Q4 2020

At Saturna, we entered 2020 with cautious optimism.  Geopolitical uncertainties, rich corporate valuations, and stretched monetary policies kept us vigilant, while generally strong business and economic fundamentals supported optimism.  What we didn’t foresee was the looming pandemic, widespread economic shutdowns, and rapid government intervention.  By nature, such a "black swan" is unforeseeable, and it’s also why we place emphasis on seeking out companies with robust balance sheets and competitive positioning to support earnings growth even through trying times.  We cannot control the weather, but we can plot a course and pick a vessel to ride out the storm.

And what a storm 2020 presented. From its peak on February 19 to its trough on March 23, the S&P 500 fell 33.9%.  In spite of this swoon, when all was said and done, the Index fully recovered its losses and more, providing an 18.40% total return in 2020.  A combination of accommodative monetary policy, unprecedented injections of fiscal stimulus, and the rapid development of several promising vaccines have buoyed the market.

In our first quarter commentary we recommended staying invested for most investors.  Short-term tactical trading rarely yields positive results.  Indeed, since 1928, seven out of the 10 best days for the S&P 500 returns came within two weeks of one of the 10 worst days.  We saw this when, on March 16, 2020, the S&P 500 experienced the worst one-day sell-off since 1987.  Subsequently, on March 24 the Index experienced its 10th largest daily return since 1928.  Although short-term volatility can cause even the most seasoned investor’s stomach to turn, staying invested for the long run is generally the best course.

At the onset of the COVID-19 pandemic, epidemiologists estimated that in the best case scenario, a vaccine could be developed in 12-18 months.¹  The fact that a vaccine was developed in less than a year is a testament to human ingenuity.  Prior to COVID-19 the fastest vaccine development was for mumps, which took four years.  Despite this feat, deploying the vaccines globally will require yet another triumph.  Even in countries with developed infrastructure, rolling out the vaccine has hit snags.  For instance, the United States had a goal of delivering 20 million vaccines by the end of 2020, but as of January 4, 2021, just over 15 million had been delivered, and far fewer had been administered.²  In addition to the logistical challenges, at least one new, and possibly more contagious, variant of the virus has appeared and is spreading around the globe.  We’d be remiss to underestimate the havoc a microscopic piece of RNA can wreak, given what we have already witnessed in 2020.

Facing widespread economic shutdowns, central banks across the world rapidly cut interest rates.  Between March 1 and March 16, the Federal Reserve cut the federal funds target range from 1.5-1.75% to 0.0-0.25%.  This easy monetary policy has helped to spur equity markets to all-time highs, despite the ongoing calamity.  By driving down interest rates, future earnings become more attractive; thus, companies with high growth expectations tend to be the biggest winners.  In line with this theory, Technology stocks led the markets in 2020, exemplified by the continued ascension of Facebook, Alphabet, Amazon, Apple, and Microsoft.  At the start of 2020 this group accounted for 17.5% of the S&P 500’s market cap; by the end of the year the figure had reached 22.3%. 

Environment & Outlook

With 2020’s bull market largely being driven by multiple expansion, particularly in Tech stocks, valuations continue to be a point of contention. One way to consider whether or not the market has become irrational is to look at the cyclically adjusted price-to-earnings, or “CAPE”, ratio. This figure considers inflation-adjusted share prices relative to the 10-year average of real earnings per share. When we compare this figure with the US government’s 10-year interest rate, a common starting point for discount rates used in valuation, the market appears to be fairly priced. That said, we see the strong returns of 2020 largely attributable to a one-off cut in interest rates as opposed to continued earnings growth. Thus, looking ahead, we don’t expect to see further multiple expansion, barring the Fed cutting nominal interest rates into negative territory. With 2020 being far from a normal baseline, we expect some volatility as the market shakes out which companies are deserving of their newfound valuations.

Turning our gaze from what happened in 2020 to what is on the horizon, we continue to be cautiously optimistic for these four reasons:

• Unknown timeline for vaccines and additional virus curveballs
• Accommodative monetary policy
• Stretched, but not irrational, corporate valuations
• New presidential administration and possibility for further fiscal accommodation 

As to the final point, the results of two runoff elections for the Senate seats in Georgia have provided the Democratic Party with the slimmest of majorities, given the vice president’s role as tie-breaker.  As a result, Democrats control the House, the Senate, and the Presidency, raising the likelihood of further fiscal accommodation in 2021.

Saturna Sustainable Bond Fund

Saturna Sustainable Equity Fund

Performance Summary

As of December 31, 2020

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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.

Performance Summary

As of December 31, 2020

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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 December 31, 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 November 30, 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 Cagle, Tess. Until now, what’s the quickest a vaccine has ever been developed? Nautilus, May 2020.  https://coronavirus.nautil.us/until-now-whats-the-quickest-a-vaccine-has-ever-been-developed/

²  Soucheray, Stephanie. US COVID deaths top 350,000 as vaccine rollout continues. Center for Infectious Disease Research and Policy, January 4, 2021. https://www.cidrap.umn.edu/news-perspective/2021/01/us-covid-deaths-top-350000-vaccine-rollout-continues

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.