Quarterly Azzad Funds Shareholder Letter

January 16, 2020

Dear Azzad Funds Shareholder,

Enclosed is your fourth quarter Azzad Funds statement. It shows the performance of your account over the last three months.

It was a steady march higher for stocks in the fourth quarter. October rallied off expectations of a Federal Reserve interest rate cut, along with assurances that the central bank will continue to be data dependent. Investors began to further anticipate the first phase of a U.S.-China trade deal, and it was announced in December that the agreement would be signed in Washington, D.C., in early 2020. In this environment, earnings growth came back into style, with health care and information technology being the best performing sectors. Classic safe havens like real estate, utilities, and consumer staples underperformed.

Sovereign and corporate sukuk markets finished the fourth quarter of 2019 with strong performance despite geopolitical tensions in the Middle East. The threat of possible conflict between the United States and Iran was more than offset by the market’s appetite for risk, buoyed by the relatively positive macroeconomic outlook in developed markets.

Saudi Arabia remained in the spotlight for much of the quarter as the financial press focused on December’s record-setting initial public offering of Saudi Aramco shares. While the IPO represented only 1.5% of the capital, the valuation of the firm at $1.9 trillion made it the most valuable listed company in history.

As markets enter the new year, the investment environment presents a number of opportunities for equities. After cutting the federal funds rate for the third time in late October, the Federal Reserve is now signaling that it should be a relatively quiet year, with no rate cuts or hikes currently on the horizon. The American consumer appears confident in current and future prospects, as reflected in not only retail sales, but larger purchases like housing, as well.

Thank you for your continued trust and investment,

Sincerely,


Joshua A Brockwell, CSRIC™
Investment Communications Director
Azzad Asset Management

 

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund returned 7.41%, trailing the Russell Midcap Growth Index’s 8.17% return for the fourth quarter of 2019.

The Fund’s best performers during the quarter came from the information technology and health care sectors. Skyworks Solutions, which makes communications chips, rose more than 50% as investors looked forward to 5G smartphone rollouts. Advanced Micro Devices rose even more as its processors continued to gain share in the notebook computer space. Lam Research, a producer of systems used to make advanced integrated circuits, reported stronger-than-expected demand as 5G buildouts continue. And Citrix Systems continued its impressive rally as it transitions to a subscription model. At the intersection of technology and health care, DexCom posted impressive returns after evidence that its glucose monitoring system continues to gain acceptance from patients and treatment partners.

Top Contributors to Total Return (9/30/2019 to 12/31/2019)

 

Top Detractors from Total Return (9/30/2019 to 12/31/2019)

 

 

A number of Fund holdings had specific issues that prevented them from participating in the rally. Shares of Twitter fell hard after a bug in its mobile promotion software caused a revenue shortfall. Uncertainty in the jet production market depressed Hexcell’s share price. Sage Therapeutics highlighted the downside to investing in innovative biopharma companies; its shares fell over 50% after the company announced an experimental treatment for major depressive disorder did not meet expectations. Expedia fell after saying that profits will be depressed due to higher marketing costs. Arista Networks reduced its guidance after saying a key large cloud customer had cut orders for its networking equipment.

The Fund’s current positioning reflects Ziegler’s goal of balancing the attractiveness of companies with consistent, above average growth while also maintaining a valuation discipline. The management team has kept the largest overweight to the industrials sector, which they believe should benefit from an easing of trade tensions with China. The Fund has also maintained overweights to the health care and information technology sectors, where Ziegler believes that some of the most exciting growth stories reside. The Fund remains underweight the consumer and communication sectors. Ziegler plans to continue to look for opportunities to buy quality companies when valuations become more attractive in its estimation.

 

Azzad Wise Capital Fund (WISEX)

The Azzad Wise Capital Fund returned 0.93% for the fourth quarter of 2019, outperforming its benchmark, the ICE BofAML 1-3 Yr. U.S. Corp. & Govt. Index, which returned 0.56%.

According to WISEX sub-adviser Federated Investment Management Company, the market for investment grade 1-3 year sukuk returned nearly 70 basis points during the period, topping off a strong year in terms of total return.

Turkey continued to make progress stabilizing its economy over the quarter, leading to an easing of downside risks and a revision of its credit rating from negative to BB- stable at Fitch, which supported its sukuk issues across the curve. Indonesian equities and sukuk were also well bought in the quarter, driven by a large investment in the country’s sovereign wealth fund from the UAE. In addition, the Indonesian central bank announced its intention to allow the rupiah to appreciate, giving investors further confidence.

The Fund’s sukuk allocation represented 59% of the portfolio at quarter end. Top performing sukuk for the period included the Bahrain and Oman 2025s, Turkey 2023 and 2022s and Indonesian 2024s and 2027s. Underperformers included the NMC healthcare 2023s, which widened materially on market reports that management plans to raise 200 million euros of off-balance sheet debt to fund new hospitals in the Middle East.

The Fund’s allocation to Islamic trade finance as of December 31, 2019, was around 6.5% with new projects in Gambia and Burkina Faso.

Looking towards the first quarter of 2020 and beyond, Federated has become more cautious on the potential for geopolitical events to trigger volatility in the region. Despite the market’s somewhat muted reaction to the escalation of tensions between the United States and Iran, the portfolio management team at Federated sees more potential for a wider direct confrontation. They do not believe that this increased likelihood is currently reflected in energy and financial asset prices. Therefore, they see the currently tight levels in higher beta sukuk issuers as an opportunity to reduce riskier holdings in the portfolio and will reportedly look to reallocate into more defensive issues, in addition to increasing allocation to short duration Islamic bank deposits.

 

 

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-advisers as of December 31, 2019. Those views may change, and the Funds disclaim any obligation to advise investors of such changes. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. 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/prospectus 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. Both indices are unmanaged and an investment cannot be made directly in this or any other index.