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Q4 2023

We typically refrain from market or economic prognostications because, to quote Hall of Fame catcher Yogi Berra, “It’s tough to make predictions, especially about the future.” Last year was a master class in the wisdom of that statement. In early January 2023, most economic forecasters anticipated a recession to result from the Federal Reserve’s aggressive series of interest rate hikes to tame inflation. Instead, no single quarter experienced an economic contraction and the US gross domestic product (GDP) growth figure for 2023 is expected to be around 2.4%. Meanwhile, the stock market briefly stumbled in the wake of regional bank failures before achieving liftoff with the emergence of generative artificial intelligence (AI), Large Language Models (LLM), and AI chip leader Nvidia’s historic May results announcement and earnings upgrade. Following a summer lull, the market received a booster shot from rapidly falling inflation despite the economy and employment remaining strong. Futures markets started anticipating 2024 rate cuts, and the heretofore mythical “soft landing” became conventional wisdom.

Of course, the land of conventional wisdom can be a dangerous place. Conventional wisdom from 12 months ago proved to be wrong, as it was 12 months before that. A recent bulge bracket firm survey reported that investors ended 2023 the most bullish they had been since early 2022, and we know how that year turned out. Might the dominant expectation be shattered again as we move through 2024?

We don’t know, but one lesson we can draw from 2023’s performance is that market indices don’t always reflect the performance of stocks in the aggregate, which brings us to the Magnificent Seven. Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Nvidia dominated index returns throughout most of 2023, rising from 19% of the S&P 500 at year-end 2022 to 26% by year-end 2023 and contributing 59% of Index returns. When the largest capitalization stocks appreciate by significant amounts, indices can push higher despite modest performance across the broad market. We can best explain this phenomenon by comparing the returns of the market capitalization-weighted S&P 500 against the equal-weighted S&P 500.

For the first two months of 2023, the indices moved in tandem. With the regional bank failures in March, mega-cap Tech stocks diverged on the assumption that their businesses would avoid fallout from the bank difficulties. This divergence widened at Nvidia’s above-mentioned announcement, lighting the fuse on AI-adjacent Tech stocks. Over the first six months of 2023, the market cap-weighted S&P 500, led by the Magnificent Seven, jumped 15.91% versus only 6.93% for the equal-weighted index, a gap of 898 basis points (bps).

Entering the second half of 2023, concerns of a “higher for longer” interest rate environment weighed on the market, sending both indices into negative territory for the summer. Despite conventional wisdom (there’s that phrase again) that longer-duration and more expensive Tech stocks should have suffered more in a higher rate environment, the equal-weighted S&P 500 declined by a greater amount before catching up in November and December, courtesy of the soft-landing scenario gaining traction. By year-end, the indices were only 86 bps apart. During the final two months of the year, the equal-weighted index outperformed the other. It seems reasonable to expect a more balanced market that is less skewed by the movements of a handful of stocks in 2024.

We are hopeful that such an environment may be more favorable to our approach. As managers of diversified funds, our exposure to mega-cap stocks will be limited to levels below what the companies represent in major benchmarks. Few stocks driving returns presents a relative performance headwind, while a more diversified return profile removes that disadvantage.

Saturna Sustainable Equity Fund

Saturna Sustainable Bond Fund

Performance Summary

As of December 31, 2023

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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 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. 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 December 31, 2023

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

© 2024 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, 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 November 30, 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 91% 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 International Monetary Fund. “Global Financial Stability Report: Financial and Climate Policies for a High-Interest-Rate Era.” IMF, Washington, DC, October 2023. https://www.imf.org/en/ Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023

² Buchwald, Elisabeth. “Here’s why the fed thinks it can cut rates in 2024.” CNN, December 19, 2023. https://www.cnn.com/2023/12/19/business/fed-rate-cuts-2024/index.html

³ Ari, Anil, et al. “One Hundred Inflation Shocks: Seven Stylized Facts.” IMF Working Papers. International Monetary Fund, September 15, 2023. https://www.imf.org/en/Publications/WP/ Issues/2023/09/13/One-Hundred-Inflation-Shocks-Seven-Stylized-Facts-539159

⁴ Ibid.