Azzad Funds semi-annual report shareholder letter

December 31, 2016

Dear Azzad Funds shareholder,

Enclosed is your copy of the Azzad Funds semi-annual report, in which you will find a brief market commentary and a review of the performance of your investments for the six-month period ending 12/31/16.

Donald Trump’s presidential win in November was the headline event during the period. Domestic equity markets viewed the victory as a catalyst for increased growth and rallied into year-end. Fixed income markets were mixed. Islamic markets sold off moderately on the news with longer dated sukuk selling off 1-2 points, much of which was due to the rise in U.S. Treasury yields.

President-elect Trump’s comments on increased infrastructure and military spending in conjunction with tax reform plans raised inflation expectations and increased deficit concerns. Consequently, government and investment grade corporate yields rose steadily, with the U.S. 10-Year Treasury note testing yields of 2.60%. (Yields and bond prices move in opposite directions.) On the other hand, high-yield corporate paper tracked equities and finished the quarter higher, driven in part by rising energy prices.

As a whole, 2016 did not start off well for equities, but by the end of the year, major indexes posted year-over-year gains, some reaching all-time highs. Most of the gains in equities happened during the second half of the year as favorable corporate earnings, resurgent oil prices, and accelerating consumer income and spending encouraged investors to trade.

 

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund gained 3.08% for the six months ending 12/31/16, trailing the Russell Midcap Growth’s 5.07% gain. Within the portfolio, a couple of areas stood out as driving performance. Much of the fund’s underperformance was concentrated within the semiconductor industry, where one index constituent that the fund did not own because of valuation concerns continued its impressive move higher. While missing such opportunities can be frustrating, fund sub-advisor Ziegler Capital Management remains mindful of the risks of chasing such names.

The fund’s healthcare stocks outperformed the index by a good margin. Outperformance was seen in the pharma and biotech industry, where several of the fund’s holdings posted promising clinical results. The portfolio tends to favor names that offer proven, marketed products along with promising pipelines. The fund also experienced good returns from the industrials sector, specifically the transportation industry. Several of the portfolio laggards were within the consumer space.

The portfolio’s positioning has seen some changes. Ziegler increased the fund’s overweight to the healthcare equipment industry as valuations there became more compelling. The tech hardware space went from an underweight to an overweight, as the manager added a proven earnings growth story that passed quantitative screens. Ziegler reduced the fund’s underweight to the capital goods sector and reduced its overweight to the troubled retailing industry, taking some gains in transportation names.

The start of 2017 began with encouraging signs for the fund. In 2016, we saw value outperform growth by a sizable margin; the start of 2017 showed a bit of trend reversal. On a historic valuation basis, growth remains attractive relative to value. A recent increase in mergers and acquisition activity within the portfolio serves as a reminder that the fund’s holdings are often some of the most attractive to larger companies who may want to boost their growth profile. The portfolio manager continues to look for opportunities that exhibit compelling growth profiles at reasonable valuations to the broader market.

Looking forward, Ziegler believes that we are seeing a market in transition: in their view, what has been a monetary policy-driven bull market needs to become an earnings-driven market to continue. Political events during the period, both in the U.S. and abroad, have left investors with new questions to consider regarding those earnings. The hypothetical reduction of tax rates would raise earnings, and the repatriation of cash overseas could help spur merger activity. Still, the timing and scope of such measures remains to be seen.

 

Azzad Wise Capital Fund (WISEX)

During the six-month period, the Azzad Wise Capital Fund returned -0.23%, outperforming the Bank of America Merrill Lynch US Corporate & Government 1- 3 Year Index return of -0.36%. The yield on the benchmark 10-year U.S. Treasury bond continued its slow climb off the multi-year low in July of 2016. The surprising U.S. election result lifted hopes for a pro-growth change in economic policy, which further increased bond yields and inflation expectations.

Throughout this period, certain holdings in the Azzad Wise Capital Fund also saw a moderate degree of volatility, particularly in the fourth quarter where some longer-dated issues traded off due to a steepening yield curve. This was offset in large part by the fund’s allocation to Islamic bank deposits, very short-dated sukuk, and cash holdings, all of which performed well during the period with minimal volatility.

The fund’s sukuk in general showed less volatility versus emerging market fixed income during period. Fund sub-advisor Federated Investment Management Company reduced duration during the period by increasing exposure to short-term sukuk and Islamic bank deposits.

The second half of 2016 saw new sovereign issues from Pakistan, Malaysia, Oman, Indonesia, and Turkey, some of which the fund participated in. Federated continues to welcome new issues as they add depth to the market and allows them to further diversify the portfolio. During the six-month period, the fund’s holdings in Islamic bank deposits grew from 29% to 33%.

Going forward, Federated remains cautious on duration and the impact of rising U.S. Treasury yields on emerging market sukuk issuers in the Middle East/North Africa region. At the same time, they see event risks — particularly on the geopolitical front in Europe, China, Turkey, and South Africa — that could put pressure on Treasury yields in a flight to quality. That, in turn, could slightly temper the fund’s current duration underweight.

As rates rise, the portfolio manager expects to see more attractive profit rates on Islamic bank deposits and will look to add additional banks to the portfolio. They also expect to see more attractive rates in Islamic trade finance and thus a greater allocation for the fund in 2017.

Regardless of market environment, remember that your asset allocation should be aligned with an appropriate investment strategy. To discuss your goals and how to meet them and to get answers to any other questions you might have at no additional charge, please contact an Azzad investment advisor at 888.86.AZZAD.

Thank you for your continued trust and investment in the Azzad Funds.

Jamal Elbarmil
Vice President

The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the portfolio manager as of December 31, 2016. Those views may change, and the Funds disclaim any obligation to advise investors of such changes. The Azzad Funds are self-distributed and available by prospectus only. A free copy of the prospectus, which contains information about the Funds’ risks, fees, and objectives, and other important information, is available at www.azzadfunds.com or by calling 888.350.3369. The Bank of America Merrill Lynch US Corporate & Government 1-3 Year Index tracks the performance of US dollar-denominated investment grade Government and Corporate public debt issued in the US Domestic bond market, excluding collateralized products. The Midcap Growth Index measures the performance of the midcap growth segment of the U.S. equity universe. It includes those Russell Mid Cap Index companies with higher price to book ratios and higher forecasted growth values. The index is unmanaged and an investment cannot be made directly in this or any other index.