2020 Impact Report
We are pleased to share our 2020 Impact Report. The Saturna Sustainable Funds continue to outperform the MSCI All Country World Index in exposure to carbon, gender diversity, and many other key performance indicators. We encourage investors to read the report for full details alongside case studies and a full detailing of our investment process.
The ESG Environment
Just when one thinks 2020 has run out of tricks, it throws another tantrum in the form of exploding conflagrations across California, Oregon, and parts of Washington, while simultaneously inundating the Gulf Coast with multiple tropical storms and hurricanes. The record extent of the wildfires, along with an Atlantic season so active that we ran out of letters to name storms and had to switch to the Greek alphabet (Hurricane Delta jumped to Category 4 during writing and the Gulf Coast is again in the crosshairs), further cements our position in the Anthropocene1 and the irrefutable conclusion that human influence has spread beyond environmental degradation and extinction to planetary-wide changes to the atmosphere and oceans. Absent serious and immediate steps toward revolutionizing our modus operandi, we will render the Earth uninhabitable across vast swaths, a progression most damaging to those least able to afford it in the developing world and those at the lower end of the socioeconomic scale in the developed world but also far from inconsequential for the wealthiest segments of the population.
As the coronavirus
continues to spread,
are at risk of permanent
In response, we have continued to refine our approach to sustainable investing. We seek additional opportunities to raise the impact of our funds through investment in alternative sources of energy such as wind power, further researching the developments in battery-powered transportation, and attempting to identify those companies that may drive the transition and benefit from the nexus of solar power generation and battery storage. At the same time, we have worked to increase the rigor of our carbon screening process, identifying not only companies that achieve relatively low emissions, but ensuring that they remain relentless in efforts to limit emissions and that goals, once set, are met.
The pandemic and resultant economic dislocation has also afforded an opportunity to revisit the social commitments of our investments. Not surprisingly, strong environmental and social performance often go hand in hand with good governance, and we have continued to seek opportunities to engage with companies on board diversity, executive pay, and other governance issues.
Market Environment and Outlook
Extending the unpredictability of 2020, markets charted an aggressive course through the third quarter. Following the abrupt sell-off in late February and early March, the S&P 500 Index quickly recovered in the second quarter and accelerated its ascent through the end of August, peaking on September 2 and providing a total return of 15.85% for the quarter through that date. Then, a 9.5% correction through September 23 ensued, returning to levels last seen in late July. A rebound into the final week of September pushed the index return to 8.93% for the quarter and 5.57% year-to-date. The European and Japanese markets reflected this pattern to a less dramatic extent.
The unusual August melt-up may be attributed to a number of theories including retail options trading, a single large investor’s positioning, and of course, unspecified Federal Reserve actions. The construction of the benchmark S&P 500 Index certainly contributed to the rise: at the peak, the five largest companies by market capitalization (Apple, Microsoft, Amazon, Facebook, and Alphabet) comprised more than 22% of the index. The price action of those five companies influence the benchmark performance as much as the bottom 363 companies combined.
Market action since late March indicates investors have looked past many of the factors that precipitated the poor first quarter performance, but the disturbing resilience of the coronavirus in the US, combined with its resurgence across Europe and Canada, prevents us from signaling the all-clear. That’s especially true given the onset of cooler weather across the northern hemisphere and the announcement that the virus has spread throughout the Trump administration, including the president and the first lady. While wishing POTUS and FLOTUS, as well as other members of the government who have tested positive, speedy recoveries, the fourth quarter of 2020 has already continued the trend set in the first three, that is, uncomfortably unpredictable. Measures of expected volatility are forecast to remain elevated through December of this year – the biggest surprise to the market would be an uneventful election and a wind-down of COVID infections. That does not represent our base case, especially in light of President Trump’s recent illness.
Currently, the state of the economy stands as our biggest concern. Federal Reserve Chairman Powell shares those concerns, stating, “At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship.”2 Democrats and Republicans have failed to agree on additional stimulus measures and, absent bringing the spread of COVID-19 under control, economic indicators have weakened, particularly in the realm of employment. While the unemployment rate dropped to 7.9%, a significant improvement from April’s 14.7%, the figure was distorted by 700,000 people dropping out the labor force and pushing the September labor participation rate down to 61.4% from 61.7% in August and 63.4% last February. We must also recognize that many people are taking anything they can get in the current environment; a reality reflected by the Federal Reserve U-6 measure. U-6 takes the unemployment rate and adds those employed part time or only marginally attached to the labor force. The U-6 rate for September was 12.8%, lower than its peak this past spring. Looking to pre-COVID times, it’s the highest reading since December 2013.
Stepping away from government statistics, developments toward the end of the third quarter indicate the growing trend of long-term unemployment. Disney announced the permanent lay-off of 28,000 employees3 who had been previously furloughed due to continued park closures. American Airlines and United Airlines sent notices to 19,000 and 13,000 workers, respectively. As the virus continues to spread, restaurants, movie theaters, gyms, hotels, and numerous other businesses are at risk of permanent closure. While the job losses last April were jarring, they were largely thought at the time to be temporary. According to the Labor Department, 3.8 million people lost their jobs permanently in September, nearly twice the level of permanent losses in April.
With the arrival of autumn weather, COVID infections soaring in certain states, the economy weakening, and the US November elections approaching, any number of news reports could shock a correction that we would look to as an entry point. Depending upon the election outcome, expected tax policy changes could influence market action either up or down. Looking past the election, our base case is to remain positive on US equities as we believe the government will attempt to manage the economy with a combination of fiscal and monetary policies. We expect policy makers have a bias to stimulate and provide more than adequate liquidity. Perhaps we are not all Keynesians now, but we are Modern Monetary Theorists.
Saturna Sustainable Bond Fund
Saturna Sustainable Bond Fund returned 1.54% for the third quarter, relative to 2.68% for the FTSE World Big Index. Year-to-date the Fund returned 3.60%, relative to 6.39% for the index.
The differential year-to-date was mainly due to the index’s large holding of long-dated Treasurys, which had a 22% total return in the first quarter. In addition, the index generally holds around 30% in euro-denominated debt relative to 10.37% in the Fund. The euro recovered strongly relative to the US dollar, appreciating 4.34% during the third quarter. Year-to-date the Fund is performing on par with the Morningstar World Bond category, behind by only seven basis points.
What mainly drove positive performance in the first quarter were the positions in US Treasury bonds. The Treasury yield curve experienced a massive shift downward during the first three months of the year as investors flew to quality. However, the second and third quarters saw Treasury yields remaining relatively stable, and returns were driven by the strong recovery of corporate yields and by the recovery of foreign currency positions relative to the US dollar.
On March 23, credit spreads of corporate bonds hit their widest levels since the 2008 financial crisis.4 Since that time, spreads have tightened significantly as the result of several factors. The Federal Reserve has provided a great deal of support to the market in the form of cutting interest rates, providing liquidity to money market funds, and importantly purchasing corporate bonds in the secondary market. This buying program includes corporate bond ETFs and recently was adjusted to also include individual corporate bonds with maturities of five years or less.5 The market has also been supported by slowing liquidations from leveraged investors forced to sell to meet margin calls and we have not yet seen the feared tidal wave of defaults.
However, the third quarter did show a change in sentiment. Non-investment grade corporate bonds saw spreads widen over the quarter, especially in the “BB” range. Meanwhile, investment-grade corporate credit saw continued tightening of spreads, especially in the short end. The Fund’s position in Nokia, rated “BB” by S&P, saw the lowest return for the quarter with the 2025 position returning -3.58%. We continue to focus on purchasing holdings well positioned with strong cash flow and financial flexibility. Defensive positioning in the portfolio is geared to withstand a protracted economic recovery or even a possible second wave of COVID. We believe that corporate credit will continue to face challenges, especially with the extended timeframe the US likely needs to get the coronavirus pandemic under control. The chart below details the movement away from Treasurys to select opportunities in the “BBB” space where we believe there is more opportunity for value creation.
As of September 30, the Fund had an effective duration (price sensitivity to changes in interest rates) of 5.81 years. This is up from 3.30 years as of December 31 in 2019 due to opportunities on the long end of the curve.
Some of these purchases include selectively adding floating rate securities due to dramatic adjustments in price from the beginning of the year and potential opportunity for upward movement. The top performing bond during the quarter was the 2066 LNC Float, which returned 8.XX% for the third quarter. The second top performer in the Fund during the third quarter was the position in Stora Enso, a “BBB” rated paper and packaging company featured in our most recent Impact Report. The security showed a total return of 7.06% for the third quarter.
Currently the portfolio has a total exposure to foreign currency of 28.94%, up from 18.35% last quarter. The euro and the Mexican peso performed very well relative to the dollar, appreciating 4.34% and 4.05%, respectively. The Fund’s third top performing security was the peso-denominated 2021 Mexico Bonos Desrollow position, which saw a total return of 6.18% for the quarter. However, both the Brazilian real and Colombian peso depreciated against the dollar, falling -2.57% and -1.87% versus the US dollar. This resulted in a loss for two securities; the 2022 Federal Republic of Brazil position returned -1.01% and the 2021 Republic of Colombia position returned -1.76%. These were the second and third worst performing securities in the Fund.
Volatility made its mark in the first part of the year including a massive shift in the Treasury curve, and both a severe widening then tightening of corporate spreads. However, aside from some spread widening of non-investment grade credit, the bond market has seen relatively little volatility, including barely any movement of Treasury yields over the quarter. Looking to the horizon, there are no shortage of catalysts lurking to upset the current stability. In the immediate future, we face uncertainties related to the presidential cycle, further government stimulus, a resurgence in COVID-19 cases, and the implications of an economy operating below full capacity. In the long term, wild as it may seem, we also have to consider the potential for inflation. With the Federal Reserve’s announcement that it will target an average inflation rate of 2%, and in so doing, allow for inflation to run “moderately above 2% for some time,” we will continue to consider the implications of this policy shift. We stand on guard for both the risks and opportunities that remain obscured below the surface.
As of September 30, 2020
|Top 10 Holdings||Portfolio Weight|
|United States Treasury Bond (4.50% 05/15/2038)||4.72%|
|United States Treasury Bond (3.375% 11/15/2048)||4.66%|
|Mexico Bonos Desarrollo||4.07%|
|Bank of Nova Scotia||3.68%|
|Canadian Imperial Bank||3.09%|
|European Investment Bank||2.97%|
Credit ratings are the lesser of S&P Global Ratings or Moody’s Investors Service. If neither S&P nor Moody’s rate a particular security, that security is categorized as not rated (except for US Treasury securities and securities issued or backed by US agencies which inherit the credit rating for the US government). Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). Ratings apply to the creditworthiness of the issuers of the underlying securities and not the Fund or its shares. Ratings may be subject to change.
Saturna Sustainable Equity Fund
The Saturna Sustainable Equity Fund continued its trend of quarterly outperformance in the third quarter, returning 11.19% versus 7.61% for the S&P Global 1200 and 8.25% for the MSCI All Country World Index. Year-to-date the Fund has gained 13.41% against the 1.20% appreciation of the S&P and 1.77% for the MSCI, performance gaps of 1,221 and 1,164 basis points, respectively. The Fund enjoyed positive returns across all of the sectors in which it is invested and positive selection in all but one of the sectors.
The third quarter was notable for the relatively minor role played by tech companies in driving performance. Only Apple, Taiwan Semi, and Adobe appear among the 10 Largest Contributors. As ESG investors, we are gratified to see global wind power leaders Vestas and Siemens Gamesa standing atop the list, while Malaysian nitrile glove maker Hartalega also registered a strong, if volatile performance. After soaring in July, the share price was nearly cut in half over August and early September, followed by a strong rally to round out the quarter. Video games are a major media industry and we see growth drivers across the industry, but Nintendo stands apart in providing family-friendly exposure to the industry. Adidas has been making solid ESG and business progress under the leadership of current CEO Kasper Rorsted, and in August his contract was extended an additional five years. The arrival of CEO Marvin Ellison at Lowe’s two years ago has also driven a sea-change at that company, which is now riding the wave of the home renovation “stay-cation.” Finally, Church & Dwight represent the rare true growth opportunity in Consumer Staples, featuring a consistent Return on invested capital track record despite its mergers and acquisitions “roll-up” business model.
Half of the Fund’s 10 Largest Detractors were largely flat over the quarter. Pharmaceutical companies in general have underperformed during the third quarter, although our selection was relatively weak. GlaxoSmithKline, which scores well on ESG metrics, especially in the social category, remains a “show me” story as the renewed pipeline focus under CEO Emma Walmsley will take time to bear fruit. In the meantime, the shares provide an attractive dividend yield of over 5%. Danone is a new position in the Fund, and we are impressed by its efforts in the arena of alternatives to dairy beverages. Danone still has exposure to the bottled water business but has partnered with NGOs to provide “nature-based” solutions to preserve watersheds in areas where they withdraw water. Additionally, it has audited 100% of its water sources to ensure sustainable withdrawal rates. Telekomunikasi has been struggling for some time and we are reviewing the position. Seeing a tough road ahead for European banking, we have exited the Banco Santander position.
Due to strong share price appreciation, Vestas, Siemens Gamesa, and Nintendo all climbed into the Top 10 Holdings, while Legrand, Novozymes, and L’Oreal dropped out.
As of September 30, 2020
|10 Largest Contributors||Return||Contribution|
|Vestas Wind Systems||59.47%||1.07|
|Siemens Gamesa Renewable Energy||53.24%||0.84|
|Taiwan Semiconductor ADS||43.55%||0.66|
|Church & Dwight||21.54%||0.33|
|10 Largest Detractors||Return||Contribution|
|Astellas Pharma ADS||-10.50%||-0.14|
|Telekomunik Indonesia ADS||-16.70%||-0.05|
|Banco Santander ADS||-12.45%||-0.02|
|Roche Holdings ADS||-1.31%||-0.02|
|Top 10 Holdings||Portfolio Weight|
|Vestas Wind Systems||2.69%|
|Siemens Gamesa Renewable Energy||2.25%|
|Dassault Systemes ADR||2.13%|
|Schneider Electric ADR||2.09%|
As of September 30, 2020
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|Average Annual Total Returns (Before Taxes)||YTD||1 Year||3 Year||5 Year||Since InceptionB||Gross||Net|
|Sustainable Equity Fund (SEEFX)||13.41%||22.92%||13.85%||12.69%||9.33%||1.81%||0.75%|
|S&P Global 1200 Index||1.20%||10.23%||7.97%||11.13%||8.36%||n/a|
|S&P 500 Index||5.57%||15.15%||12.26%||14.13%||11.52%||n/a|
|Sustainable Bond Fund (SEBFX)||3.60%||4.14%||2.28%||2.89%||2.34%||0.83%||0.65%|
|FTSE WorldBIG Index||6.39%||6.77%||4.26%||3.98%||3.53%||n/a|
|MSCI All Country World Index||1.77%||11.00%||7.67%||10.88%||7.99%||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 27, 2020 and incorporate results from the fiscal year ended November 30, 2019. 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, 2021.
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.
As of September 30, 2020
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|Morningstar Ratings™C||Overall||1 Year||3 Year||5 Year||Sustainability RatingD|
|Sustainable Equity Fund (SEEFX)||★ ★ ★ ★||n/a||★ ★ ★ ★||★ ★ ★ ★||
Percent Rank in Category: 3
|% Rank in World Large Stock Category||n/a||17||13||20|
|Number of Funds in Category||725||823||725||608|
|Sustainable Bond Fund (SEBFX)||★ ★ ★||n/a||★ ★ ★||★ ★ ★||Not rated|
|% Rank in World Bond Category||n/a||65||68||75|
|Number of Funds in Category||182||203||182||169|
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The Morningstar Sustainability Rating is not based on fund performance and is not equivalent to the Morningstar Rating (“Star Rating”).
© 2020 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 September 30, 2020. 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 August 31, 2020. 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% of Assets Under Management and the Saturna Sustainable Bond Fund was not rated.
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 Encyclopedia of Earth. Welcome to the Anthropocene, 2020. http://www.anthropocene.info/
2 Timiraos, Nick. Fed’s Powell Says U.S. Faces ‘Tragic’ Risks From Doing Too Little To Support Economy. Wall Street Journal, October 6 2020. https://www.wsj.com/articles/feds-powell-says-u-s-faces-tragic-risks-from-doing-too-little-to-support-economy-11601995201
3 Casselman, Ben, Gillian Friedman and Jeanna Smialek. Workers Face Permanent Job Losses as the Virus Persists. The New York Times, October 3 2020. https://www.nytimes.com/2020/10/03/business/economy/coronavirus-permanent-job-losses.html
4 Sekera, Dave. Corporate Bonds Stand Out in Second Quarter. Morningstar, July 8 2020. https://www.morningstar.com/articles/991119/article
5 Cox, Jeff. The fed is buying some of the biggest companies’ bonds, raising questions overs why. CNBC, June 29 2020. https://www.cnbc.com/2020/06/29/the-fed-is-buying-some-of-the-biggest-companies-bonds-raising-questions-over-why.html
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.