And Now for Something Completely Different
In our 2017 year-end commentary we discussed the unprecedented absence of volatility in the stock market over the previous year. Through the first few weeks of 2018 the good times continued to roll as the S&P 500 Index appreciated over 6%, buoyed by a strong Christmas season and the recently enacted tax reform. At the end of January and into early February, however, investors were reminded that the stock market does not move in a linear fashion as the S&P 500 slumped -10.16% from a high of 2872.87 on January 26 to 2581.00 on February 8 before finishing out the quarter with a decline of -0.76%.
While there was no specific catalyst that sparked the sell-off, once it started the market became more vulnerable to headlines of the day. Whether concerning steel tariffs, trade action against China, Facebook’s travails, or the President’s dislike of Amazon, a single tweet could push the market sharply in one direction or the other. Following a 2017 that experienced only four daily downdrafts greater than 1% (the largest of which was -1.82%), gyrations of -2% or more became almost the norm in the first quarter, with five such instances, including a -4.10% plunge on February 5.
The remarkably calm market of 2017 was an aberration but it’s interesting that “animal spirits” appeared when they did. Fourth quarter earnings reports (released throughout the first quarter) were excellent, with 77% of S&P 500 companies exceeding sales estimates,1 while aggregate sales growth of 8.2% was the highest since the fourth quarter of 2011. With such strong sales, the majority of companies also reported positive earnings surprises,2 and the fourth quarter earnings per share (EPS) growth rate was a healthy 14.8%. The solid performance is expected to continue for the first quarter, and, as of the end of March, the Q1 earnings growth rate for the S&P 500 was estimated at a tax-cut enhanced 17.3%, the highest since the first quarter of 2011.3
On the other hand, perhaps we shouldn’t have been surprised that strong earnings were met by choppy markets, since that condition had been developing for the past few quarters. The most logical explanation would be that earnings surprises were insufficient to offset what many investors had come to view as unsustainably high valuations.
The S&P 500 closed 2017 at 2673.61, while Thomson Reuters Eikon financial analysis shows 2017 earnings are estimated at $130.61 for a year-end price-to-earnings ratio of 20.47x. The current (April 2) estimate for 2018 EPS stands at $147.99, implying excellent 13.31% earnings expansion and a 2018 year-end price-to-earnings ratio of 17.84x. Despite the highly attractive earnings and reasonably attractive valuation, we expect volatility to remain, as the pros and cons in the market and the economy are more balanced than previously. The bull market and the economic expansion are getting long in the tooth, and there are risks to both in the form of inflation and interest rates. It seems reasonable that a $1.5 trillion tax cut,4 combined with shrinking unemployment and steady wage growth could lead to increased inflationary pressures, which would be exacerbated by dollar weakness relative to major trading partners. Inflation leads to higher interest rates, while increased borrowing by the federal government could potentially lead to “crowding out” of other borrowers, further increasing costs.
From an index perspective, another risk is the rise of exchange traded funds (ETFs). Since ETFs buy the index, companies with momentum, such as the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) can grow to outsize index positions; positions that active managers may not feel comfortable matching, leading to underperformance. Of course, the reverse happens when money flows out of the markets and ETFs, leading to concentrated selling of the largest stocks. This phenomenon likely goes some way in explaining recent volatility.
Saturna Sustainable Bond Fund
The end of the first quarter of 2018 marks the third anniversary of the Saturna Sustainable Funds. In those three years, the Saturna Sustainable Bond’s assets grew eightfold to over $27 million as of quarter-end. We want to sincerely thank our investors as we celebrate in our shared success of this important milestone. As careful stewards of investors’ capital, we look forward to building on the Fund’s success by focusing on companies that respect both their stakeholders and the environment.
For the period ending March 31, the Sustainable Bond Fund generated a total return of 0.32%, underperforming the 1.23% return of its Citi WorldBIG Index benchmark. For the three-year period since the Fund’s inception, the Sustainable Bond Fund generated a total return of 6.03%, underperforming the benchmark’s 9.26% total return. The benchmark index has concentrated exposure to currencies that have appreciated strongly against the US dollar, which accounts for some of the Fund’s relative underperformance. For example, at the quarter-end, the Citi WorldBIG Index’s exposure to the euro was 31.81% offering a weighted average yield to maturity of 0.54% and a modified duration of 6.89 years. The index’s 11.26% allocation to Japanese yen offered a yield to maturity of 0.16% with a modified duration of 10.44 years. Over the past year, the euro and the Japanese yen have appreciated relative to the US dollar 15.47% and 4.66%, respectively. Over the trailing three year period, the euro and the Japanese yen have appreciated relative to the US dollar 14.62% and 12.87%, respectively.
By comparison, the Sustainable Bond Fund invests primarily in US dollar denominated securities, representing 71.64% of the portfolio at quarter-end. The Fund’s remaining currency exposures include: 7.36% in the Canadian dollar, 6.58% in the Mexican peso, 4.32% in the New Zealand dollar, 4.32% in the Australian dollar, 3.16% in the euro, and 2.63% in the Norwegian krone. To meet its objective of capital preservation and current income, the Fund is also diversified by credit rating. At quarter-end, the Fund invested approximately 68.2% of its total assets among investment grade issuers, 29.4% invested in high-yield and nonrated issues, and 2.4% in cash.
At the end of the first quarter, the Sustainable Bond Fund posted a 30-day yield of 3.27% and a modified duration of 2.91 years. The top two performing issues were Mexican peso denominated securities with the Mexican Government sovereign appreciating 10.45% followed by telecommunications firm, America Movil, gaining 9.39%. The two worst performing issues throughout the first quarter were the Canadian dollar denominated Canadian Imperial Bank followed by US dollar denominated Iron Mountain, which returned -2.77% and -2.74%, respectively.
Corresponding with the anniversary, we capture key highlights of the Fund’s sustainable characteristics. Note that for these non-performance metrics, we compare the Fund to the MSCI All Country World Index.
- The Fund has no investments in companies dedicated to the resource extraction sector or with a primary business in the hydrocarbon industry.5
- 78.1% of the of the Fund’s holdings have a carbon emissions reduction policy compared to the benchmark reporting that 74.7% of its constituents have taken similar actions. 62.5% of the Fund’s holdings report their Scope 1 carbon emissions – emissions generated directly by company-owned assets – compared to 45.5% of the benchmark’s constituents.
- The Fund’s carbon footprint is 66.8% lower than the benchmark’s.
- 68.8% of the Fund’s issuers have three or more female board members compared to 41.9% of the benchmark’s constituents.
- 65.6% of the Fund’s holdings have at least 25% board representation by females compared to 41.9% reported by the benchmark.
- 56.3% of the Fund’s holdings are compliant with the Global Reporting Initiative compared to 34.3% reported by the benchmark.
As of March 31, 2018
|Top 10 Holdings||Portfolio Weight|
|NextEra Energy Capital (FPL Group)||4.89%|
|Hartford Financial Services Group||4.78%|
|First Abu Dhabi Bank||4.53%|
|Bond Quality Diversification|
|Cash and equivalents||2.35%|
Credit ratings are the lesser of S&P Global Ratings or Moody’s Investors Service, Nationally Recognized Statistical Rating Organizations. If neither S&P nor Moody’s rate a particular security, that security is categorized as not rated.
Saturna Sustainable Equity Fund
The Saturna Sustainable Equity Fund gained 1.13% for the quarter, outperforming both the S&P Global 1200 Index (which declined -0.92%) and the Morningstar World Large Stock Category (which declined -0.44%).
Dassault Systemes and Adobe Systems showed the strongest performance among the Fund’s holdings this past quarter, a particular boon since they are also the two largest positions. Offering 3D software under a variety of brands, the France-based Dassault’s stock price has echoed Adobe’s: both have climbed slowly but steadily since the dot-com bubble burst but have taken off spectacularly in the past year. Dassault’s price increased 55% and Adobe’s increased 65% since April 2017. Adobe reports a quarterly revenue record of $2.08 billion for the first quarter, a 24% year-over-year revenue growth. Adobe’s president and CEO Shantanu Narayen attributes this growth to their products “enabling our customers to be more creative, work smarter, and transform their businesses” through Adobe’s “relentless focus on delivering innovation and intelligence.”6
Dassault and Adobe show other similarities, namely as ESG leaders in many of the same fields: energy and climate change, environmental policy and reporting, and resource management. This type of performance is not uncommon among software companies, but is nonetheless welcome.
Hartalega Holdings (discussed in our Q4 2017 commentary as having a compelling business niche in the production of nitrile gloves), Siemens Gamesa Renewable Energy, and Mastercard rounded out the double-digit returns in the Fund for Q1. Siemens Gamesa, regarded as one of the world’s most sustainable companies and a constituent of both the FTSE4Good Global Index and the MSCI Global Climate Select Index, is the largest wind turbine manufacturer worldwide – larger even than Vestas Wind Systems, another Fund holding. Though a recent forecast of renewable energy growth in the EU is 40% lower than in the past five years, the forecast for India is much more optimistic; recent projections expect the subcontinent to see more than double its current renewable electricity capacity by 2022.7
Underperformers in the first quarter include Telekomunikasi Indonesia, Randgold Resources, Ramsay Health Care, Valeo, Naspers, and China Mobile. Though these six issuers vary widely in sector and geographic location, all are headquartered outside of North America.
Valeo is a star ESG performer despite its rough quarter, demonstrating a strong commitment to improving efficiency and reducing emissions both in the solutions it provides the marketplace and in its own operations. It is a leading provider of turbochargers, which allow smaller engines to provide greater power, variable automatic transmissions, which improve fuel efficiency, and stop-start mechanisms which can reduce fuel consumption by as much as 15% in city driving.
Ramsay Health Care found itself on the list of top detractors this quarter, though with a slightly less disappointing performance than we saw in Q3 2017. We maintain that this is a solid long-term investment, however, due to Ramsay’s expansion opportunities and the fact of an aging population who will likely demand greater access to medical facilities than will be available.
While Accenture and Philips previously held spots in the portfolio’s top 10, they were replaced this quarter by Mastercard and Taiwan Semiconductor; the remaining top eight holdings, however, are consistent with those of the previous quarter.
As of March 31, 2018
|10 Largest Contributors YTD||Return||Contribution|
|Dassault Systemes ADR||27.75%||0.82|
|Mastercard, Class A||12.72%||0.30|
|Taiwan Semiconductor ADR||7.67%||0.19|
|Siemens Gamesa Renewable Energy||15.65%||0.14|
|Nike, Class B||4.94%||0.09|
|Kimberly-Clark de Mexico, Class A||5.02%||0.09|
|10 Largest Detractors YTD||Return||Contribution|
|Ramsay Health Care||-11.66%||-0.28|
|Telekomunikasi Indonesia ADR||-18.56%||-0.22|
|Randgold Resources ADR||-14.69%||-0.13|
|Top 10 Holdings||Portfolio Weight|
|Dassault Systemes ADR||3.86%|
|Mastercard, Class A||2.71%|
|Taiwan Semiconductor ADR||2.67%|
Morningstar Sustainability Ratings™
Saturna Sustainable Equity Fund (SEEFX)
Percent Rank in Category: 1
Among 709 World Large Stock Funds
The Morningstar Sustainability Rating is not based on fund performance and is not equivalent to the Morningstar Rating ("Star Rating").
© 2018 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.
Morningstar Sustainability Ratings are as of February 28, 2018. The Morningstar Sustainability Rating™ is intended to measure how well the issuing companies of the securities within a fund’s portfolio are managing their environmental, social, and governance (“ESG”) risks and opportunities relative to the fund’s Morningstar category peers. The Morningstar Sustainability Rating calculation is a two-step process. First, each fund with at least 50% of assets covered by a company-level ESG score from Sustainalytics receives a Morningstar Portfolio Sustainability Score™. The Morningstar Portfolio Sustainability Score is an asset-weighted average of normalized company-level ESG scores with deductions made for controversial incidents by the issuing companies, such as environmental accidents, fraud, or discriminatory behavior. The Morningstar Sustainability Rating is then assigned to all scored funds within Morningstar Categories in which at least ten (10) funds receive a Portfolio Sustainability Score and is determined by each fund’s rank within the following distribution: High (highest 10%), Above Average (next 22.5%), Average (next 35%), Below Average (next 22.5%), and Low (lowest 10%). The Morningstar Sustainability Rating is depicted by globe icons where High equals 5 globes and Low equals 1 globe. A Sustainability Rating is assigned to any fund that has more than half of its underlying assets rated by Sustainalytics and is within a Morningstar Category with at least 10 scored funds; therefore, the rating it is not limited to funds with explicit sustainable or responsible investment mandates. Morningstar updates its Sustainability Ratings monthly. Portfolios receive a Morningstar Portfolio Sustainability Score and Sustainability Rating one month and six business days after their reported as-of date based on the most recent portfolio. As part of the evaluation process, Morningstar uses Sustainalytics’ ESG scores from the same month as the portfolio as-of date.
The Fund’s portfolios are actively managed and is subject to change, which may result in a different Morningstar Sustainability Score and Rating each month.
The Funds were rated on the following percentages of Assets Under Management:
Saturna Sustainable Equity Fund 96%
The Saturna Sustainable Bond Fund was not rated by Morningstar for the period.
Percent 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.
As of March 31, 2018
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|Average Annual Total Returns (Before Taxes)||YTD||1 Year||3 Year||Since InceptionB||Gross||Net|
|Sustainable Equity Fund (SEEFX)||1.13%||▲||15.89%||▲||5.80%||▲||5.71%||▲||1.37%||0.75%|
|S&P Global 1200 Index||-0.92%||▼||14.89%||▲||9.04%||▲||8.96%||▲||n/a|
|S&P 500 Index||-0.76%||▼||13.99%||▲||10.79%||▲||10.88%||▲||n/a|
|Sustainable Bond Fund (SEBFX)||0.32%||▲||3.34%||▲||2.01%||▲||2.00%||▲||0.84%||0.65%|
|Citi WorldBIG Index||1.23%||▲||7.31%||▲||3.14%||▲||2.99%||▲||n/a|
|MSCI All Country World Index||-0.84%||▼||15.44%||▲||8.71%||▲||8.67%||▲||n/a|
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A By regulation, expense ratios shown are as stated in a Fund’s most recent prospectus or summary prospectus, dated March 28, 2018, and incorporate results from the fiscal year ended November 30, 2017. Expense ratios are restated to reflect the ending of the Distribution (12b-1) Fees, as approved by the Board of Trustees on March 14, 2017. Saturna Capital, the Funds’ investment adviser, has voluntarily capped actual expenses of the Sustainable Equity Fund at 0.75% and actual expenses of the Sustainable Bond Fund at 0.65% through March 31, 2019.
B Both Saturna Sustainable Equity and Saturna Sustainable Bond Fund began operations on March 27, 2015.
Performance data quoted herein represents past performance, which is no guarantee of future results. 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. Current performance may be higher or lower than the performance data quoted herein. Performance current to the most recent month-end can be obtained by visiting www.saturnasustainable.com or calling toll-free 1-800-728-8762.
The S&P 500 is an index comprised of 500 widely held common stocks considered to be representative of the US stock market in general. The S&P Global 1200 Index is a global stock market index covering nearly 70% of the world's equity markets. The Citi WorldBIG Bond Index is a multi-asset, multi-currency benchmark, which provides a broad-based measure of the global fixed income markets. The MSCI ACWI covers approximately 85% of the global investable universe, with large- and mid-cap representation across 23 developed market and 23 emerging market countries. Investors cannot invest directly in the indices.
A Fund’s 30-Day Yield, sometimes referred to as “standardized yield” or “SEC yield,” is expressed as an annual percentage rate using a method of calculation adopted by the Securities and Exchange Commission (SEC). The 30-Day Yield provides an estimate of a Fund’s investment income rate, but may not equal the actual income distribution rate. Without the voluntary expense cap, the 30-Day Yield for Saturna Sustainable Bond Fund would have been 3.15%.
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.
The Saturna Sustainable Funds limit the securities they purchase to those consistent with sustainable principles. This limits opportunities and may affect performance.
Investing involves risk, including possible loss of principal. Generally, an investment that offers a higher potential return will have a higher risk of loss. Stock prices fluctuate, sometimes quickly and significantly, for a broad range of reasons that may affect individual companies, industries, or sectors. When interest rates rise, bond prices fall. When interest rates fall, bond prices go up. A bond fund's price will typically follow the same pattern. 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." Investing in foreign securities involves risks not typically associated directly with investing in US securities. These risks include currency and market fluctuations, and political or social instability. The risks of foreign investing are generally magnified in the smaller and more volatile securities markets of the developing world.
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.
The FTSE4Good Global Index is a capitalization-weighted index. The underlying members have been classified as ethical companies by FTSE-Russell.
The MSCI Global Climate Index is an equal weighted index of companies that operate in three key environmental areas: clean technology and effciency, renewable energy , and future fuels. The index is designed to include companies that are leaders in mitigating immediate and long-term factors that contribute to climate change and that may potentially beneﬁt from the de-carbonization of the economy.
1 Butters, John. Earnings Insight: Q4’17 by the Numbers [Infographic], FactSet, March 8, 2018. https://insight.factset.com/earnings-insight-q417-by-the-numbers-infographic
2 Butters, John. S&P 500 Sees Negative Price Reaction to Positive EPS Surprises For Q4 2017, FactSet, March 12, 2018. https://insight.factset.com/sp-500-sees-negative-price-reaction-to-above-average-positive-eps-surprises-for-q4-2017
3 Butters, John. Earnings Insight, FactSet, March 29, 2018. https://insight.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_032918.pdf
4 Analysis of Growth and Revenue Estimates Based on the U.S. Senate Committee on Finance Tax Reform Plan, Department of the Treasury Press Release, December 11, 2017. https://www.treasury.gov/press-center/press-releases/Documents/TreasuryGrowthMemo12-11-17.pdf
5 While Saturna Sustainable Bond Fund holdings Nextera and PSE participate in the hydrocarbon industry, it does not appear to be their primary business.
6 Adobe Achieves Record Revenue: Creative ARR Exceeds $5 Billion in Q1 FY2018, Adobe Press Release, March 15, 2018. https://wwwimages2.adobe.com/content/dam/acom/en/investor-relations/pdfs/51308102/a4TbM20lIuy6NF49.pdf
7 Renewables 2017, IEA.org, October 4, 2017. https://www.iea.org/publications/renewables2017/