Quarterly Azzad Funds Shareholder Letter
January 12, 2018
Dear Azzad Funds Shareholder,
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. Beginning in March 2009 and now more than 3,000 days old, this bull market in stocks is the second-longest on record. It has been fueled by several factors; chief among them are relatively low inflation, low interest rates, synchronized global growth, and strong corporate earnings.
Questions persist, however, about how long this “Goldilocks” economy can continue to support stocks. In the face of such uncertainty, investors should be prepared for pullbacks and an uptick in volatility by making sure their asset allocations are appropriate for their time horizons and objectives. For questions, please contact an Azzad investment advisor at 888.86.AZZAD. Thank you for your continued trust and investment in the Azzad Funds.
Azzad Ethical Fund (ADJEX)
The Azzad Ethical Fund returned 6.13% for the fourth quarter, trailing the 6.81% posted by the benchmark Russell Midcap® Growth Index. According to Fund sub-advisor Ziegler Capital Management, the anticipation and passage of the Tax Cuts and Jobs Act of 2017 was one of two major themes during the final three months of the year. Investors bid up industries and companies that they felt would benefit from the legislation. Companies with domestic markets or high income tax rates saw increased buying interest. On the other hand, companies that were already paying low tax rates may have lagged because of the expected legislation. According to Ziegler, this helps explain underperformance in health care and information technology.
The second theme was the rally in the downtrodden retail sector. Strong holiday sales may have given traditional retailers a respite, Ziegler says, and long-term bargain hunters may have been snapping up some shares that appeared to be on sale. Other notable outperformers included the capital goods industry (another tax reform beneficiary) and the consumer staples sector.
The Fund’s largest detractors for the quarter came in health care. Henry Schein sold off after a rare earnings miss that stoked worries about long-term margins. Cooper Companies sold off on worries that future share gains in the contact lens space will not be as robust. Ziegler believes that both of these companies have quality management teams that have navigated growth concerns before, but also that these are long-term issues that bear watching. Pandora Media had a challenging quarter, as experts remain skeptical about changes in the industry’s largest digital music service. Tableau Software gave back some of its impressive gains after earnings prompted worries about longer sales cycles and the company’s switch to a subscription model. Finally, long-time Fund holding Skyworks Solutions sold off, hurt by concerns that demand for the new iPhone was less robust than expected.
The top contributors to the Fund’s total performance came from a broad cross-section of the market. Carter’s is a manufacturer of children’s clothing, through its own brands as well as private label business for several large retailers, and Ziegler believes that the company has shown it is managing the switch to online retail well. Steel Dynamics enjoyed strong demand and price increases and was one of the biggest beneficiaries of the tax reform legislation. Citrix Systems was one of the Fund’s largest holdings, and eased investor worries after reporting strong margins. TransUnion had a strong rally, and Ziegler says that it may benefit further from the legal trouble of one of its competitors. Rockwell Automation’s gains were the result of takeover rumors swirling around the systems specialist.
The Azzad Ethical Fund’s portfolio was rebalanced at the start of 2018, taking into account some of the impressive moves in the market last year. The Fund reduced its exposure to the technology sector, booking some of the sector’s outsized gains. The portfolio also reduced its weight in the industrials sector, though Ziegler maintained the Fund’s current weight in capital goods, which could benefit from the recently passed tax legislation. Ziegler added to the Fund’s the health care exposure, where they believe that some of the more compelling valuations still reside. Overweights to the materials and consumer staples sector were also increased. While the market’s 2017 returns are impressive, Ziegler is looking forward to 2018 and the opportunities inherent in a strong economy.
Azzad Wise Capital Fund (WISEX)
The Fund gained 0.47% for the quarter, outperforming its benchmark, the BofAML US Corp. & Govt. 1-3 Yr. Index, which returned -0.22%.
According to Fund sub-advisor Federated Investment Management Company, the fourth quarter topped off a constructive year for Islamic finance. Demand for sukuk remained robust, with total global issuance for the year finishing at $97.9 billion, the highest level since 2014. These levels were underpinned by issuances from Gulf Cooperation Council countries hoping to further develop their Islamic finance industries.
The positive performance for the entire year notwithstanding, the fourth quarter saw overall flatter sukuk returns as global sovereign yields rose on increased inflation and growth outlooks signaling a forthcoming policy change. However, less duration-sensitive, shorter-dated sukuk, like those in which the Azzad Wise Capital Fund primarily invests, continued to outperform the broader market.
Drilling down into the portfolio, the Fund’s top performing securities for the period included Dubai Islamic Bank perpetual sukuk (+1.10%); Kuwaiti EQUATE 2024 sukuk (+1.09%); Oman sovereign sukuk (+1.06%); Indonesia sovereign 2027s (+0.83%); and FlyDubai 2019 sukuk (+0.82%). The top detractors included KSA sovereign 2022s (-0.33%); Malaysian Axiata 2020 sukuk (-0.24%); Saudi Arabian SECO 2022s (-0.07%); and UAE Emaar properties 2019 sukuk (-0.01%).
Looking ahead to the first quarter of 2018, Federated sees a gradual approach to monetary policy normalization resulting in higher yields and a steeper curve. It feels, however, that 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. It also expects to continue growing the Fund’s allocation to Islamic trade finance in the first quarter while slightly reducing bank deposit positions. Federated continues to monitor the geopolitical situation in Saudi Arabia and Qatar but remains comfortable with current positions there. It is growing less comfortable with the current economic climate in Turkey and has therefore reduced positions in both sukuk and bank deposits.
The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the portfolio managers 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 Bank of America Merrill Lynch U.S. Corporate & Government 1-3® Year Index tracks the performance of U.S. dollar-denominated investment grade government and corporate 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. Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Azzad Asset Management’s presentation thereof.