Quarterly Azzad Funds Shareholder Letter
April 12, 2018
Dear Azzad Funds Shareholder,
The first quarter of 2018 was a volatile one for U.S. equities, with a quick start to the new year all but erased by large drops in February and March. This stands in stark contrast to the relatively placid 2017. To illustrate, the S&P 500 had more days when it was up or down by 1% or more in the first quarter of 2018 than it did during all of 2017.
Quarterly earnings reports gave analysts another layer of complexity to consider, as companies detailed the mostly positive (but sometimes negative) effects that the Tax Cuts and Jobs Act of 2017 would have on current earnings and future prospects. Within the mid-cap growth space, where the Azzad Ethical Fund invests, this led to renewed outperformance in the information technology and health care sectors; these stocks had been hurt in prior months because they were not seen as primary beneficiaries of the cut in corporate tax rates.
It was another exceptional quarter for growth stocks, as they outperformed their value-oriented peers by more than 4%. Small caps outperformed large, but the gap was less than one percent. From an investment factor perspective, we saw some interesting trends. Given the disparity between growth and value performance, it should be no surprise that traditional valuation factors had another tough quarter, or that stocks with strong historical growth records and price momentum were among the best performers.
As we’ve seen over the last few months, volatility is back. In the face of such uncertainty, investors should be prepared for the ups and downs in their portfolios 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 Asset Management
Azzad Ethical Fund (ADJEX)
The Azzad Ethical Fund rose 2.33% in the first quarter of 2018, beating the 2.17% total return posted by the Russell Midcap® Growth Index. According to Fund sub-advisor Ziegler Capital Management, one driver of outperformance that emerged during the quarter was some strong stock selection in the software and services industry.
Square is revolutionizing the mobile payments industry, Ziegler says and its further potential was on display in this quarter’s earnings presentation.
Tyler Technologies designs software for municipalities, helping them upgrade outdated systems that have outlived their usefulness.
ServiceNow helps its corporate customers automate and integrate their enterprise technologies using cloud-based software.
According to Ziegler, all of these companies exhibit exceptional growth potential within their specific industries, and their management teams have taken the right steps to make the most of those opportunities. Another driver that emerged was an increase in mergers and acquisitions within the portfolio. This is exemplified by Dr. Pepper Snapple, which is merging with Keurig Green Mountain, giving the portfolio’s return a boost.
Top Contributors to Total Return (12/31/2017 to 03/31/2018)
Stocks with disappointing results were scattered over several industries.
Poultry producer Pilgrim’s Pride gave back much of 2017’s rally, as investors started to fear what the rising price of feed and a glut of supply might do to margins.
Thor Industries saw a sell-off, brought on by fears that America might be at a cyclical peak for recreational vehicle sales.
Quanta Services, a contractor for the utilities and energy industry, declined on uncertainty around infrastructure spending.
Federal Realty Investment Trust is a quality operator of high-end shopping centers, but even it was not immune from the ongoing fears about the future of traditional retailing.
Carter’s also sold off after its earnings reports stoked fears about a slowdown in its physical stores, overlooking big strides made in its online and third-party channels.
Top Detractors from Total Return (12/31/2017 to 03/31/2018)
Ziegler’s portfolio manager has noted with some bemusement that profit estimates for the first quarter continue to rise as stocks undergo a swift price correction. The net result is a market becoming cheaper on a P/E basis than it was at the end of 2017.
By these measures, Ziegler says, U.S. equities are at their cheapest levels since mid-2016. It also points out that the recent implementation of tariffs by the U.S., and retaliatory measures by China, serve as a threat to profit margins for firms both at home and abroad and may inhibit global economic growth.
The Azzad Ethical Fund was recently repositioned to add to the industrial and health care sectors, trimming some of the Fund’s exposure to technology and consumer staples. As Ziegler moves forward into the year, their outlook is buoyed by a number of signs that the U.S. economy remains strong. It will be watching, however, for tell-tale late economic cycle signs that those growth prospects could fade—an environment in which its focus on quality growth stocks should be favored.
Azzad Wise Capital Fund (WISEX)
The Fund returned -0.40% for the quarter, underperforming its benchmark, the ICE BofAML US Corporate & Government 1-3 Yrs Index, which returned -0.19%.
According to WISEX sub-advisor Federated Investment Management Company, the downturn in global equity markets last quarter revitalized demand for the safe harbor characteristics of global bonds, particularly government-issued debt. Consequently, global bond markets were generally up in the quarter, although lower quality sukuk did trade off in sympathy with equities.
The Azzad Wise Capital Fund’s allocation to Islamic bank deposits and Islamic trade finance (29% and 8%, respectively), as well as the short duration of the 48% sukuk allocation, helped insulate the Fund from much of the volatility seen in longer dated, more volatile sukuk, which tend to perform in line with equities.
Drilling down into Fund holdings, the top performing securities were sukuk on the front end of the curve, including the Turkish Islamic bank TF Varlik Kiralama 2018s, Sharjah Islamic Bank 2018s, FlyDubai 2019s, Abu Dhabi Islamic Bank 2019s, and Dubai Water and Electricity Authority 2018s. The top detractors came from the long end of the curve and included the KSA 2027 sovereign, Oman 2024 sovereign, and Indonesia 2027, 2024, and 2022 sovereign sukuk.
On a fundamental basis, Federated reports that a number of the Fund’s sukuk issuers continue to maintain solid balance sheets with a strong deleveraging profile.
Federated also says that with oil prices averaging $67 over the reporting period, emerging market and Middle Eastern countries have more of a sense of stability from a macro perspective. This bodes well for sovereign sukuk.
Looking ahead, despite the volatility seen in equities, Federated expects a robust new issuance calendar, including seasoned issuer Saudi Arabia as well as infrequent or inaugural issuers such as Morocco.
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 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.