Q2 2021

Last quarter we posited that accelerated vaccine distribution would spur reopenings, increased economic activity, higher inflation, and strong corporate earnings.  Despite the rising rate environment at the time – the year-to-date peak yield for the US 10-year Treasury was 1.74% on March 31 – we noted that market weakness during a time of economic ebullience would be unusual.  Our crystal ball need not have been polished to a high sheen to proffer these prognostications, and they have indeed come to pass.  By quarter-end, 66% of American adults had received one vaccine dose and 57% had been fully vaccinated.¹  While much of the world continues to struggle with the more contagious Delta variant, higher vaccination rates in the US appear to have blunted the threat, at least in those regions with greater vaccination acceptance.  This has allowed a return to almost normal economic activity, and the Conference Board now forecasts 2021 GDP growth of 6.6% followed by 3.8% in 2022.²  Meanwhile, surging demand, combined with still-challenged supply chains, drove inflation sharply higher.  The Bureau of Labor Statistics reported 5% annualized inflation at the end of May.³  First quarter corporate earnings demonstrated strength, notwithstanding the occasional weak report from pandemic darlings such as Clorox, which rode an early demand wave until consumers were equipped with several years’ supply of wipes and had little need for more.  As expected, US stock markets shrugged off inflation worries; the S&P 500 Index returned 8.55% over the second quarter, pushing the year-to-date return to 15.25%.  The bond market was equally sanguine as the 10-year Treasury yield slipped from 1.74% at the end of the first quarter to 1.47% on June 30.

Environment and Outlook

While we had a good idea of how some things would play out over the quarter, there were also uncertainties, primarily political.  During the first quarter, the US administration proposed infrastructure bills and changes to the tax code.  It now appears that a slimmed-down bipartisan infrastructure bill may pass in some form.  As for taxes, little has moved forward on the domestic front, but the administration has won international backing with 130 countries, including every member of the Group of 20, for a global minimum tax of 15%. The OECD (Organisation for Economic Co-operation and Development) estimates that governments lose $100 billion to $240 billion every year to tax avoidance, so the revenue will not make a huge difference to national budgets, but it could affect individual corporate earnings for multinationals that have employed Irish domicile, royalty schemes, and other dodges.  Of course, congressional approval is dubious.

Inflation, interest rates, and Federal Reserve policy will likely dominate discussions for the rest of 2021.  Fed Chairman Jerome Powell remains committed to his view that the current bout of inflation will be transitory but acknowledges that a longer period of high inflation is a possibility.⁴  Indeed, the Federal Reserve has become quite divided on the outlook.  While the majority of governors still anticipate no interest rate hikes until 2023, expectations for that year are all over the map, as shown in the “FOMC participants’ assessments of appropriate monetary policy” dot plot.  A vocal minority has emerged, arguing for quicker action to head off the risk of inflation expectations becoming embedded.  Before any change to the federal funds rate, of course, the quantitative easing program that currently has the Fed purchasing $120 billion of Treasury securities and government-backed mortgage debt every month will need to be wound down, ideally without creating a “taper tantrum.”

We view the wide range of opinions within the Fed as an affirmation of our long-term investment approach.  If the governors of the Federal Reserve can’t agree on the future path for inflation and interest rates, how could we possibly create value for our investors by attempting trade around such expectations?  Rather, we continue to focus on the best companies built for the long haul that we anticipate will provide outperformance over the cycle. 

Saturna Sustainable Bond Fund

Saturna Sustainable Equity Fund

Performance Summary

As of June 30, 2021

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

^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 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 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.  When available, Saturna uses total return components of indices mentioned.  Investors cannot invest directly in the indices.

Performance Summary

As of June 30, 2021

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

© 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.

^C Morningstar Ratings^™ (“Star Ratings”) are as of June 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.

^D Morningstar Sustainability Ratings are as of May 31 2021. 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 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 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 100% and the Saturna Sustainable Bond Fund was rated on 81% 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 See How Vaccinations Are Going in Your County and State. New York Times, June 30, 2021. https://www.nytimes.com/interactive/2020/us/covid-19-vaccine-doses.html

² The Conference Board Economic Forecast for the US Economy. The Conference Board, June 9, 2021. https://www.conference-board.org/research/us-forecast

³ Consumer Price Index—May 2021. News Release: Bureau of Labor Statistics, US Department of Labor. June 10, 2021. https://www.bls.gov/news.release/pdf/cpi.pdf

⁴ Smialek, Jeanna and Jim Tankersley. Fed Unity Cracks as Inflation Rises and Officials Debate Future. New York Times, June 30, 2021. https://www.nytimes.com/2021/06/30/business/economy/inflation-federal-reserve.html

⁵ Vineyard Wind Receives Record of Decision for First in the Nation Commercial Scale Offshore Wind Project. Vineyard Wind, May 11, 2021. https://www.vineyardwind.com/press-releases/2021/5/11/vineyard-wind-receives-record-of-decision

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 1.80%.  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.