Q3 2021

 

Markets across the globe were muted in the third quarter, with the S&P 500 posting a modest 0.58% return and the MSCI ACWI Index falling -0.95%. Emerging markets presented a dark spot, with the MSCI Emerging Markets Index falling -8.09% during the quarter.

Over the past five years, the S&P 500 Index produced positive quarterly returns for 17 out of 20 quarters.  Remarkably, the S&P’s positive-return trend continued during the COVID-19 pandemic. Since the beginning of March 2020, the Index produced positive monthly returns 14 out of 19 times despite (or because of?) harrowing circumstances.

September 2021 produced one of those few negative-return months as market volatility reasserted itself in the capital markets almost in lockstep with the seasonal onset of autumn.  Following the September meeting of the Federal Open Market Committee (FOMC), the capital markets’ views on deflation, inflation, or reflation and global GDP trends once again shifted, this time from a deflationary to an inflationary outlook. Nominal interest rates rose, the US Dollar Index rallied, commodities — excluding energy — declined, and equities began to falter, notably in the Technology sector, which benefits from a deflationary outlook. This sorting is likely to continue, shifting back and forth as the effects of the pandemic and policymaker response become apparent.

Global central banks are signaling an end to the unprecedented highly accommodative monetary policies.  The recent FOMC hawkish tone, with US legislature gridlocked over fiscal spending, points to a tightening of conditions sometime soon, which is typically negative for the capital markets. The rise in US 10-year Treasury yields from 1.310% on August 31 to 1.535% on September 30 is a byproduct of this market volatility. While an increase of 20 basis points may not seem like a large movement when measured on a nominal basis, it does represent a 21% increase in interest rates. During periods of monetary policy shifts, market volatility often reasserts itself among the capital markets.

Exiting the third quarter, the unwinding of the deflation trade and back-up in rates paused the ongoing equity rally led by Technology growth stocks.  Combined with elevated valuations, US equities demonstrated vulnerability to another growth/value rotation, or perhaps a correction.   September marked a quick reversal of the growth/value trend, with growth trailing.  Despite unprecedented expansion of the Federal Reserve’s balance sheet and money supply, the US dollar Index remained range-bound, year-to-date.

For now, the inflation theme appears ascendant as supply shocks and deglobalization concerns impact price levels, offsetting some leading indicators of slower global growth.  Energy markets, led by natural gas, strengthened as supply constraints met the seasonal demand increase in the northern hemisphere.  At this point, the knock-on effects are unclear; however, it reasonable to anticipate that these high energy prices will hamper future economic activity and slow the global recovery.  The rise in energy prices is also likely to increase inflationary pressures, which, in turn, is likely to lead market participants to anticipate higher interest rates – at least over the near-term.

US consumer sentiment slackened during the quarter to its lowest point in seven months, but still retained a positive bias.  While wages were mixed, hourly compensation for US non-farm businesses and job openings both set a record in the second quarter 2021.  Policymakers’ plan for the reduction in stimulus benefits combined with higher wages are expected to lift employment over the upcoming quarters.  Yet the Citibank Economic Surprise Index trended negative, suggesting that economic forecasters are behind in assessing a slower-than-expected economy.

The global Purchasing Managers’ Index (PMI) remained positive over the quarter but trended down, with the US remaining the strongest market.  Notably, China reported a neutral outlook which will likely decline into the fourth quarter with recent electrical system interruption and Communist party policy decisions to restrain some economic sectors.  China’s intent to reorder its economy to promote “common prosperity” presents a risk to future global GDP growth that may yet be incorporated into forecaster and investor views.  In addition, the slow-moving default of the real estate development company, the Evergrande Group, may signal at least two changes in the China outlook: a policy shift from protecting too-big-to-fail companies and changing from an infrastructure-led to a consumer-led economy.  These events may signal slower growth rates in China as well as growth rates of global GDP in the future.

Eventually, the US economy needs to perform ex-stimulus by demonstrating consecutive improving GDP reports and employment trends.  Absent some external shock, into the first half of 2022, we expect the markets to sort out these trends and come to grips with a reflation, inflation, or deflation medium-term outlook.  Until that point, equity markets will likely remain on-trend while discounting re/inflation vs. deflation and rotating between growth and value.  A fall back to a deflationary outlook with economic prices reset higher will restart the trends witnessed in the second half of 2020.  This may occur if the economic impact of fiscal stimulus proves disappointing.

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, 2021

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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 30, 2021, and incorporate results from the fiscal year ended November 30, 2020. 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, 2022.

^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 September 30, 2021 is 4.99%.

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 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. 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 September 30, 2021

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

© 2021 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, 2021. 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 Gallant, Chris. Why People Say September is the Worst Month for Investing. Investopedia, September 30, 2021. https://www. investopedia.com/ask/answers/06/septworstmonth.asp

²The breakeven inflation rate represents a measure of expected inflation derived by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal treasury maturity.

³ Chuin-Wei Yap, William Boston, and Alistair MacDonald. Global Supply-Chain Problems Escalate, Threatening Economic Recovery. The Wall Street Journal. October 8, 2021. https://www. wsj.com/articles/supply-chain-issues-car-chip-shortage-covidmanufacturing- global-economy-11633713877

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), 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.