Saturna Capital, the Funds' investment adviser, screens more than 10,000 US traded equities monthly. The Sextant Funds follow a value investment style and seek tax efficiency and reduced trading expenses by limiting portfolio trading.
Investment discipline — value focus with a tilt toward growth
- Value investment emphasis allows for longer holding periods as business plans (and therefore investment propositions) tend to develop over longer time horizons
- Longer holding periods can lead to tax efficiency
- Focus on fundamentals at both the company and industry levels
- Well-defined research universe, with portfolio assets limited to a proprietary focus list
- The focus list assets exhibit
- High earnings quality
- Bias toward companies with low debt levels relative to their market capitalization
- Positive trends in capital returns: return on assets, return on equity, return on invested capital
- Growth in both top line revenue and operating profit
- A trend toward increasing levels of free cash flow
- A history of earnings surprises
- Companies with proven management that invests with stockholders
- Portfolio assets must have identifiable, sustainable competitive advantages
- Value estimates use both intrinsic valuation models and varied relative value metrics
- Catalysts for value realization are identified
Objective — to identify emerging risk factors
- Team approach — everyone contributes to risk management
- Focus encompasses both macro and micro risk factors
- Macro focus — industry trends that may impair future earnings power
- Micro focus — changing fundamental metrics or qualitative factors that suggest deteriorating earnings prospects (e.g., operational, legal)
- Individual assets are reviewed as they price daily
- Strict limitations on size of proprietary focus list
- No additions without displacement
- Process leads to a constant testing of investment conviction
- Continuous monitoring
- Periodic reporting
- Interim reviews
- Test of initial expectations of fundamental performance vs. current outcomes
- Valuation assessments
The Funds do not purchase securities on margin or sell securities short or purchase or write put or call options; purchase "restricted securities" (those which are subject to legal or contractual restrictions on resale or are otherwise not readily marketable); nor invest in oil, gas or other mineral exploration leases and programs.
As with equity securities, investment managers focus on fundamental analysis in assessing price and credit risk. For fixed income instruments, we add to our investment discipline a rigorous comparative analysis that looks at credit prices relative to credit default swaps from the same issuer, if available, as well as prices on comparable instruments with similar maturities. We sometimes use matrix pricing for securities that may lack liquidity.
In general, for portfolio managers to consider a credit instrument for inclusion in a portfolio (except Global High Income Fund), the security must:
- Be considered investment grade at the time of purchase. To be considered investment grade, a nationally recognized rating agency (e.g., Standard & Poor's, Moody's, Fitch, DBRS or other) must provide a minimum rating of BBB- or Baa3;
- Be considered high quality commercial paper (minimum Moody's rating of P-3 or similar); and
- Have a tangible underlying security. For bank obligations, including repurchase agreements, total bank assets must exceed $1 billion.
- Consistent with its objective of high income, the Global High Income Fund favors bonds of lower quality, but may have up to half of its investments in bonds rated A- or higher.
In addition, risk limits are imposed usually upon managers to assure against unintended risk/return parameter distortion.
The Sextant Short-Term Bond Fund maintains a dollar weighted average effective maturity of less than 3 years, under normal circumstances.
The Sextant Bond Income Fund maintains a dollar weighted average effective maturity of greater than 10 years, under normal circumstances.
The Sextant Core Fund maintains an allocation of 40% of total fund assets to fixed income securities. 15% of the total portfolio is invested in fixed income securities (inclusive of cash) having dollar weighted average effective maturity of less than 3 years. The remainder of the fixed income allocation is to securities having maturities longer than 3 years.
The Sextant Global High Income Fund maintains a globally diverse allocation of foreign and domestic common and preferred stocks, including depository receipts; foreign and domestic corporate bonds, including convertible bonds; and foreign and domestic government bonds. In keeping with its secondary objective of capital preservation, the Fund invests the majority of its assets in preferred stocks and bonds issued by corporations and governments.