Azzad Funds semi-annual shareholder letter

February 14, 2018

Dear Azzad Funds Shareholder,

Enclosed is your copy of the Azzad Funds semi-annual report, in which you will find a review of your investments from the six-month period beginning July 1, 2017, and ending December 31, 2017.

It was a big year for the stock market, with major indexes hitting new highs throughout the year. Markets ended the year on an even more upbeat note once it became clear that the Tax Cuts and Jobs Act would become law. Prior to that, the bull market was driven by several factors, most notably low inflation, low interest rates, synchronized global growth, and strong corporate earnings.

The second half of 2017 was also a banner time of growth for the global sukuk market in terms of total assets as well as total returns. Underpinned by larger sovereign issuers such as Pakistan and Bahrain, issuances for the period well outpaced the second half of 2016.

Looking ahead, the U.S. and global economic expansion remains healthy. Barring some exogenous shock from a geopolitical event or other unforeseen crisis, the odds of a recession in 2018 appear low. However, as global economies strengthen, the risk heightens that strong inflation will force a more rapid tightening of financial conditions by monetary authorities. Tax reform will boost corporate earnings, particularly for companies with primarily U.S.-based operations and customers, which may serve as a tailwind for mid-sized companies versus large multinationals.

If you would like to discuss your financial goals and how investing can help you meet them, please contact an Azzad investment advisor at 888.86.AZZAD. Thank you for your continued trust and investment.

Sincerely,

Jamal Elbarmil
Vice President

 

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund gained 10.25% for the six months ending December 31, 2017, but trailed the 12.45% rise in its benchmark, the Russell Midcap® Growth Index. According to sub-advisor Ziegler Capital Management, the Fund’s best results were in the technology hardware space, along with materials and consumer durables.

nderperformance was concentrated in three industries; health care equipment and services space was the Fund’s largest detractor, followed by software and services, and retailing.

The Fund’s investment universe, when adjusted for its ethical screens, lagged the unrestricted benchmark, which served as a headwind to the Fund’s relative performance. Part of this can be attributed to the cheap cost of debt incentivizing some quality companies to take on levels of debt that exceed Azzad’s thresholds, making them ineligible for investment.

Additionally, Ziegler finds that investors generally bid up stocks with the rosiest future growth projections over stocks with proven historical track records.

Top Contributors to Total Return for 6/30/2017 to 12/31/2017

The Fund’s top performers reflect its overweight in information technology. Lam Research was the biggest positive contributor to return, as semiconductor manufacturers continued to order more of their products to keep up with demand.

IPG Photonics benefited from greater international demand for its fiber lasers in several industries.

VeriSign continued to move higher, aided by its dominant position in the internet domain registry space. Rockwell Automation benefitted from takeover rumors but also from solid demand for its productivity-enhancing designs.

Finally, Carter’s, a maker of children’s apparel, has managed the switch online and to larger retail channels better than its peers.

Top Detractors to Total Return for 6/30/2017 to 12/31/2017

 

The stocks that hurt Fund performance came from multiple industries.

The Fund had owned shares of Equifax on the day that its online security breach was exposed; that position has since been reduced.

Dental products distributor Henry Schein was hurt by fears of online competitors.

As a retailer, Ulta Beauty is dealing with fears about online competitors, but also has to compete with traditional department stores trying to use their own beauty counters to drive in-store traffic.

Dick’s Sporting Goods had a tough six months, as competitor bankruptcies and online entrants hurt sales.

Intercept Pharmaceuticals lost half of its value over safety concerns surrounding its drug for liver diseases.

Ziegler adjusted the Fund’s positioning to emphasize areas where it sees opportunity in the marketplace. Fund overweights in commercial and professional services as well as transportation stocks were reduced, as Ziegler believes certain holdings have reached fair value. The Fund added to the retailing space as price momentum has picked up for the group, and increased holdings in the food and beverage sector, reflecting a better pricing environment.

 

Azzad Wise Capital Fund (WISEX)

The Fund gained 1.24% for the six months ending December 31, 2017, outperforming its benchmark, the ICE BofAML US Corp. & Govt. 1-3 Yr. Index, which returned 0.16%.

According to WISEX sub-advisor Federated Investment Management Company, the second half of 2017 saw growth in the U.S. dollar global sukuk market in terms of total assets as well as a positive total return. Underpinned by larger sovereign issuers such as Pakistan and Bahrain, this growth outpaced the second half of 2016.

Despite increased geopolitical risk considerations in the region, demand for sovereign sukuk remained robust. This was driven in large part by Islamic retail banks using risk-weighted sovereign sukuk to satisfy regulatory liquidity requirements. The period also saw a reduction in price differential between similar sukuk and conventional paper. As conventional investors’ familiarity with the asset class increased, the risk and liquidity premiums have narrowed.

The positive performance for the entire six months notwithstanding, December saw overall flatter to negative sukuk total returns resulting from a rising yield curve on increased inflation and growth outlook. However, the less duration-sensitive, shorter-dated sukuk, in which the Fund is primarily invested, continued to outperform the broader market.

Drilling down into the Fund itself, the top performing sukuk for the six-month period were Indonesia 2027; Oman 2024; Dubai Islamic Bank Perpetual; Abu Dhabi Islamic Bank Perpetual; and Indonesia 2024. The top detractors for the period were EMAAR Properties 2019; Pakistan 2022, Mazoon 2027, Axiata Group 2024; and SECO 2022

Looking ahead to the first quarter of 2018, Federated sees a gradual monetary policy normalization resulting in higher yields and a steeper curve. However, they feel geopolitical and event risk is not being priced in by investors and therefore remains closer to neutral. Federated expects to see primary global sukuk issuance somewhat below last year’s levels, which will provide a positive technical backdrop for existing issuance. They also expect to continue growing the Fund’s allocation to Islamic trade finance in the first quarter while slightly reducing bank deposit positions.

Finally, Federated continues to monitor the geopolitical situation in Saudi Arabia and Qatar, although they reportedly remain comfortable with the current positions. They are less comfortable with the current economic climate in Turkey and have reduced positions in the Fund’s sukuk and bank deposit allocations accordingly.

The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the Azzad Funds portfolio managers and sub-advisors as of December 31, 2017. 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 ICE Bank of America Merrill Lynch U.S. Corporate & Government 1-3 Year Index tracks the performance of U.S. dollar-denominated investment grade corporate and government public debt issued in the U.S. Domestic bond market, excluding collateralized products. The Russell Midcap® Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap® 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.