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Q1 2023

The New Year kicked off with an ebullient rush back into assets as equities, corporate debt, and Treasurys all caught a bid.  In many ways, it looked like the S&P 500 rally that began in mid-October was set to continue after a brief pause for tax-loss selling in December.  Buoying the narrative were a series of positive data points that suggested that the Federal Reserve was winning its war on inflation. Year-over-year (YoY) increases to the US Consumer Price Index (CPI) peaked at 8.9% in July and fell rapidly to 6.4% in December.  Core inflation (excluding food and energy) peaked at 6.6% in September and then steadily decreased.  Job gains were trending down while unemployment remained low.  The Fed’s rare success — taming inflation without causing a recession — led some to describe the event as an “immaculate disinflation.” Investors bought into the narrative, and the S&P 500 rallied 6.28% in January.

Changes in Consumer Prices (Year-over-Year)

Then came February and with it, January’s contrary data. Inflation wasn’t ready to roll over at the Fed’s behest.  Core inflation, an important metric in the Fed’s determination of its success, remained stubbornly high.  What’s more, in a classic market paradox where good news was actually bad, the US economy added 504,000 jobs, up from 239,000 in December.1  With inflation sticky and likely to remain so due to tight labor conditions, markets began to reprice, expecting interest rates to stay higher for longer.  The S&P 500, driven by these expectations, drifted lower for much of February. Add to this the failures of Silicon Valley Bank and Signature Bank, and by March 13, most of the S&P 500’s year-to-date gains had evaporated.

In a rush to quell depositor anxiety, the Fed and the Federal Deposit Insurance Commission (FDIC) engaged in a series of measures to backstop the banking system.  Pulling a page from the pandemic playbook, regulators rapidly intervened, injecting liquidity into the market and causing the Fed balance sheet to grow by nearly $400 billion between March 8 and March 22.2  It appears investors were confident in this backstop, and newfound liquidity rushed back into capital markets, pushing the S&P 500 to finish the quarter up 7.50%.



In a world of fiat money, confidence is everything.  So, should investors rest assured the worst is behind us, or be skeptical that another shoe has yet to drop?  Those in the “worst is behind us” camp will suggest the series of bank failures in mid-March were idiosyncratic and can be chalked up to concentrated depositors, cryptocurrency exposure, and poor governance.  The skeptics would suggest that a series of systemic issues underpinned these failures.  These issues include the reality that banks were inundated with deposits at a time of modest loan demand, and one of their preferred and often considered “safest” assets, US Treasury bills, offered record-low yields. Investing new deposits in low-yielding securities embedded interest rate risk across the system.  An inverted yield curve adds pressure to banks, whose core business is to borrow short and lend long.  Despite a challenging environment for banks, these institutions have favored high-quality government-backed securities.  Barring fleeting depositors, such assets should mature at par.

Whether the recent bank failures are a prelude to systemic shocks is unknown, and by the time clarity emerges, the opportunity to react will have passed.  The longer that interest rates remain high, the more they’ll weigh on company profits.  For the past decade, yields on “BBB”-rated bonds averaged 3.7%, jumping to 5.3% over the past year.  As of March 31, 2023, these yields were 5.5%. Thus, any corporate refinancing will likely occur at materially higher interest rates.  With 8% of all debt rated by S&P maturing in 2023 and another 10% maturing in 2024, higher interest rates alone are likely to present a headwind to corporate earnings.3

Compounding this challenge, a rapid fall in interest rates implies recession.  Currently, consensus 12-month forward earnings estimates for the S&P 500 are holding around 4% and the Index trades in line with its 10-year average of 17.4x forward earnings.  Given this outlook, the market doesn’t appear to be discounting a rapid slowdown in growth.  This begs the question, who is right?  The market with its moderate expectations, or the vocal prognosticators calling for recession?  Time will tell, as it always does, and we see no advantage to speculating on short-term dynamics.  Instead, as the market gyrates between expectations of irrational exuberance and irreparable impairment, we’ll continue to favor high-quality companies that can weather the storm through cycles.

A grocery cart with an arrow full of groceries shooting out of it

Saturna Sustainable Bond Fund

For the quarter ended March 31, 2023, the Sustainable Bond Fund returned 2.57% and the FTSE WorldBIG Index returned 3.33%. Although the Fund trailed the Index for the three-month period, it significantly outperformed the Index by 562 basis points (bps) for the trailing 12 months. The one-year performance for the Fund was -2.74%, relative to -8.36% for the Index.

Recessionary Warnings Exacerbated by Liquidity Crisis

The first quarter of 2023 was marked by several high-profile banking failures, aggravating the already challenging economic environments in Europe and the US. Liquidity declined as a result, which can negatively impact financial markets. In the graphic titled “US Liquidity & Fixed Income Credit Spreads,” the yellow line shows that commercial bank borrowing from the Federal Reserve’s Discount Window rose over $150 billion on March 17, 2023.4 This amount exceeded the withdrawals that banks made in response to the pandemic in March of 2020 ($50 billion) and during the Global Financial Crisis ($110 billion). Fixed income credit spreads tend to widen out in sympathy. Historically, the spreads of US investment-grade bonds, high-yield bonds, and emerging market bonds widen during periods of liquidity stresses. Fixed income spreads did widen, but not to the extent seen during the height of the COVID-19 pandemic. It’s too early to determine the implications on credit markets, and we will be paying close attention over the coming months.

US Liquidity & Fixed Income Credit Spreads

What makes this liquidity crisis different from prior episodes is that the financial conditions in the US were not as tight as they are now. Over the past 12 months, the Federal Reserve raised its benchmark interest rates by 475 bps to 5.0%. The graphic “US Financial Conditions” shows the Senior Loan Survey (green) and the Goldman Sachs Financial Conditions Index (blue) rising from -18.2 and 97.05 at year-end 2021, respectively, to 39.1 and 100.20 at year-end 2022. This represents a significant change.

US Financial Conditions


The Sustainable Bond Fund had a 26.9% exposure to bonds with maturities of 10+ years, which was than in the previous quarter. The Fund also increased the percentage of bonds in the one to three-year bucket. The effective duration of the Fund was 3.83 years. The Fund’s effective duration was shorter than that of the Index, which was 6.87 years.

Portfolio Maturity Breakdown


The portfolio had a total exposure to foreign currency of 43.68%, an increase from the exposure of 30.73% last quarter and from 17.48% the third quarter of 2022. Positions were re-initiated in the Australian dollar and increased in the Mexican peso and the euro.

Currency drove performance during the quarter, with the peso, which comprises 12.19% of the portfolio, appreciating 8.05% relative to the dollar. The best performing security over the first quarter was the peso-denominated supranational International Bank for Reconstruction and Development bond maturing in 2026. The second-best performing security was also a peso-denominated supranational bond, the Inter-American Development Bank bond, maturing in 2024.

The worst performing security over the quarter was also driven by currency movements. Odfjell SE, a floating-rate sustainably linked bond, matures in 2025. The position’s low performance was due to the Norwegian kroner depreciating -6.37% relative to the US dollar over the quarter.

Compared to the FTSE WorldBIG Index, the Sustainable Bond Fund maintains an underweight to the euro, despite increasing the position size this past quarter. At quarter-end, the Fund held 6.95% of the euro while the Index maintained an allocation of 28.26%. This underweight was a contributor to the Fund’s relative outperformance over the year, given that the euro depreciated -2.06% relative to the US dollar over the quarter.

Currency Performance and Exposure

Defensive Positioning

The Sustainable Bond Fund continues to invest in variable rate demand notes (VRDNs) but reduced the exposure to those securities this past quarter in favor of other opportunities. The position was reduced from 15.51% to 6.67%. Municipal VRDNs always trade at 100 and have daily or weekly put features built into the security. This helps stabilize the Fund’s net asset value (NAV), provides excellent liquidity, and is more in line with the Fund’s sustainable objective versus a pure cash position.

Credit Ratings

Corporate credit yields outside of two years showed some recovery during the quarter. Most notably, corporate credit yields recovered for high-yield bonds, especially “B” rated securities. The longer end of the curve mirrored the Treasury shifts; the long end saw decreasing yields while the shorter end saw higher yields.

Change in Corporate Yield Curve, 12/31/22 - 03/31/23

The Sustainable Bond Fund deployed cash from the sale of municipal VRDNs, primarily in “A” rated securities and “AAA” rated foreign currency bonds. Choosing strong credits with improving stories is part of our extensive due diligence process.

Credit Ratings Distribution

The Sustainable Bond Fund continues to underweight to the euro relative to the Index. The Fund held 0% while the Index maintained an allocation around 27%. This underweight contributed to the Fund’s relative outperformance, given that the euro depreciated -6.51% relative to the US dollar.

Green and Sustainable Bonds

As of quarter-end the portfolio had 32.70% in green bonds, 7.97% in sustainable and social bonds and 2.84% in sustainably linked bonds. Green bonds are primarily used to support specific climate-related or environmental projects, while sustainable bonds generally can have a wider purpose including social impact. Sustainably linked holdings are issues where the failure to meet a carbon target will result in increased payments to the bondholder.

As of March 31, 2023

Top 10 Holdings Portfolio Weight
International BK Recon & Develop 5.96%
Asian Development Bank 4.61%
Inter-American Devel BK 4.57%
Canadian Imperial Bank 4.56%
Commonwealth Bank Australia 4.27%
US Treasury N/B 4.04%
Koninklijke Philips NV 3.59%
New York City NY Hsg Dev Corp 3.51%
Munich RE 3.21%
MAF Sukuk 2.76%

Saturna Sustainable Equity Fund

As of March 31, 2023

Top 10 Holdings Portfolio Weight
Novo Nordisk ADS  4.06%
Wolters Kluwer  3.17%
Tractor Supply  2.94%
CGI Group Inc Class A  2.89%
Schneider Electric ADR  2.85%
Legrand  2.84%
Nintendo ADR  2.75%
Assa Abloy ADR  2.65%
Johnson Matthey  2.59%
Apple  2.50%

Performance Summary

As of March 31, 2023

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  Expense RatioA
Average Annual Total Returns (Before Taxes) YTD 1 Year 3 Year 5 Year Since InceptionB Gross Net
Sustainable Equity Fund (SEEFX) 7.08% -5.22% 10.96% 7.30% 6.69% 0.93% 0.75%
S&P Global 1200 Index 7.70% -6.00% 16.65% 8.39% 8.59% n/a
S&P 500 Index 7.50% -7.73% 18.60% 11.17% 11.06% n/a
Sustainable Bond Fund (SEBFX) 2.57% -2.74% 0.07% 0.32% 0.95% 0.74% 0.65%
FTSE WorldBIG Index 3.33% -8.36% -4.04% -1.57% 0.12% n/a
MSCI All Country World Index 7.44% -6.96% 15.90% 7.46% 7.91% 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 31, 2023 and incorporate results from the fiscal year ended November 30, 2022. 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, 2024.

B Saturna Sustainable Equity Fund 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 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 FTSE 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.  The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market.  Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.   When available, Saturna uses total return components of indices mentioned.  Investors cannot invest directly in the indices.


Performance Summary

As of March 31, 2023

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Morningstar RatingsC Overall 1 Year 3 Year 5 Year Sustainability RatingD
Sustainable Equity Fund (SEEFX) ★ ★ ★ ★ n/a ★ ★ ★ ★ ★ ★ ★ ★
Morningstar Sustainability Rating: 5 Globes

Percent Rank in Category: 8
Among 7,814 Global Equity Large Cap Funds

% Rank in Global Large-Stock Blend Category n/a 85 72 24
Number of Funds in Category 334 368 334 288
Sustainable Bond Fund (SEBFX) ★ ★ ★ ★ n/a ★ ★ ★ ★ ★ ★ ★
Morningstar Sustainability Rating: 4 Globes

Percent Rank in Category: 10
Among 1,977 Global Fixed Income Funds

% Rank in Global Bond Category n/a 21 13 19
Number of Funds in Category 196 203 196 170

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The Morningstar Sustainability Rating is not based on fund performance and is not equivalent to the Morningstar Rating (“Star Rating”). 

© 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.

C Morningstar Ratings (“Star Ratings”) are as of March 31, 2023. 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.

D Morningstar Sustainability Ratings are as of February 28, 2023. 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 67% 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 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 are subject to change, which may result in a different Morningstar Sustainability Score and Rating each month. 

The Saturna Sustainable Equity Fund was rated on 99% and the Saturna Sustainable Bond Fund was rated on 92% of Assets Under Management.

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.


Footnotes to commentary

1 The Discount Window functions as a safety valve, relieving pressures in reserve markets. Credit extensions can help alleviate liquidity strains at a depository institution and in the banking system. The Discount Window also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress.


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.

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 2.80% and the 30-Day Yield for Saturna Sustainable Equity Fund would have been 0.87%. Unsubsidized yield does not adjust for any fee waivers and/or expense reimbursements in effect.

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.

Variable rate securities risk: Variable rate debt securities (which include floating rate debt securities) pay interest based on an interest rate benchmark. When the benchmark rate changes, the interest payments on those securities may be reset at a higher or lower rate and, as a result, such securities generally are less price sensitive to interest rate changes than fixed rate debt securities. However, the market value of variable rate debt securities may decline, or not appreciate as quickly as expected, when prevailing interest rates rise, particularly if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, variable rate securities will not generally increase in market value if interest rates decline. However, when interest rates fall, there may be a reduction in the payments of interest received by the Fund from its variable rate securities.

About the Authors

Patrick Drum

Patrick Drum MBA, CFA®, CFP®
Senior Investment Analyst
Portfolio Manager,
Saturna Sustainable Bond Fund

Elizabeth Alm

Elizabeth Alm CFA®
Senior Investment Analyst
Deputy Portfolio Manager,
Saturna Sustainable Bond Fund

Scott Klimo

Scott Klimo CFA®
Chief Investment Officer
Deputy Portfolio Manager,
Saturna Sustainable Equity Fund