novo Nordisk made its second consecutive appearance on the top contributors list. We recently had an opportunity to meet with company management and remain committed to it as a long-term holding. Dassault Systemes of France is also a return performer. Dutch professional media firm Wolters Kluwer rebounded following a weak second quarter.
Panamanian based airline Copa Holdings remains our most challenged investment due to the disarray among its key Latin American markets. Toyota Motor appeared on the detractors list for the second consecutive quarter, but its share price stabilized and then received a boost when Volkswagen's emissions fraud was discovered. The emissions issue goes beyond Volkswagen and could affect consumer acceptance of diesels in general, as well as government attitudes toward emissions regulation. In such an event, few companies are better placed than Toyota, which has largely bet the ranch on hybrids and plug-in hybrids.

The only change among the top holdings was Unilever replacing Novo Nordisk due to relative share price movements.

As of September 30, 2015

Ten Largest Contributors Return Contribution
Wolters Kluwer 4.15% 0.2
Dassault Systemes ADR 0.99% 0.06
Novo Nordisk ADS -1.03% 0.06
Fomento Economico Mex ADS 0.18% 0.01
Korea Elec Power ADS 0.64% 0.00
SK Telecom ADR -1.57% -0.01
Koninklijke Philips -7.86% -0.05
Sanofi ADR -4.16% -0.06
BCE -3.18% -0.07
Nidec ADS -7.23% -0.10
Ten Largest Detractors Return Contribution
Copa Holdings, Class A -48.38% -1.37
ASML Holding -15.51% -1.03
Belmond, Class A -19.06% -0.86
Nice Systems ADS -11.20% -0.71
Toyota Motor ADS -12.31% -0.60
MercadoLibre -35.66% -0.58
BASF ADS -13.82% -0.56
Australia & New Zealand  Banking ADS -23.06% -0.52
Methanex -40.44% -0.52
Novartis ADR -6.53% -0.49
Top Ten Holdings Portfolio Weight
Wolters Kluwer 7.0%
Novartis ADR 7.0%
ASML Holding 6.5%
Nice Systems  ADS 5.7%
Dassault Systemes ADR 5.6%
Toyota Motor ADS 4.8%
Toronto-Dominion Bank 4.0%
Belmond, Class A 4.0%
Unilever ADS 3.9%
BASF ADS 3.9%
 

Sextant Core

Returns across a spectrum of equity and fixed income assets reflected a volatile third quarter. Equities fell as investors faced a decline in earnings and potential change in Federal Reserve policy. In response, fixed income assets rose with the Barclay's Aggregate Bond Index outperforming the S&P 500 Index by 7.67%. This quarter illustrated one of the benefits of investing in a multi-asset class mutual fund: asset classes sometimes move in different directions in response to market stress.

For the quarter ended September 30, the Sextant Core Fund posted a total return of -5.12% with performance roughly in line with the benchmark Dow Jones Moderate Portfolio Index return of -5.10%. In contrast, the S&P 500 Index fell -6.44%. Materials and Energy stocks took the worst hits though Health Care names were also weak as the primary election season focused some policy debate on health care costs. Regulators followed by requesting drug pricing information from various firms.

The Sextant Core Fund underperformed by -0.63% within its fixed income allocation. Overweight positions in corporate debt continued to add value even as the rally in government debt detracts due to the Fund's underweight position. Rising Treasury yields offset the price gains in non-government securities. Despite the higher exposure to non-government credit, we are managing risk by raising credit quality over the last year. With spreads tightening, lower investment grade credits offer less value.

Within the equity allocation, the Fund remains overweight Health Care sector equities which detracted from performance in the quarter. We maintain a positive bias toward the industry and see technological advancements combined with demographic trends as potent tailwinds for the industry. We recognize that there are some significant headline risks in the interim that investors should not discount. Long term, we believe the sector offers investors the potential for superior earnings growth.

Top performance contributors included consumer staples firms Nestle, Kimberly-Clark, and PepsiCo which benefited from investors's perception of their lower risk profiles. Top detractors from performance included a mixture of Energy and Biotech names.

As of September 30, 2015

Ten Largest Contributors Return Contribution
Nestle ADS 4.27% 0.09
Welltower 4.44% 0.07
Tacoma WA Elec Sys Revenue (5.966% 01/01/2035) 4.97% 0.07
Tyco International (8.50% 01/15/2019) 4.75% 0.06
Lowe's 3.34% 0.05
Kimberly-Clark 3.76% 0.04
PepsiCo 1.80% 0.03
General Electric Capital  (5.35% 04/15/2022) 1.90% 0.03
Skagit SD#1 (4.613% 12/01/2022) 2.33% 0.03
Lake Washington SD 414 (4.906% 12/01/2027) 2.05% 0.03
Ten Largest Detractors Return Contribution
Devon Energy -37.27% -0.57
Medivation -25.57% -0.49
Williams Companies -34.87% -0.46
NRG Energy -34.68% -0.46
Biogen Inc -23.39% -0.33
ConocoPhillips -20.83% -0.28
Express Scripts Holding -8.97% -0.18
Qualcomm -13.48% -0.17
Bellsouth Capital Funding (7.875% 2/15/2030) -6.44% -0.14
Procter & Gamble -7.30% -0.12
Top Ten Holdings Portfolio Weight
Chubb Equity 3.0%
Republic of Chile Bond 2.6%
Fannie Mae Bond 2.5%
Nestle ADS Equity 2.3%
Bellsouth Capital Funding Bond 2.3%
PepsiCo Equity 2.0%
Express Scripts Holding Equity 2.0%
Novo Nordisk ADS Equity 1.8%
SK Telecom ADR Equity 1.8%
Procter & Gamble Equity 1.8%
 

Sextant Global High Income

The Sextant Global High Income Fund returned -10.38% in the third quarter of 2015 and completed the period with $6.8 million in total assets, including 9.4% in cash and income receivable.

The Fund's continued poor results in the third quarter were once again attributable in large part to investments we have initiated in recent months. These include equity investments in energy and raw materials companies, emerging markets, and even combinations of the above themes (i.e., the Brazilian chemicals company Braskem). Although the Fund's investment losses are painful, we do believe that the accelerated intensity of selling and negative news flow in these areas may have peaked as the recent quarter ended.

We now count among our equity holdings a number of capably managed companies with limited debt and highly competitive operations that happen to be operating in deeply cyclical industries, and even if our timing is not so proficient that we catch the very bottoms of these cycles, we are confident that we are much closer to cyclical bottoms than to tops. As compensation for wading into these turbulent sectors, we are earning attractive dividend yields from companies with remote risk of financial distress while we wait patiently for economic conditions, and sentiment, to improve.

We continue to believe our strategy of an asset allocation approach to high income investing will bear fruit as time passes. High yield bonds are typically issued by highly leveraged or weaker businesses, so we have complemented our allocation with high dividend yield stocks in high quality businesses with lower leverage. For example, our equity holdings average a 33% debt to market capitalization ratio compared to the FTSE All-World average of 42%.

During the third quarter we liquidated our investments in Ukraine government bonds and the general obligation bonds of Puerto Rico. Our investment in Ukraine, after a rocky ride, turned out to be profitable as the government negotiated a creditor-friendly restructuring. Puerto Rico, however, began taking an increasingly hostile approach toward its creditors in the summer, and the Fund suffered a loss. The Fund also liquidated BASF in favor of better ideas, which included increasing the Fund's investments in BHP, South 32, Anglo American, Itau Unibanco, and Potash Corp.

As of September 30, 2015

Ten Largest Contributors Return Contribution
Ukraine Government  (9.25% 07/24/2017) 56.01% 1.03
Puerto Rico Aqueduct & Sewer Rev (5.00% 07/01/2019) 14.37% 0.09
Colony TX NFM Sales Tax Revenue (7.00% 10/01/2027) 3.81% 0.05
Colombia Republic Bond (8.375% 02/15/2027) 1.36% 0.03
Hopewell Highway Infrastructure 1.35% 0.03
Whistler Blackcomb Holdings 2.74% 0.03
Hewlett Packard (4.65% 12/09/2021) 1.52% 0.02
Star Gas Partners (8.875% 12/01/2017) 1.90% 0.02
Colony TX NFM Sales Tax Revenue (7.625% 10/01/2042) 3.42% 0.02
Hanesbrands (6.375% 12/15/2020) 0.45% 0.01
Ten Largest Detractors Return Contribution
Goodrich Petroleum (8.875% 03/15/2019) -50.55% -1.11
Anglo American ADR -40.69% -0.88
Potash Corp of Saskatchewan -32.91% -0.69
Itau Unibanco Holding ADS -31.89% -0.67
CCR -36.26% -0.67
CNOOC ADR -25.32% -0.63
South 32 -27.85% -0.54
Banco Santander ADS -24.10% -0.52
E.ON ADR -36.01% -0.50
Statoil ADS -17.58% -0.38
Top Ten Holdings Portfolio Weight
Burlington Northern Santa Fe Bond 3.1%
Rent A Center Bond 2.9%
Braskem ADS Equity 2.7%
NY Community Bancorp Equity 2.7%
San Miguel  Bond 2.6%
Grupo Bimbo Bond 2.6%
Novartis ADR Equity 2.6%
Microchip Technology Equity 2.5%
Total ADS Equity 2.5%
Hopewell Highway Infrastructure Equity 2.4%
 

Footnotes:

¹ Chandran, Nyshka. Is this the mother of all warnings on EMs? CNBC, October 1, 2015. 
http://www.cnbc.com/2015/10/01/emerging-markets-to-post-first-negative-year-of-net-capital-flows-since-1988.html

² Harrison, G., Aurelio, D. This Week In Earnings, Aggregate Estimates and Revisions. Thomson Reuters, October 9, 2015. 
http://www.trpropresearch.com/pdf/This_Week_In_Earnings.pdf

 

Performance Summary

As of September 30, 2015

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Average Annual Total Returns (Before Taxes) 1 Year 3 Year 5 Year 10 Year Expense Ratio
  GrossA Net
Sextant Growth (SSGFX) -2.46% 11.66% 10.88% 6.24% 0.96%B 0.95%
S&P 500 Index -0.61% 12.38% 13.33% 6.80% n/a
 
Sextant International (SSIFX) -10.00% 0.36% 0.24% 3.46% 0.78%B 0.77%
MSCI EAFE Index  -8.27% 6.07% 4.44% 3.44% n/a
 
Sextant Core (SCORX)C -5.86% 3.21% 4.37% n/a   1.10%B 1.10%
Dow Jones Moderate Portfolio Index -1.83% 5.69% 6.52% 5.44% n/a
 
Sextant Global High Income (SGHIX)D -13.56% -0.60% n/a   n/a   1.31%B 0.90%
S&P 500 Global 1200 Index -5.14% 8.72% 8.63% 5.47% n/a
Bloomberg Global High Yield Corporate Bond Index -5.35% 2.70% 5.17% n/a   n/a
 
Sextant Short-Term Bond (STBFX) 0.66% 0.76% 0.94% 2.64% 1.19%B 0.75%
Citi USBIG Govt/Corp 1-3 Year Index 1.14% 0.82% 1.00% 2.83% n/a
 
Sextant Bond Income (SBIFX) 2.19% 1.59% 3.40% 4.29% 1.17%B 0.90%
Citi US Broad Investment-Grade Bond Index 2.85% 1.66% 3.06% 4.72% n/a

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Performance data quoted represents past performance, is before any taxes payable by shareowners, and is no guarantee of future results. Current performance may be higher or lower than that stated herein. Performance current to the most recent month-end is available by calling toll-free 1-800-728-8762 or visiting Month-end Performance. Average annual total returns are historical and include change in share value as well as reinvestment of dividends and capital gains, if any. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Shares of a Fund may only be offered for sale through the Fund's prospectus or summary prospectus.

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

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

C Sextant Core Fund began operations March 30, 2007.

D Sextant Global High Income Fund began operations March 30, 2012.

The S&P 500 Index is an index comprised of 500 widely held common stocks considered to be representative of the US stock market in general. The MSCI EAFE Index is an international index focused on Europe, Australasia, and the Far East. The S&P Global 1200 Index is a global stock market index covering nearly 70% of the world's equity markets. The Bloomberg Global High Yield Corporate Bond Index is a rules-based, market-value weighted index engineered to measure the non-investment grade, fixed-rate, taxable, global corporate bond market. The Dow Jones Moderate Portfolio Index is a broad-based index of stock and bond prices. The Citi USBIG Govt/Corp 1-3 Year Index is a broad-based index of shorter-term investment grade US government and corporate bond prices. The Citi US Broad Investment-Grade Bond Index is a broad-based index of medium and long-term investment grade bond prices. Investors cannot invest directly in the indices.

 

Important Disclaimers and Disclosure

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

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

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

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

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

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

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

The Bloomberg European 500 Index is a free float capitalization-weighted index of the 500 most highly capitalized European companies.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values.

The FTSE All-World Index is a market-capitalization weighted index representing the performance of the large and mid cap stocks from the FTSE Global Equity Index Series and covers 90-95% of the investable market capitalization.

The Trimmed Mean Personal Consumption Expenditures (PCE) Inflation Rate is the weighted average, or mean, of the rates of changes in the prices of goods and services included in the Consumer Price Index calculated after excluding, or "trimming," the highest and lowest changes.

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.