Quarterly Azzad Funds Shareholder Letter

July 13, 2018

Dear Azzad Funds Shareholder,

The second quarter of this year could be called many things, but boring isn’t one of them. The beginnings of a trade war between the United States and China, as well as major allies, heated up during the period. Favorable corporate earnings reports helped calm some of the global economic angst investors may have felt, but that could only do so much as saber rattling continued apace through the period.

For the second quarter, all three major indexes ended in the green, with the Dow up 0.7%, the S&P 500 up 2.9%, and the Nasdaq climbing 6.3%. For the first half of the year, the Dow is down 1.8% and the S&P 500 is up 1.7%. The Nasdaq is up 8.8%.

The Federal Open Market Committee raised the federal funds target range rate for the second time this year, bumping the range up by 25 basis points following the committee’s June meeting. The target range now sits at 1.75%-2.00%. The committee cited continued strengthening in the labor market and increased household spending as justifications for the rate hike. Also of note, the committee forecasts the median funds rate to be 2.4% by year’s end instead of 2.1% as forecasted in March. This means two more rate hikes could be in the offing before the end of the year.

Money managers say that when the Fed started to unwind its bond-buying program and raise interest rates, borrowing costs for businesses went up. Higher borrowing costs mean that heavily indebted companies — the kind that were able to stay afloat when credit was easy to come by — will likely lag compared to higher-quality firms with stronger balance sheets.

With higher borrowing costs now a reality, price differences between laggards and top-performing stocks have widened. This has created opportunities for active portfolio managers to find bargains.

For questions about your account, please contact an Azzad investment advisor at 888.86.AZZAD. Thank you for your continued trust and investment in the Azzad Funds.

Sincerely,


Jamal Elbarmil
Vice President
Azzad Asset Management

 

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund rose 4.04% in the second quarter of 2018, topping the 3.16% total return posted by the Russell Midcap® Growth Index. According to ADJEX sub-advisor Ziegler Capital Management, U.S. stocks seemed exceptionally focused on the prospect of 20% year-over-year earnings growth, brought about by the tax reform legislation passed in late 2017. The rally in growth stocks, they say, continues unabated, with growth outperforming value by 4.6% in the second quarter. For the year, growth has outperformed value by nearly 9%.

The second quarter saw continued outperformance by Ziegler’s software picks.

Tableau Software is used by a number of Fortune 500 companies to help users visualize large amounts of data.

Citrix Systems, the Fund’s largest holding during the quarter, specializes in virtualization software and other connectivity solutions for the modern office.

Verisign may not be a household name, but it’s involved in the registration of the .com and .net domains that we use each day. All three were among the top contributors to outperformance.

Top Contributors to Total Return (3/31/2018 to 6/30/2018)

 

The companies that did not fare as well came from several industries.

Apparel and footwear brand Skechers suffered a large sell-off after posting a quarter with disappointing margins and conservative 2Q guidance.

Construction and industrial supplier Fastenal fell back on concerns over its margins and long-term pricing power.

Lam Research was hurt by fears of a semiconductor industry slowdown, which would curb demand for its equipment.

The portfolio also had a couple names hurt by fears over tariffs, according to Ziegler. Recreational vehicle manufacturer Thor Industries called out the prospects of higher steel and aluminum prices as a threat to profits, while Wabco Holdings had to deal with price and volume uncertainty due to possible actions in the automotive and truck industries.

Top Detractors from Total Return (3/31/2018 to 6/30/2018)

 

The Azzad Ethical Fund recently underwent what will likely be its largest repositioning of the year, reflecting the annual changes that occurred in its benchmark. The Fund added to its information technology and health care holdings, keeping up with the moves in the underlying benchmark. These came at the expense of the industrial and consumer staples sectors.

Ziegler finds the current market environment intriguing, noting that investors appear to have placed a high premium on growth. While Ziegler’s investment team has increased the Fund’s exposure to some of this growth, they remain mindful of elevated valuations and the long-term importance of cash flows. These cash flows can fund the projects that lead to future growth, but can also provide security during a slowdown.

 

Azzad Wise Capital Fund (WISEX)

The Fund returned 0.08% for the quarter, underperforming its benchmark, the ICE BofAML US Corporate & Government 1-3 Yrs. Index, which returned 0.29%.

According to WISEX sub-advisor Federated Investment Management Company, fears of a global trade war weighed heavily on international markets during the quarter, particularly emerging market currencies and equities.

Meanwhile, Turkish President Recep Tayyip Erdogan’s commanding victory in Turkey’s general elections further rattled markets. Investors have become increasingly concerned about Turkey’s ability to fund its current account deficit given Erdogan’s vocal opposition to raising interest rates despite annual inflation topping 15% in June.

Against this backdrop, sukuk traded off with international equities, with shorter maturities and defensive issuers outperforming.

Drilling down into the portfolio, Federated reports that the top performing securities were shorter-dated, high-quality sukuk. Those included the Fund’s Emaar Properties 2019s, Qtel 2018s, Aldar Properties 2018s, Dubai Investments 2019s, and Dubai Ports 2019s. Detracting from performance were longer-dated sukuk, including ADIB perpetuals; DP World 2023s; Indonesia 2027s; and Goldman Sachs 2019s.

Looking ahead to the third quarter, Federated remains cautious about developments in Turkey as well as trade negotiations between the U.S. and its partners. Federated continues to manage duration with the Federal Reserve’s comments on rates in mind and expects the new issuance calendar to remain light through the rest of the summer.

 

The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the portfolio managers as of June 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.