Azzad Funds annual shareholder letter
August 7, 2018
Dear Azzad Funds shareholder,
Enclosed is your copy of the 2018 Azzad Funds annual report. In it, you will find a review of your investments from July 1, 2017 to June 30, 2018—the fiscal year for the Funds.
For much of the Funds’ fiscal year, U.S. investors were focused on discerning potential winners and losers from the Tax Cuts & Jobs Act of 2017, focusing on stocks that could benefit most from a lower tax rate and an environment that would encourage capital spending.
Growth outperformed value by more than 10%, a relatively steady trend throughout the year. When market volatility made its triumphant return as 2018 began, it brought new investment opportunities for the Azzad Ethical Fund.
For fixed income, rising rates finally caught up with investor optimism during the second half of the period. The downturn in global stocks increased demand for the safe harbor characteristics of global bonds, particularly government-issued debt. Consequently, global bond markets were generally up in the fiscal third quarter, although lower-quality issuers and subordinated sukuk underperformed in sympathy with equities.
Sukuk continued to trade off into fiscal year-end with shorter maturities and defensive issuers outperforming, which helped the Azzad Wise Capital Fund’s total return.
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.
Joshua A. Brockwell
Director, Investment Communications
Azzad Ethical Fund (ADJEX)
During the one-year period ending June 30, the Fund rose by 17.37%, underperforming the Russell MidCap Growth® benchmark’s 18.52% return. According to sub-advisor Ziegler Capital Management, mid-cap growth was among the best performing areas of the market over the period, with particular strength in the technology and financials sectors, and to a lesser extent, energy. While the Fund’s ethical restrictions may have served as a slight headwind this year, the Fund’s focus on reasonable valuations was more detrimental and has yet to be rewarded.
The retail industry was a source of underperformance. The Fund held a couple of prominent traditional retailers that posted above average but slowing sales and profit growth rates, sparking concerns over their long-term strategies. Within this industry, Ziegler aims to focus on companies with observable competitive advantages that online peers might not be able to duplicate or negate.
A second area of concern was the health care equipment and services industry. Two holdings suffered from price erosion and slowing end-market growth. These companies have quality managements that have successfully weathered industry changes before, according to Ziegler, but the portfolio manager still took steps to improve relative growth exposure to other names in the sector as a precaution.
There were several areas of outperformance for the Fund. The first was the software and services industry. Two of the Fund’s best-performing holdings are in the business of registering new internet domain names, an area that has seen steady growth. The Fund also held strong performers that are involved in the analysis and visualization of the large amounts of data being collected in seemingly every industry. Ziegler believes that these trends should continue, and they expect to seek out new opportunities in this quickly evolving space.
The Fund also saw positive net performance from the tech hardware industry. The Fund’s holdings are diversified, ranging from makers of server switches to high-performance welding lasers. Within the materials industry, stock picking helped drive performance. The Fund profited from sizable positions in steelmakers and construction supply manufacturers. Within the pharmaceutical and biotech industry, outperformance was driven by focusing on steadier growth stocks rather than smaller companies that work on specific drug research milestones, according to Ziegler.
Ziegler believes that the current market backdrop presents unique opportunities and concerns for mid-cap growth investors. The current economic expansion passed its ninth anniversary during the year, making it the second longest in the post-war period. This has left many looking for imminent signs of economic weakening, or a market top. While this concern is understandable, Zeigler believes there are a good number of indicators that the economy remains strong. Market valuations remain elevated, they say, but are still reasonable considering forecasted earnings.
The latest repositioning of the Fund takes these factors into account. The overweight to technology is small compared to recent history, though tech is nearly a third of the portfolio. The largest overweights are to industrials and health care.
The relative outperformance of growth stocks compared to value stocks over the last year has provided an attractive backdrop for the Azzad Ethical Fund. Ziegler believes that its approach, which focuses on quality growth stories with the ability to generate strong cash flows now and in the future, should position the Fund well regardless of market environment.
Azzad Wise Capital Fund (WISEX)
The Fund gained 0.90% for the 12 months ending June 30, outperforming its benchmark, the ICE BofAML 1-3 Yr. U.S. Corp. & Govt. Index, which returned 0.27%.
According to Fund sub-advisor Federated Investment Management Company, the fiscal year 2017-18 started with a backup in U.S. dollar rates driven by increased inflation and growth across both developed and emerging economies. Fears of a global trade war also weighed heavily on international markets, particularly emerging market currencies and equities, while a flight to quality pushed U.S. government bond yields tighter toward their lows for the year.
The Middle East/North Africa and Gulf Cooperation Council (GCC) regions were no exception. They saw U.S. dollar-denominated sovereign prices drop on inflation expectations. Much of this was counterbalanced, however, by new supply and higher oil prices, which attracted institutional sukuk investors, according to Federated.
Sukuk issuance remained robust with total global issuance for the year finishing at $97.9 billion, the highest level since 2014. These levels were underpinned by the jumbo issuances of some GCC countries with the goal of further developing their Islamic finance industries.
Also of note, Recep Tayyip Erdogan’s victory in the Turkish general elections further rattled markets, according to Federated. Investors have become increasingly concerned about Turkey’s ability to fund its current account deficit given Erdogan’s vocal opposition to raise interest rates despite annual inflation topping 15% in June.
Against this backdrop, sukuk traded off into fiscal year-end with shorter maturities and defensive issuers outperforming.
Drilling down into the Fund, sukuk remained the largest asset class, comprising around 50.5% of the Fund at June 30 2018. Top performing issues for fiscal year 2018 included Dubai Islamic Bank perpetuals (5.17%); Abu Dhabi Islamic Bank perpetuals (3.54%); Qtel 2018s (3.08%); Turkish sovereign 2018s (3.08%); and Fly Dubai 2019s (2.81%). The top detracting sukuk for the fiscal year included: KSA 2027s, (-3.50%); Turkish sovereign 2023s (-2,71%); Mazoon Electricity 2027s (-2.21%); Indonesia sovereign 2027s (-0.96%); and Pakistan sovereign 2019s (-0.75%).
Federated reports that Islamic bank deposits comprised 29% of the Fund at fiscal year-end. These deposits were allocated to six different banks domiciled in the U.S., U.K., Turkey, and Malaysia. During the fiscal year the Fund’s exposure to Turkish Islamic bank deposits was materially reduced from 9% to 3%, with the assets being reallocated to Islamic bank deposits domiciled in the U.K.
Islamic trade finance was 8% of the Fund, allocated into nine separate transactions originating in Egypt, Gambia, Indonesia, Pakistan, Togo, and Tunisia.
The reminder of the Fund was allocated to equities and cash.
Looking ahead to the new fiscal year, 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.
Finally, they expect to continue to broaden the Fund’s Islamic deposit base into other banking systems as well as continue to diversify the Fund’s trade finance allocation.
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 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 Bank of America Merrill Lynch 1-3 Yr. U.S. Corporate & Government Master 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.