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Q2 2023


In our 2022 year-end commentary we noted the remarkably consistent track record of stock market gains in every year that followed a midterm election dating back to World War II. We also noted the rare instances of the US stock market declining over two consecutive years. History was setting up 2023 to be a good year and, reviewing the first half of 2023 performance, the track record appears likely to remain intact. Year-to-date, the S&P 500 Index rose a healthy 16.89%, while the more Tech-heavy NASDAQ Composite Index soared 32.32%. Such figures, however, belie a darker picture just below the surface, as index performance was driven by a handful of mostly mega-cap stocks: Alphabet, Amazon, Apple, Meta (Facebook), Microsoft, Netflix, Tesla, and Nvidia. Together these stocks account for 30% of the S&P 500 Index’s market capitalization, up from 22% at the start of the year. As a market capitalization-weighted index, larger capitalization stocks have a greater effect on index performance. To see the result, we need only compare the performance of the S&P 500 Index to the performance of the S&P 500 Equal Weight ETF as a proxy for an equal-weighted S&P 500 Index, as shown in Heavyweights Rule.

Heavyweights Rule Sustainable

Following the March collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse, the S&P Equal Weight ETF moved into negative territory, remaining lackluster until June 2023. Over the same period, the large-cap Tech stocks continued appreciating, receiving a boost in mid-May from Nvidia due to demand for Artificial Intelligence (AI) chips.

Market Weights

While Nvidia’s year-to-date 189.54% appreciation helped pull the benchmark higher, a reversal could shave points off the S&P 500 Index while other stocks appreciate. The six-month performance gap of 9.44% between market capitalization and equal-weighted indices registered over the first half of 2023 ranks as the third-widest gap over the past 25 years. The widest gap was 10.71% in March 2000 during the height of the dot-com bubble, a period that bears more than a passing resemblance to the current AI frenzy. That March 2000 spread was wiped out and reversed over the following 15 months, as the collapse in online stocks dragged the Index down and obscured the solid performance of stocks that had been neglected during the dot-com bubble. Whether history will rhyme remains to be seen, but a longer-term view shows that the two versions of the S&P 500 rarely deviate more than a few percentage points from each other on an annualized basis.


In early September of 1939, Germany invaded Poland, and Britain and France declared war on Germany. However, for eight months, there was minimal fighting; it wasn't until May 1940 when the German Panzerdivision rolled into the Low Countries and France that the war took off. The eight-month interregnum came to be known as “The Phoney War.”1 Market observers could be forgiven for thinking the same of the yet-unrealized recession that was assumed to be an inevitable consequence of the Federal Reserve’s aggressive rate tightening in the wake of high post-pandemic inflation. Economists are generally a sunny lot, rarely forecasting downturns in advance of their arrival. For 2023, however, consensus strongly favored a global recession.2 In the first half, European economies were certainly weak, while the removal of China’s COVID-19 restrictions released a burst of activity that subsequently cooled to the point of spurring officials to take stimulative measures. Meanwhile, Japan demonstrated surprising strength, while the US economy soldiered on with first-quarter gross domestic product (GDP) growth of 2.0%, 339,000 new jobs in May, and an unemployment rate of 3.7%.3 What now?

Just as May 1940 brought an end to the Phoney War, we cannot dismiss future economic contraction based on it not having arrived. Inflation remains elevated and earlier hopes of a Fed pivot have evaporated. Indeed, the Fed has indicated the possibility of two additional rate hikes by year-end, following the June pause. Higher-for-longer, in terms of inflation and interest rates, does not bode well for growth. And what of that genie of economic prognostication, the yield curve? While boasting an impressive record of predictive success, it provides little guidance regarding timing. A general rule of thumb looks for a recession to begin within a year of the curve inverting, although the lag has been as great as two years. Disconcertingly, the two-year and 10-year yield curves inverted for good almost exactly a year ago, while the Cleveland Fed currently estimates the probability of recession within one year at 79%.4

What this means for stock market returns remains anyone’s guess, but so far, activity in 2023 indicates that bad economic news may be interpreted as good stock market news if investors believe lower rates are just around the bend. Valuations may prove problematic for the architects of this year’s index gains, but most stocks performed meekly, as described above. It may be that investors have already discounted the risks of lower earnings for companies not involved in AI, creating an opportunity for the first-half wallflowers to move to the center of the dance floor.


Saturna Sustainable Equity Fund

For the second quarter ended June 30, 2023, Saturna Sustainable Equity Fund returned 3.43%, relative to 6.86% for the S&P Global 1200 Index. The one-year return for the Fund was 13.45%, relative to 18.60% for the Index.

The first half of 2023 witnessed securities markets range between slight increases in the fixed income market to moderate escalations in equity markets. The S&P 500 Index climbed 16.89%, while the S&P Global 1200 Index rose 15.08%. Saturna Sustainable Equity Fund trailed them both, posting a gain of 10.75% for the same period.

The underperformance of the Saturna Sustainable Equity Fund can be attributed to a combination of factors, with the primary one being the Fund’s conservative approach in response to market conditions. In the face of numerous forecasts calling for a recession which has yet to materialize, we opted to adopt a cautious stance, favoring capital preservation over aggressive investment strategies.

While prudence is essential in uncertain times, this approach caused the Sustainable Equity Fund to miss out on potential growth opportunities during this period of market strength. The reluctance to take on higher levels of risk led to a lack of exposure to the highest performing names, resulting in subdued returns compared to more risk-tolerant funds.

As we emerge from the current period of disruption, what sort of environment can we expect on the other side? There are two competing theses. The first is that we return to a period like the decade following the Global Financial Crisis (GFC): anemic growth, low inflation, and low interest rates. Presumably, such an easy money environment would support renewed asset price inflation with housing and stocks once again off to the races, the latter focusing on growth opportunities, be they immediate or in the future. Elements contributing to this outlook include the deflationary effect of aging demographics, stagnant-to-falling developed world populations, and continued efficiency gains from technological developments such as automation. The second thesis is that a pullback in globalization (coupled with an end to the China-driven surge in working age population that has helped restrain prices for much of the century) will empower workers to demand higher wages, leading companies to increase prices, creating a cycle of embedded inflation and implying higher interest rates. Any sign of trouble will spur governments to act more aggressively than they did following the GFC and more closely follow their pandemic playbooks, given the apparent victory of Modern Monetary Theory and the absence of bond market vigilantes.

While far too early to settle upon the likely outcome, between now and then, we face the highest interest rates in decades. Given our focus on strongly cash generative, low-debt companies, such an environment may prove relatively beneficial for our investments. They will not be burdened by high interest payments and may be able to exploit difficulties faced by other, more heavily indebted companies, or take advantage of opportunities to invest when others cannot. We undoubtedly face more economic turmoil, but we retain faith in the power of human resilience and creativity.

As of June 30, 2023

10 Largest Contributors Return Contribution
Adobe 26.89% 0.53
Nintendo ADR 17.44% 0.48
Apple 17.79% 0.45
Microsoft 18.38% 0.39
Lowe's 13.44% 0.32
Schneider Electric ADR 11.29% 0.32
Legrand 10.79% 0.30
CGI Group, Class A 9.70% 0.28
Accenture, Class A 8.39% 0.20
Novartis ADR 9.68% 0.19
10 Largest Detractors Return Contribution
Johnson Matthey -6.60% -0.18
Tractor Supply -5.47% -0.17
Pfizer -9.12% -0.15
Novozymes ADR -8.89% -0.15
Walt Disney -10.84% -0.14
Unicharm ADR -8.66% -0.14
PayPal -12.13% -0.14
Vestas Wind Systems -8.37% -0.13
Starbucks -4.39% -0.08
BioNTech ADR -13.36% -0.07
Top 10 Holdings Portfolio Weight
Novo Nordisk ADS 3.92%
Nintendo ADR 3.06%
Wolters Kluwer 3.01%
CGI Group, Class A 3.00%
Schneider Electric ADR 2.95%
Legrand 2.92%
Apple 2.79%
Tractor Supply 2.62%
Lowe's 2.57%
Assa Abloy ADR 2.54%

Saturna Sustainable Bond Fund

For the second quarter ended June 30, 2023, Saturna Sustainable Bond Fund returned 1.20%, relative to -1.07% for the FTSE WorldBIG Index. The one-year return for the Fund was 2.97%, relative to -1.11% for the Index.

For the first half of 2023, central banks around the world continued to tighten benchmark interest rates to quell inflationary pressures. While these measures have successfully slowed the acceleration of rising inflation, it remains high and resilient. Some central banks, such as those in Australia and Canada, made hopeful efforts to incorporate a policy pause, choosing to wait and see what would happen. Later, they had to scramble with a subsequent rate hike that surprised investors. With the Federal Reserve’s decision to pause in June 2023, investors’ attention will be front and center.

The byproduct of global central banks raising benchmark rates is a tightening of financial conditions and softening of economic outlook. This can be noted with the downward revisions of economic growth forecasts for 2023; the International Monetary Fund (IMF) just announced another reduction in global gross domestic product (GDP) outlook. On April 11, 2023, the IMF revised their semi-annual global baseline forecast for growth in 2023, changing their estimate from 3.4% to 2.8%, with 2024 forecasted at 3.0%. Advanced economies are projected to experience the greatest weakness, with growth slowing down from 2.7% in 2022 to 1.3% in 2023.5

The sticky inflation was especially apparent in the UK, where British consumer price inflation was 8.7%, the highest, along with Italy, among major advanced economies. As a result of the interest rate environment and high inflation, gilt yields rose during the second quarter. The two-year gilt yields hit their highest level since July of 2008.6 As a result, two of the worst performing bonds in Saturna Sustainable Bond Fund were the 2033 and 2053 United Kingdom Gilt bonds, which returned -2.08% and -5.88%, respectively.


The Saturna Sustainable Bond Fund had a 26% exposure to bonds with maturities over 10 years. During the second quarter, the Fund increased its allocation to bonds with maturities of one year or less to 16% of the portfolio. Effective duration was relatively stable at 3.53 years, lowering only 0.30 years since the end of the first quarter. The portfolio maintained a barbell position, focusing on bonds with maturities of one to three years and outside of 10 years.

Portfolio Maturity Breakdown Q2 2023


The portfolio had a total exposure to foreign currency of 40.97%, down from 43.68% since the end of the first quarter, but still significantly higher than the 17.48% exposure recorded at the end of the third quarter of 2022. Positions were increased in the euro and the Brazilian real, while positions in the Australian dollar and New Zealand dollar were decreased.

Currency continued to drive performance over the second quarter. The Brazilian real appreciated 5.77% relative to the dollar. The best performer of the quarter was the real-denominated 2026 Asian Development Bank green bond, which returned 15.46%. The Mexican peso appreciated 5.40% relative to the dollar. The second-best performer of the quarter was the peso-denominated 2024 Inter-American Development Bank bond, which returned 11.09%. One of the lowest performers of the second quarter was the New Zealand government bond, which returned -2.46%, due primarily to the New Zealand dollar depreciating -2.13% relative to the US dollar.

Currency Performance

Defensive Positioning

The Saturna Sustainable Bond Fund invests in variable rate demand notes (VRDNs). For the second quarter, the Fund lowered its exposure to those securities in favor of other opportunities. On March 31, 2023, the Fund held 6.67% in VRDNs. On June 30, 2023, the Fund held 3.56%. Municipal VRDNs always trade at 100 and they 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. Some of the new positions that were added to the portfolio were a blue bond issued by the Export-Import Bank of Korea maturing in 2033, and a Brazilian real-denominated supranational maturing in 2025.

Credit Ratings

Corporate credit yields rose across the curve, with generally more movement in the short end. Most notably, corporate credit yields were only stable for high-yield bonds, especially “B” rated securities between three and five years. Saturna Sustainable Bond Fund deployed capital by slightly increasing exposure to the “B” rating category. The Fund reported a 3.34% exposure to the “B” rating category, represented by Telecom Italia and Coty bonds.

Change in Corporate Yield Curve Q2 2023


Credit Ratings Distribution Q2 2023

Green and Sustainable Bonds

At quarter-end the portfolio had 35.31% in green bonds, 6.24% in sustainable and social bonds, and 3.62% in sustainability 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. Sustainability linked holdings are issues where the failure to meet a carbon target will result in increased payments to the bondholder.

As of June 30, 2023

Top 10 Holdings Portfolio Weight
Canadian Imperial Bank 4.79%
Asian Development Bank 4.78%
US Treasury N/B 3.67%
Munich RE 3.62%
Microsoft 3.61%
Nokia 3.47%
Koninklijke Philips NV 3.30%
Treasury Bill due 07/11/2023 3.29%
Inter-American Devel BK 2.73%

Performance Summary

As of June 30, 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) 10.75% 13.45% 5.72% 7.82% 6.92% 0.93% 0.75%
S&P Global 1200 Index 15.08% 18.60% 12.65% 9.54% 9.19% n/a
S&P 500 Index 16.89% 19.59% 14.60% 12.29% 11.84% n/a
Sustainable Bond Fund (SEBFX) 3.80% 2.97% -0.84% 0.89% 1.06% 0.74% 0.65%
FTSE WorldBIG Index 2.22% -1.11% -5.41% -1.25% -0.02% n/a
MSCI All Country World Index 14.26% 17.13% 11.51% 8.63% 8.47% 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.  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 June 30, 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: 7
Among 7,907 Global Equity Large Cap Funds

% Rank in Global Large-Stock Blend Category n/a 72 98 43
Number of Funds in Category 340 366 340 291
Sustainable Bond Fund (SEBFX) ★ ★ ★ ★ n/a ★ ★ ★ ★ ★ ★ ★ ★
Morningstar Sustainability Rating: 4 Globes

Percent Rank in Category: 9
Among 2,016 Global Fixed Income Funds

% Rank in Global Bond Category n/a 17 11 16
Number of Funds in Category 190 197 190 170

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

© 2022 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, 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 May 31, 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 93% 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 British spelling is generally used on both sides of the Atlantic, rather than the American “phony.”

2 “Chief Economists Say Global Recession Likely In 2023, But Pressures On Food, Energy and Inflation May Be Peaking.” World Economic Forum. January 16, 2023. chief-economists-say-global-recession-likely-in-2023-but-costofliving- crisis-close-to-peaking/

3 “The Employment Situation – June 2023.” Bureau of Labor Statistics. July 7, 2023.

4 “Yield Curve and Predicted GDP Growth.” Federal Reserve Bank of Cleveland. June 2023. data/yield-curve-and-predicted-gdp-growth

5 “A Rocky Recovery.” International Monetary Fund. April 2023. https:// worldeconomic- outlook-april-2023

6 Bahceli, Yoruk and Milliken, David, “Analysis: Soaring UK bond yields don’t herald repeat of ‘mini-budget’ chaos.” Reuters, June 14, 2023. dont-herald-repeat-mini-budget-chaos-2023-06-15/


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.

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 4.58% and the 30-Day Yield for Saturna Sustainable Equity Fund would have been 0.83%. 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

Jane Carten

Jane Carten MBA
Portfolio Manager,
Saturna Sustainable Equity Fund

Patrick Drum

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

Scott Klimo

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

Elizabeth Alm

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