Q3 2020

Environment & Outlook

Extending the unpredictability of 2020, markets charted an aggressive course through the third quarter.  Following the abrupt sell-off in late February and early March, the S&P 500 Index quickly recovered in the second quarter and accelerated its ascent through the end of August, peaking on September 2 and providing a total return of 15.85% for the quarter through that date.  Then, a 9.5% correction through September 23 ensued, returning to levels last seen in late July.  A rebound into the final week of September pushed the index return to 8.93% for the quarter and 5.57% year-to-date.  The European and Japanese markets reflected this pattern to a less dramatic extent.

The unusual August melt-up may be attributed to a number of theories including retail options trading, a single large investor’s positioning, and of course, unspecified Federal Reserve actions.  The construction of the benchmark S&P 500 Index certainly contributed to the rise: at the peak, the five largest companies by market capitalization (Apple, Microsoft, Amazon, Facebook, and Alphabet) comprised more than 22% of the index.  The price action of those five companies influence the benchmark performance as much as the bottom 363 companies combined. 

Market action since late March indicates investors have looked past many of the factors that precipitated the poor first quarter performance, but the disturbing resilience of the coronavirus in the US, combined with its resurgence across Europe and Canada, prevents us from signaling the all-clear.  That’s especially true given the onset of cooler weather across the northern hemisphere and the announcement that the virus has spread throughout the Trump administration, including the president and the first lady.  While wishing POTUS and FLOTUS, as well as other members of the government who have tested positive, speedy recoveries, the fourth quarter of 2020 has already continued the trend set in the first three, that is, uncomfortably unpredictable.  Measures of expected volatility are forecast to remain elevated through December of this year – the biggest surprise to the market would be an uneventful election and a wind-down of COVID infections.  That does not represent our base case, especially in light of President Trump’s recent illness.

Currently, the state of the economy stands as our biggest concern.  Federal Reserve Chairman Powell shares those concerns, stating, “At this early stage, I would argue that the risks of policy intervention are still asymmetric.  Too little support would lead to a weak recovery, creating unnecessary hardship.”¹  Democrats and Republicans have failed to agree on additional stimulus measures and, absent bringing the spread of COVID-19 under control, economic indicators have weakened, particularly in the realm of employment.  While the unemployment rate dropped to 7.9%, a significant improvement from April’s 14.7%, the figure was distorted by 700,000 people dropping out the labor force and pushing the September labor participation rate down to 61.4% from 61.7% in August and 63.4% last February.  We must also recognize that many people are taking anything they can get in the current environment; a reality reflected by the Federal Reserve U-6 measure.  U-6 takes the unemployment rate and adds those employed part time or only marginally attached to the labor force.  The U-6 rate for September was 12.8%, lower than its peak this past spring.  Looking to pre-COVID times, it’s the highest reading since December 2013.

Stepping away from government statistics, developments toward the end of the third quarter indicate the growing trend of long-term unemployment.  Disney announced the permanent lay-off of 28,000 employees² who had been previously furloughed due to continued park closures. American Airlines and United Airlines sent notices to 19,000 and 13,000 workers, respectively. As the virus continues to spread, restaurants, movie theaters, gyms, hotels, and numerous other businesses are at risk of permanent closure.  While the job losses last April were jarring, they were largely thought at the time to be temporary.  According to the Labor Department, 3.8 million people lost their jobs permanently in September, nearly twice the level of permanent losses in April.

With the arrival of autumn weather, COVID infections soaring in certain states, the economy weakening, and the US November elections approaching, any number of news reports could shock a correction that we would look to as an entry point.  Depending upon the election outcome, expected tax policy changes could influence market action either up or down. Looking past the election, our base case is to remain positive on US equities as we believe the government will attempt to manage the economy with a combination of fiscal and monetary policies. We expect policy makers have a bias to stimulate and provide more than adequate liquidity. Perhaps we are not all Keynesians now, but we are Modern Monetary Theorists.

 

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 September 30, 2020

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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 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™

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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 September 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 Timiraos, Nick. Fed’s Powell Says U.S. Faces ‘Tragic’ Risks From Doing Too Little To Support Economy. Wall Street Journal, October 6 2020. https://www.wsj.com/articles/feds-powell-says-u-s-faces-tragic-risks-from-doing-too-little-to-support-economy-11601995201

² Casselman, Ben, Gillian Friedman and Jeanna Smialek. Workers Face Permanent Job Losses as the Virus Persists. The New York Times, October 3 2020. https://www.nytimes.com/2020/10/03/business/economy/coronavirus-permanent-job-losses.html

³ Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. The Federal Reserve, August 27 2020. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm

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.