Q4 2022

Back to Top

In 2022, three consecutive years of highly remunerative stock market returns collided with persistent inflation, the Federal Reserve pushing rates sharply higher, and Russia’s invasion of Ukraine causing food and energy prices to soar. These combined forces, abetted by high valuations, drove equities to their worst annual performance since 2008 and the Global Financial Crisis.¹ Since the end of World War II there have been only three years when the S&P 500 declined by a greater percentage than in 2022: 1974, following the previous year’s OPEC oil price hikes; 2002, following the 2001 Dot Com crash and amid growing tensions over possible war in Iraq; and 2008, as mentioned above.

How did the Sextant Funds perform in this environment? To paraphrase the old chestnut, when the going gets tough, the tough provide downside protection. No investor enjoys a decline in value, but in 2022 the Sextant Funds’ performance mitigated the downdrafts experienced across the competition, as shown in the table below, and provided returns well ahead of Morningstar category averages. That downside protection was provided not only by the equity funds but also by the hybrid and bond funds. Fixed-income markets suffered one of the worst years in memory, but the investments among the Sextant Funds proved resilient.

Scroll right to see more » »

Scroll right to see more » »

For standardized performance of the Funds versus their benchmarks, see below.  For further details on Morningstar Ratings and Rankings, see below.

To understand how the Sextant Funds avoided the worst of the market disruption, we return to first principles in our investing philosophy. We invest in well-established companies with experienced management, demonstrating skilled asset allocation leading to good returns on invested capital (ROIC), excellent cash generation, fortress balance sheets, and an identifiable and sustainable competitive advantage that can drive revenue and margin gains.

Let’s examine the positive effects of our focus on low-debt companies. At the end of 2021, the US Corporate BBB (lowest tier of investment-grade) effective yield was 2.60%. By the end of 2022, the effective yield had more than doubled to 5.80%, which had obvious implications for interest expense and profitability.² Furthermore, many believe there will be a recession in a 2023. In such an environment when revenues and margins could come under pressure, are heavily or lightly indebted companies likely to be more resilient?

The focus on high quality benefited our bond funds. The Sextant Short-Term Bond Fund, for instance, held an A+ average credit rating as of writing. With spreads widening during 2022, the ICE BofA Single-A Corporate Index returned -14.69% for the year, beating the ICE BofA BBB Corporate Index by 117 basis points (bps). Meanwhile, some of our funds, the Sextant Global High Income Fund in particular, actively participated in the Energy and Mining sectors, providing natural hedges against inflation and geopolitical upheaval.

Another important element of our philosophy is the avoidance of speculation, which includes not investing in companies that haven’t been publicly listed for at least three years and not investing in unprofitable firms. In 2020, several speculative stocks – Peloton, Square, Zoom, Beyond Meat, and most of all Tesla – strongly rallied. We avoided all of them. Day traders (or funds with much higher turnover than the Sextant Funds) may be able to play these types of stocks, but in our opinion, they are unlikely to consistently succeed. All the above-mentioned speculative stocks declined, and some teeter on the edge of bankruptcy. In 2021, Tesla was ranked as the fifth largest company in the US. As of the end of 2022 the stock had fallen over 70% and Tesla ranked as only the sixteenth largest company.³ Tesla provides insight regarding the benefits of minimizing ESG risk, especially in the governance silo. Elon Musk has always been a loose cannon and Tesla has always been a governance debacle, but shareowners were especially punished in the wake of Musk’s tumultuous takeover of Twitter. We prefer management focus.

Outlook

As we embark upon the new year, no question figures more prominently among investors than “What are your market expectations?” Such queries carry greater urgency, given the significant decline in 2022 and recessionary worries in 2023. In response to this question, we typically reply that we are not market prognosticators, preferring to focus on the long-term outlook for the stocks in which we invest. Every four years, however, we arrive upon a market phenomenon with an unblemished multi-decade record of calling the market over the coming year – the Midterm Effect. From 1945 to 2019, the one-year return of the S&P 500 has been positive in 19 out of 19 of the years following a midterm election. For the same period, returns for the S&P 500 in the years following a midterm election averaged 16.28% compared to an average return of 7.99% in other years.

From 1942 until now, the S&P 500 has had 17 down years. However, in that time, there have been only three pairs of consecutive down years (1973-1974, 2000-2001, and 2001-2002). Considering the market’s 2022 downdraft, this perhaps provides another reason for optimism regarding the prospects for 2023 and for remaining engaged with the markets.

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 December 31, 2022

Scroll right to see more » »

Scroll right to see more » »

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 30, 2022, and incorporate results from the fiscal year ended November 30, 2021. 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% and actual expenses of Sextant Short-Term Bond at 0.60% through March 31, 2023.

^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.

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. ICE BofA 7-10 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years. ICE BofA US Corporate Index tracks the performance of US dollar-denominated investment-grade corporate debt publicly issued in the US domestic market. 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 December 31, 2022

Scroll right to see more » »

Scroll right to see more » »

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 December 31, 2022. 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 “S&P 500 Historical Annual Returns.” Macrotrends. https://www.macrotrends.net/2526/sp-500-historical-annual-returns

²  “US Corporate BBB Effective Yield.” YCharts. https://ycharts.com/indicators/us_corporate_bbb_effective_yield#:~:text=US%20Corporate%20BBB%20Effective%20Yield%20is%20at%205.69%25%2C%20compared%20to,long%20term%20average%20of%205.24%25.

³ Vega, Nicholas. “Microsoft’s market cap grew more than $800 billion in 2021—here’s how it compares to the most valuable companies in the world.” CNBC, December 27, 2021. https://www.cnbc.com/2021/12/27/how-much-the-biggest-companies-grew-in-2021.html

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.