Quarterly Azzad Funds Shareholder Letter

October 12, 2018

Dear Azzad Funds Shareholder,

The unemployment rate fell to a nearly five-decade low in September, punctuating a remarkable rebound in the 10 years since the collapse of Lehman Brothers set off a global financial crisis.

By almost any measure, the American economy is humming. Gross domestic product is on pace for its best year since the housing bubble of the mid-2000s. Consumers and businesses are the most confident they have been in years. Stock market indexes hit record highs during the quarter.

The turnaround from a decade ago is hard to overstate. In September 2008, American employers cut 443,000 jobs as the financial system collapsed around them. More than seven million more jobs evaporated in the months that followed.

But when the hiring engine finally kicked back into gear, it did so in historic fashion. The 134,000 jobs added in September made it the 96th consecutive month of growth — eight full years, double the previous record. Employers have added close to 20 million jobs during that streak.

Crucially, this growth is reaching groups that struggled in the early years of the recovery. The unemployment rates for African-Americans and Latinos are both near all-time lows. And teenagers, less-educated workers, and disabled Americans have also made progress in recent months.

Much can and will happen between now and December 31, including the midterm elections. There are a range of geopolitical events that may come to a climax, including trade deals and Brexit. Although the pre-midterm period and the months thereafter are often best times to be in stocks, it does not take much to upset an aging bull market, as we saw with the volatility that kicked off the beginning of October. Rather than run to the sidelines in an uncertain environment, however, our portfolio managers continue to defer to the strong fundamentals in the economy and earnings, which argue for remaining fully invested and riding out the market’s ups and downs.

To discuss your financial goals and how to meet them, please contact an Azzad investment advisor at 888.86.AZZAD. Thank you for your continued trust and investment.

Sincerely,


Joshua A Brockwell
Investment Communications Director
Azzad Asset Management

 

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund returned 5.99% for the third quarter of 2018, trailing the Russell MidCap® Growth Index’s 7.57% return.

According to ADJEX sub-advisor Ziegler Capital Management, the software and services industry was once again the Fund’s best performing industry. Square remains one of the premier growth stories, says Ziegler, with its software platform enabling small businesses encouraging quick adoption. Verisign’s strong, steady performance continued thanks to demand for .com domain names in the U.S. and China.

Within the health care sector, DexCom re-established its competitive position of best-in-class technology in the continuous glucose monitoring space. Donaldson’s earnings showed management’s focus on high return of capital can overcome some of the headwinds seen in the engine products industry.

Rounding out top contributors to return, O’Reilly Automotive posted strong same-store sales for the first half of the year, quelling concerns that online entrants could disrupt the do-it-yourself auto repair space.

Top Contributors to Total Return (6/30/2018 to 9/30/2018)

 

Top Detractors from Total Return (6/30/2018 to 9/30/2018)

 

Ziegler reports that stocks hurting performance were found mainly in the information technology sector. Twitter had a tough quarter, due in part to lower near-term growth projections. IPG Photonics was hurt by increasing uncertainty in international trade, as its high performance lasers are sold to a number of Chinese manufacturers. Microchip Technology’s earnings forecast was impacted by unforeseen difficulties in absorbing a large acquisition, as well as worries about the semiconductor cycle. Zillow Group fell on worries about a slowing real estate market and issues with a new line of business. Lastly, Lear fell as investors reacted to a cautious profit margin forecast from management.

At the start of the fourth quarter, Ziegler took gains within the software industry and purchased capital goods stocks trading at what they believe to be attractive valuations. And while Ziegler maintains exposure to a number of companies with solid profit growth projections, they continue to favor companies they believe can grow earnings in a steady fashion and convert them to cash that can in turn fund further growth prospects.

Azzad Wise Capital Fund (WISEX)

The Azzad Wise Capital Fund gained 0.88% for the third quarter, outperforming its benchmark, the ICE BofAML 1-3 Yr. U.S. Corp. & Govt. Index, which returned 0.35%.

Negative news flow that included strained Turkish-U.S. relations, continued global trade tensions, and the political standoff between the E.U. and Italy, were the key culprits behind the poor market sentiment in the third quarter, according to WISEX sub-advisor Federated Investment Management Company.

In the fixed income space, a generally downbeat tone pushed U.S. Treasury yields lower through most of the quarter, but investors saw a sharp reversal upwards in the second half of September. Despite the positive impact to prices from falling benchmark yields, U.S. dollar-denominated sukuk failed to maintain prices as credit spreads widened on the back of receding emerging market risk appetite. However, as Treasury yields rose towards the end of the quarter, Federated reports that the sukuk market (especially the front end of the curve) remained more resilient.

Over the third quarter, the sukuk and trade finance portions of the portfolio posted a solid positive return against the index. Federated’s investment in the Goldman Sachs 2019 sukuk was the top performer. Offering sukuk investors diversification benefits from a non-traditional sukuk issuer, the GS sukuk also benefited from solid second quarter earnings from the bank.

The Pakistan 2019 sukuk also contributed to the Fund’s overall outperformance, as the country underwent a successful and peaceful election, which ushered in a new prime minister dedicated to economic reforms, an anti-corruption drive, and an I.M.F. bailout package. The Jebel Ali Free Zone Authority 2019 sukuk outperformed via its tender by parent group Dubai Ports World.

Other Fund investments in the G.C.C. region such as Oman Government sukuk 2024, Qatar Telecom/Ooredoo 2018, and Emaar 2019 also contributed as the G.C.C. region proved a popular safe heaven during wider emerging market volatility. Securities that had negative contributions to the Fund included the newly issued Dubai Ports World 2028s, the Turkey 2023, and the I.C.D. 2020 sukuk.

On the trade finance front, notable performers this quarter include the Fund’s Pakistan transaction to fund oil products to the Pak-Arab Refinery, which made a positive contribution. The Gambia transaction, in which the borrower is the Ministry of Finance and the deal covers the import of oil and food, also contributed to outperformance, as did the Fund’s deal with the government of Egypt to finance importing refined oil products.

The Islamic bank deposit allocation remained broadly stable during the quarter, except for the Fund’s remaining Turkish position, which Federated closed out during the quarter. Looking forward, Federated expects to see a positive impact on bank profit rates as interest rates rise in the U.S. They expect to lock in higher profit rates in the first quarter of 2019.

 

The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the portfolio managers as of September 30, 2018. 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 BofAML US Corporate & Government 1-3® Yrs 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.