Amana Mutual Funds Trust Quarterly Commentary

Quarterly Commentary

Q4 2011 • December 31, 2011

Environment

The market volatility experienced during the summer months carried through to the fall, with equities seeing numerous days of declines and advances greater than 1%. Despite the spike in volatility, U.S. markets performed reasonably well in the quarter, with the S&P 500 Index gaining 13.58% in late October before declining 2.14% to finish the year at 1258. It is an odd coincidence to see the S&P 500 virtually unchanged for the year: 1257.64 on 12/31/2010, and 1257.60 on 12/31/2011. Dividends, however, helped produce a 2.11% total return for the S&P 500 Index for the year.

Europe remains the source of much concern, as the financial crisis of 2008 has morphed into a sovereign debt crisis. A number of policy initiatives have been put forth to address it, including the recent provision of a U.S. dollar liquidity facility coordinated by the U.S. Federal Reserve. Despite this, Europe remains a slow-moving train wreck, and the issues surrounding the ability of peripheral European countries to fund themselves remain in the forefront of investors' minds. On the days that Europe's crisis seems to worsen, risk markets sell off, and on days when markets grow optimistic that solutions to the European debt crisis can be found, markets rally. Adding to the tension is political gridlock in Washington, D.C., and concerns over China's ability to sustain a high, single-digit GDP growth rate. Little wonder, then, that the benchmark 10-year Treasury yield started the quarter at a depressed yield of 1.92% and ended the quarter slightly lower, yielding 1.88%. In times of uncertainty some investors continue to prefer the safety of U.S. Treasurys in spite of their paltry yields.

Even while investors generally dialed down their risk allocations by pulling away from the Euro zone and emerging markets, they continued to shop domestically for moderate risk exposure. Returns of U.S. equities greatly outperformed foreign and emerging market stocks as investors sought to reduce their overall risk. The S&P 500 Index bested the MSCI EAFE Index and MSCI Emerging Markets Index by 8.41% and 7.37%, respectively.

Among large cap U.S. equities, valuation multiples saw modest increases in the quarter despite the conservative asset allocation preferences exhibited by investors. It appears a bit paradoxical to see risk on stocks rising (in the form of higher PE multiples) in a risk-averse environment. Perhaps there is some recognition of the stability and growth of the underlying cash flows for U.S. companies to provide this valuation support. Indeed, sector performance favored deep cyclical, higher beta sectors, as recent stock market gains have typically been accompanied by rallies in Materials and Energy. The performance of Industrials was also noteworthy as Transportation, Industrial Machinery, and Capital Goods also found favor with investors. Given the swing in risk appetites, defensive sectors such as Consumer Staples, Utilities, and Health Care lagged the market in the quarter.

Outlook

Investors should expect choppy markets to continue in 2012 as uncertainty in the Euro zone increases. This slow-moving train wreck has resulted in substantial premiums being applied to risk markets. Recently, investors have been on edge as they question the ability of peripheral Euro area sovereigns to refinance their maturing debt. According to the International Monetary Fund, Italy alone has more than 20% of its national debt coming due in 2012. Austerity, combined with a banking system that is seeking to deleverage, will present a considerable drag on growth. From an investor's standpoint, economic and political uncertainties trump fundamentals — suggesting that valuation multiples will remain well below their long-term averages in the near-term. Beyond this, however, companies with sound fundamentals and the ability to increase earnings should be rewarded while these external uncertainties resolve themselves.

AMANA INCOME FUND

Performance

For the quarter ended December 31, 2011, the Amana Income Fund had a total return of 11.15%, underperforming the S&P 500 Index by -0.66%. Performance for the year was largely in line with the benchmark, lagging by only -0.17%. Amana Income's three-year performance lagged the S&P 500 by -7.28%, but outperformed it by 24.64% over five years.

Portfolio Highlights

In the fourth quarter, the Amana Income Fund reduced its exposure to the Utilities sector by selling its position in NextEra Energy and a quarter of its position in E.ON. In both instances, the utility holding companies increased balance sheet leverage. In the case of E.ON, the portfolio manager also sought to reduce the Fund's exposure to the Euro area. The Fund is now slightly underweight the Utility sector relative to its S&P 500 Index benchmark. The Fund also reduced its position in AstraZeneca due to concerns over the health of its developmental drug pipeline.

The Fund's performance was helped by its overweight position in Industrials, Materials, and Health Care. Underweight positions in Consumer Discretionary and Information Technology sectors also provided a boost to returns relative to the benchmark. Detracting from relative performance was the Amana Income Fund's overweight in Consumer Staples and underweight in both the Energy and Financials sectors.

In contrast to the prior quarter, where the best performers were dominated by defensive names in the Consumer Staples and Health Care sectors, the fourth quarter of 2011 saw gains in Industrials and Materials companies such as Tenaris, Carlisle, Rockwell Automation, Nucor, and Freeport McMoRan. The laggards included companies in defensive Health Care and Consumer Staples sectors such as Kellogg, Becton Dickinson, Novartis, and Kimberly Clark.

AMANA GROWTH FUND

Performance

With investor appetite for deep cyclical sectors increasing in the quarter, the Amana Growth Fund's relatively high exposure to the Information Technology sector resulted in a slight lag in performance relative to its benchmark S&P 500 Index. The Amana Growth Fund returned 9.68% as compared with 11.82% for the benchmark. While the Fund had a lagging performance for the year, in part due to the benchmark's higher exposure to dividend paying stocks, it continues to have strong three, five, and 10-year relative returns — outperforming the S&P 500 Index by 2.03%, 20.15%, and 67.62%, respectively.

Positive selection effects in the Industrials sector and an overweight position in Health Care helped performance, but the fund was hurt by being underweight relative to the index in the Energy and Financial sectors. We remind investors that this fund is not permitted to invest in traditional financial companies and, as a consequence, will typically be underweight the Financials sector relative to the S&P 500 Index.

Portfolio Highlights

The fourth quarter saw little trading activity, though the Fund did invest more than $29 million in capital. More than half was allocated to the Industrials sector with the Fund adding to its position in UPS and initiating a new position in Union Pacific Railroad, which has shown strong fundamental performance in recent quarters. Aside from this, the Fund added to positions in Infosys (Information Technology), Estee Lauder (Consumer Staples), Church & Dwight (Consumer Staples), and Anglo American (Materials). These firms continue to do a good job of achieving their stated business objectives and have continued to create value for shareholders. We also feel that these firms are well positioned to endure significant bouts of economic and market volatility.

As with the Amana Income Fund, the best performers for the fourth quarter were dominated by companies in the Industrials sector, such as Lincoln Electric, Fastenal, Crane, and Genuine Parts. Information Technology companies Akamai, Google, Sandisk, and Cisco also helped Fund performance. As for lagging names, they were dominated by Consumer Discretionary stocks such as Jakks Pacific, Amazon.com, Best Buy, and John Wiley & Sons. Zimmer and Stryker (Health Care) also lagged, as investors grew concerned over the low rate of growth in hip and knee replacements.

AMANA DEVELOPING WORLD FUND

Performance

The smaller, less liquid emerging markets continued to trail the performance of the larger, more liquid domestic markets. Consistent with this is the performance of the Amana Developing World Fund relative to its sister funds, the U.S.-oriented Amana Income and Amana Growth. The Fund returned a modest 3.80% in the quarter. This compares unfavorably relative to the benchmark MSCI Emerging Markets Index, which returned 4.44%. Despite the lagging quarterly results, we are pleased that the Fund outperformed its benchmark by 10.64% for the year.

The principal reason for the Fund's large, positive performance differential remains its substantial amount of uninvested cash, which at year-end amounted to 48% of portfolio value. Positive selection effects in the Information Technology and Energy sectors provided support, as did allocations to the Health Care, Materials, and Consumer Discretionary sectors.

Portfolio Highlights

With many Asian economies having undertaken monetary tightening policies in the last year, it appeared prudent to the Fund's management to delay deployment of its excess capital. This has worked out well for Developing World shareowners this year, as emerging markets in general have punished investors. The Hang Seng Index was down -17.30%, and Brazil's BOVESPA Index was down -27.07%.

Recently, however, monetary tightening has given way to some signs of easing. Given the change in tolerance toward easy money policies, the Fund favored adding hard assets its portfolio by increasing positions in the Brazilian miner Vale as well as Impala Platinum. Positions were closed out in Western Digital and Asya Katilim Bankasi. In the case of Western Digital, there were significant concerns over the long-term impact of the recent Thai floods on the company's competitive position, and therefore its value. The Fund also closed its position in the Turkish Islamic bank Asya Katilim Bankasi in order to reduce its exposure to European financials.

Despite having an Information Technology company MercadoLibre lead the way, best performers were dominated by Materials and Industrials companies, such as copper producers Freeport McMoRan and Southern Copper. Alamos Gold also performed well. Laggards included several Telecommunications holdings: Turk Telekomunikasyon, Telekomunik Indonesia, MTN Group, and América Móvil.

Top Ten Holdings

Amana Income Fund
Nike 2.3%
Exxon Mobil 2.3%
Intel 2.2%
Eli Lilly 2.2%
Bristol-Myers Squibb 2.2%
W.W. Grainger 2.2%
Colgate-Palmolive 2.1%
Canadian National Railway 2.1%
Procter & Gamble 2.1%
PepsiCo 2.0%
Total 21.7%
Other Portfolio Securities Mentioned
Novartis ADR 2.0%
Rockwell Automation 1.8%
Carlisle 1.7%
Kimberly Clark 1.7%
Kellogg 1.6%
Becton Dickinson 1.2%
AstraZeneca ADS 1.1%
Freeport McMoRan Copper & Gold 1.1%
Nucor 0.6%
E.ON ADS 0.3%
Tenaris ADR 0.3%
Positions Closed
NextEra Energy 0.0%
Amana Growth Fund
Apple 3.9%
Humana 2.7%
Intuit 2.3%
Hansen Natural 2.2%
International Business Machines 2.2%
Google 2.2%
Qualcomm 2.1%
Intel 2.0%
PepsiCo 1.9%
Johnson & Johnson 1.9%
Total 23.4%
Other Portfolio Securities Mentioned
Amazon.com 1.7%
Cisco 1.7%
Fastenal 1.7%
United Parcel Service, Class B 1.7%
Infosys ADS 1.6%
Akamai 1.5%
Church & Dwight 1.4%
Estee Lauder 1.4%
Anglo American ADR 1.2%
Best Buy 0.9%
Lincoln Electric 0.9%
Sandisk 0.9%
Crane 0.7%
Stryker 0.7%
Zimmer 0.6%
Genuine Parts 0.4%
Union Pacific Railroad 0.4%
John Wiley & Sons, Class A 0.2%
Jakks Pacific 0.1%
Amana Developing World Fund
VF Corp 2.3%
KPJ Healthcare 2.0%
LAN Airlines ADS 2.0%
Mead Johnson Nutrition, Class A 1.9%
Sasol ADS 1.9%
Alamos Gold 1.8%
Colgate-Palmolive 1.8%
IOI 1.7%
Vale ADR 1.6%
MercadoLibre 1.6%
Total 18.6%
Other Portfolio Securities Mentioned
Telekomunikasi Indonesia ADS 1.3%
America Movil ADS 1.1%
MTN Group 1.1%
Impala Platinum ADS 1.0%
Freeport McMoRan Copper & Gold 0.9%
Southern Copper 0.7%
Turk Telekomunikasyon 0.7%
Positions Closed
Asya Katilim Bankasi 0.0%
Western Digital 0.0%

Q4 2011 Performance

Average Annual Total Returns (Before Taxes) 10 Year 5 Year 3 Year 1 Year
As of December 31, 2011
Amana Income Up 8.16% Up 4.29% Up 12.22% Up 1.94%
S&P 500 Index Up 2.92% Down -0.25% Up 14.12% Up 2.11%
Russell 1000 Value Index Up 3.90% Down -2.64% Up 11.55% Up 0.39%
 
Amana Growth Up 7.36% Up 3.52% Up 14.63% Down -1.86%
Russell 2000 Index Up 5.65% Up 0.15% Up 15.65% Down -4.17%
Russell 1000 Growth Index Up 2.54% Up 2.50% Up 18.03% Up 2.64%
 
Amana Developing World Fund¹ N/A N/A N/A Down -7.73%
MSCI Emerging Markets Index Up 13.85% Up 2.53% Up 20.19% Down -18.37%

As of the Funds’ most recent Prospectus dated September 9, 2011, the expense ratios were 1.21% for Amana Income, 1.14% for Amana Growth, and 1.61% for Amana Developing World.

Please consider an investment’s objectives, risks, charges and expenses carefully before investing. For this and other important information about the Amana Funds, please obtain and carefully read a free prospectus or summary prospectus from www.amanafunds.com or by calling toll-free 888/73-AMANA.

Distributor Saturna Brokerage Services, a wholly-owned subsidiary of Saturna Capital Corporation, investment adviser to the Amana Funds and Member FINRA / SIPC.

Performance data quoted herein represents past performance and does not guarantee 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 the original cost. Current performance may be higher or lower than performance data quoted herein. Returns do not reflect the potential deduction of a 2% redemption fee on shares held less than 90 calendar days which if applied would have lowered quoted returns. The Funds cannot guarantee that their investment objectives will be met. Securities of the Fund may only be sold by offering the Fund’s prospectus. The Russell, S&P 500, and Morgan Stanley ("MSCI") indices are widely recognized indices of common stock prices which reflect no deductions for fees, expenses or taxes. Investors cannot invest directly in the indices.

¹ The Amana Developing World Fund began operations September 28, 2009.

A Fund’s performance depends primarily on what happens in the stock market. The market’s behavior is often volatile, particularly in the short-term and in periods of unusual market occurrences. Because of this, the value of your investment will rise and fall, and you could lose money. For performance current to the most recent month-end, please ask your representative, visit our Average Annual Returns Page or call us toll-free at 888/73-AMANA (888-732-6262).

A Few Words About Risk

By diversifying its investments, each Fund seeks to reduce the risk of owning only a few securities. Diversification does not assure a profit or protect against a loss in a declining market. The Growth Fund typically invests in smaller and less seasoned companies than the Income Fund, which may lead to greater variability in the Growth Fund’s returns. Growth stocks, which can be priced on future expectations rather than current results, may decline substantially when expectations are not met or general market conditions weaken.

The Funds may invest in non-U.S. companies and in foreign markets. Investing in foreign securities involves risks not typically associated directly with investing in U.S. securities. These risks include fluctuations in exchange rates of foreign currencies; less public information with respect to issuers of securities; less governmental supervision of exchanges, issuers, and brokers; and lack of uniform accounting, auditing, and financial reporting standards. There is also a risk of adverse political, social or diplomatic developments that affect investment in foreign countries.

Islamic principles restrict the Funds’ ability to invest in certain stocks and market sectors, such as financial companies and fixed-income securities. This limits opportunities and may increase risk.

Important Disclaimers and Disclosure

This report is intended only for the information of the reader, and is not to be used for or considered as an offer or the solicitation of an offer to sell or buy any securities or other financial instruments of any kind, including without limitation, any mutual fund or other product offered, sponsored, created, or managed by Saturna Capital Corporation or its subsidiaries or affiliates ("Saturna"). This report is not intended for distribution to, or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country, or other jurisdiction in which such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Saturna to any registration or licensing requirement within such jurisdiction.

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Past performance does not imply or guarantee future performance, and no representation or warranty, express or implied is made regarding future performance. The price, and value of, and income from, any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of foreign securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs — the values of which are influenced by currency volatility — effectively assume this risk.