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Saturna Seeks to Generate High Income Through Flexible Fund

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These days, more investors are looking to generate high income through their investments, but in a world where yields are low and, by many accounts, are likely to remain low for the foreseeable future, that isn’t an easy thing to do.

Saturna Capital’s Sextant Global High Income Fund seeks to do the needful by focusing on generating yield through a go-anywhere, global mandate. The fund invests across geographies and asset classes, and with a strict focus on risk management, looks for high yielding names across a spectrum of asset classes that includes emerging market equities, high yield bonds, dividend stocks and preferred securities.   

“There are a number of specific high yield bond funds and equity income funds but we really didn’t see anything out there that has a balanced mandate, or an allocation approach with the objective of achieving high income within framework,” said Bryce Fegley, who co-manages the portfolio with John Scott. “We thought it an attractive way to invest because you can get diversification and also, by being in different asset classes, you don’t have to ride the credit cycle up and down.”

The Sextant Global High Income Fund adjusts its allocations to individual securities to manage industry, country, currency, inflation, interest rate, liquidity, and credit cycle risks. It also looks to capitalize on periodic stress in leveraged credit markets, which may result in more volatile current income in exchange for more attractive long-term, risk-adjusted total returns in a way that’s consistent with its investment objective.

“I think more in terms of a defensive asset allocation framework,” Fegley said, “looking at geographies, currencies and the relative attractiveness of various countries, in order to create target buckets for where we want to weight the portfolio.”

It’s up to Scott to then come up with the individual investment ideas that not only fit in those buckets and offer good value, but also have the potential to create income.

“Right now, we see a lot of value in Europe as it is in a deflationary environment, which bodes particularly well for fixed income, so we are over-weighted toward European fixed income and European equities,” he said.

Currently, one of the fund’s top holdings is Daimler, the German car company.

“It’s suffering more from the macro bearishness in Europe than anything else but if you look beyond that, the company has a very strong global franchise with Europe accounting for only a small part of its revenue,” Scott said. “Emerging markets will provide steady growth to Daimler in the years to come and it makes sense for us as an investment because we’re getting a 4% dividend yield compared to 2.5% for the 10-year Treasury.”

Because it has such a broad mandate, the Sextant Global High Income Fund is able to use diversification to its fullest advantage.  Exposure to a particular asset class is capped at 50% for common stocks; 50% for U.S. issuers, 50% for bonds rated A-3 or higher and 33% for emerging market securities. But its flexible mandate also allows for a better handle on risk management, Fegley said, which is key to the success of the fund.

“We’re seeking to provide a higher level of income for retirement oriented investors, so it’s good that we have a product in which we can put equity, for instance, at a time when the payment for bearing U.S. and European credit risk hasn’t been very attractive,” he said. “We also have our portfolio more tilted toward high quality high yield bonds because we haven’t felt the risk of dropping down the credit trough is worth the paltry yields, and we can also make for that on the equity side.”