FundAlarm Annex - Fund Report

Fund name: Sextant International (SSIFX)

Objective: The fund seeks long-term capital growth by investing, primarily, in "mature" markets outside the U.S. The manager looks for low price/earnings, low price/cash flow, and higher dividend yield stocks. He has the freedom to invest in smaller companies and emerging markets but tends toward larger cap issues. He’s interested in stocks that "offer favorable possibilities for capital appreciation over the next one to four years" but the fund’s single-digit turnover rate suggests that it holds stocks for more like 15 years on average.

Adviser: Saturna Capital. Saturna oversees five Sextant funds, the Idaho Tax-Free fund and two (soon to be three) Amana funds. The Sextant funds contribute about $115 million in assets while the Amana funds hold about $2 billion. The Amana funds invest in accord with Islamic investing principles and Mr. Kaiser was recognized as the best Islamic fund manager for 2005.

Manager: Nicholas Kaiser. Mr. Kaiser is president and founder of Saturna Capital. He has degrees from Chicago and Yale. In the mid 1970s and 1980s, he ran a mid-sized investment management firm (Unified Management Company) in Indianapolis. In 1989 he sold Unified and subsequently bought control of Saturna. As an officer of the Investment Company Institute, the CFA Institute, the Financial Planning Association and the No-Load Mutual Fund Association, he has been a significant force in the money management world. He’s also a philanthropist and is deeply involved in his community. By all accounts, a good guy all around.

Inception: September 30 1995.

Management’s Stake in the Fund: "Hefty" would be an understatement. Collectively, "insiders" own around 20% of the Sextant fund shares. Every management-level professional owns shares of International with Mr. Kaiser’s stake being over $100,000.

Minimum investment: $1,000 for regular accounts, $100 for IRAs.

Expense ratio: 1.43% on an asset base of about $86 million. That includes a considerable performance adjustment built into the fee: management fee will change by as much as .3% based on performance in the trailing year. There’s also a 2% redemption fee on shares held fewer than 90 days.

Comments: Consistency, thy name is Kaiser.

Who knew?

Mr. Kaiser runs four stock funds: one large value, one large core international, one large growth, and one that invests across the size and valuation spectrum. For all of his funds, he employs the same basic strategy: look for undervalued companies with good management and a leadership position in an attractive industry. Buy. Spread your bets over 60-80 names. Hold. Then keep holding for between ten and fifty years.

Here’s Morningstar’s rating (as of 8/28/09) of the four equity funds that Mr. Kaiser manages:

	3-year	5-year	10-year	Overall
Amana Income	« « « « «	« « « « «	« « « « «	« « « « «
Amana Growth	« « « « «	« « « « «	« « « « «	« « « « «
Sextant Growth	« « « «	« « « « «	« « « «	« « « «
Sextant International	« « « « «	« « « « «	« « « « «	« « « « «

In their overall rating, every one of Mr. Kaiser’s funds achieves "above average" or "high" returns for "below average" or "low" risk.

Folks who prefer Lipper’s rating system (though I’m not entirely clear why they would do so), find a similar pattern:

	Total return	Consistency	Preservation	Tax efficiency
Amana Income	« « « « «	« « «	« « « « «	« « « « «
Amana Growth	« « « « «	« « « « «	« « « « «	« « « «
Sextant Growth	« « « «	« « « « «	« « « «	« « « «
Sextant International	« « « « «	« « « «	« « « « «	« « « « «

Folks entirely skeptical of rating systems might demand, "show me the money!" Okey-dokey. I calculated Sextant International’s returns and those of its international large cap peers for a series of rolling five-year periods since with the fund’s launch in 1995. I looked at what would happen if you invested $10,000 in the fund in 1995 and held for five years, then looked at 1996 and held for five, and so on. Except for the first calculation, these figures run from mid-summer to mid-summer.

Here’s how to read the first entry: "if you’d invested $10,000 in SSIFX at inception in 1995 and held it for five years, your actual would have grown to about $21,600. If you’d invested the same amount for the same period in the average large cap international fund, you’d have $15,000. Good, but $6,700 behind the Sextant investor. Ergo, Sextant wins."

	Sextant	Peers	Winner
1995-2000	$21,600	$15,000	Sextant
1996-2001	$16,300	$11,700	Sextant
1997-2002	$10,800	$8,600	Sextant
1998-2003	$9,300	$7,800	Sextant
1999-2004	$11,800	$9,300	Sextant
2000-2005	$10,300	$8,900	Sextant
2001-2006	$15,600	$14,300	Sextant
2002-2007	$27,800	$23,900	Sextant
2003-2008	$22,900	$19,900	Sextant
2004-2009	$15,400	$11,000	Sextant

Over the longest available term – from the fund’s inception through 6/30/09 – SSIFX earned 7.9% per year by Saturna’s calculation and 8.24% per year by Marketwatch’s. That return beat its various sets of competitors by 50-100%.

While Morningstar is proud of their star rating system, they claim that there’s an even-better way to pick winning funds: listen to their analysts. Their Fund Analyst Picks represent the best insights from the best full-time analysts, and they’ve got the evidence to show that the Picks outperform the market in the following years.

And, as it turns out, Sextant International has outperformed their Picks:

	One year	Three year	Five year	Risk
Sextant International	(8.6)	3.3	11.2	Below average
American Funds EuroPacific Growth A	(8.4)	(0.1)	9.3	Below average
Artio International II	(15.1)	2.7	n/a	Below average
Fidelity Spartan International Index	(13.7)	(4.2)	5.9	Average
Manning & Napier World	(15.0)	0.2	9.5	Average
Masters’ Select International	(13.2)	(0.9)	9.6	Above average
Thornburg International Value A	(12.2)	0.4	9.6	Below average
Vanguard Total International Stock Index	(13.4)	(2.7)	7.3	Above average

Is there reason to be cautious? Sure. Three factors are worth noting:

For better and worse, the funds have moved to cash. International, for example, has been sitting on a cash hoard of 50-60% of assets for at least the past year or so. Of that decision, Mr. Kaiser wrote in May 2009: "Long years of experience on our investment team lead us forward, with caution. As investors, we don’t like to lose money. In most of the Sextant Funds, our cash reserves are much higher than normal. We also know that the best times to invest are when the outlook is dark and murky."

That decision served them brilliantly through the beginning of the March rally. In May, Mr. Kaiser noted: "for the year ended 5/31, Sextant International was ranked in the top 1% of all Morningstar Large Blend category funds for one, three and five years . . ." Over the last three months and year-to-date (through August 28), SSIFX posted strong absolute returns but utterly dismal relative ones. If we’re at the end of a bear market rally, he’ll go back to being a genius. In the unlikely event that a new secular bull market has begun, he’s going to have a lot of catching up to do.

For better and worse, investors are finally noticing Sextant. A year ago, Sextant International had $21 million in assets. Today it’s $86 million. The absolute amount is trivial, especially for a large cap fund targeting developed markets. And he is experienced in deploying cash in international markets: his Amana Growth (AMAGX) fund has a quarter-billion invested overseas and Amana Income (AMANX) has around $200 million overseas. Still, it’s a lot more than the fund has had to accommodate before.

Finally, a lot depends on one guy. Mr. Kaiser is the sole manager of four funds with $2 billion in assets. Saturna’s staff directory lists a host of people including a receptionist and a driver, but only four investment professionals. One of the four directs Islamic investing, which isn’t relevant here, while another handles fixed-income. The sole remaining guy beyond Mr. Kaiser is Peter Nielsen, "Senior Investment Analyst & Core Fund Portfolio Manager." At 62, Mr. Kaiser is still young and deeply committed but . . ..

Bottom line: if you’re looking for a good core international holding, you’ve found it!

Company link: http://www.saturna.com/ssifx.htm