Quarterly Azzad Funds Shareholder Letter
January 18, 2019
Dear Azzad Funds Shareholder,
The fourth quarter of 2018 saw negative equity sentiment across all asset classes, with the broader market as represented by the S&P 500 returning -13.52%. The retreat in the U.S. stock market over the final three months of the year was notable for its length and ferocity. By most measures, stocks narrowly avoided ending a nearly decade-long bull market. Value stocks beat their growth peers by 4% for the quarter. Large-cap stocks outperformed small-caps by 6.7%, and mid-caps, as a whole, had returns in between the two, but closer to large-caps. Economically sensitive sectors like energy, industrials, and information technology underperformed the broader market, while traditional safe havens like utilities, real estate, and staples lived up to their reputations by outperforming.
Myriad factors likely contributed to the sell-off. The first was the continuing trade war rhetoric between the U.S. and China. A 90-day detente announced in November provided a reprieve, but it turned out to be a brief one. Within the U.S., there was increased uncertainty about the pace and timing of the Federal Reserve’s interest rate hikes, in addition to the pace of its unprecedented unwinding of the balance sheet. While the economy remains at or near full employment, other economic measures could be interpreted as a sign of slowing growth, both in the U.S. and abroad.
The sukuk market was no exception to the move away from risk assets during the period. In addition to the sharp sell-off in global equity markets, the expectation of rising benchmark interest rates as well as evidence of slowing global growth including faltering energy prices dampened investor demand for Islamic credit. The Dow Jones Sukuk Index, a very broad measure of the USD denominated sukuk market, produced a total return of -32 basis points, with longer dated maturities in the 7- to 10-year bucket returning -40 basis points on average. More defensive short-duration sukuk were stable during the quarter.
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, CSRIC™
Investment Communications Director
Azzad Asset Management
Azzad Ethical Fund (ADJEX)
The Azzad Ethical Fund returned -14.28% for the fourth quarter of 2018, faring better than the Russell MidCap® Growth Index’s -15.99% decline over those same three months.
According to ADJEX sub-advisor Ziegler Capital Management, the pharmaceutical/biotech industry served as one of the largest drivers of outperformance during the quarter.
Exelixis, a mid-quarter addition to the Fund, was among the top performers due to its announcement of European approval for one of its oncology drugs. Tesaro was a small position, but shot up in price in early December after GlaxoSmithKline announced intentions to acquire the firm.
The Fund’s software and services stocks also outperformed the benchmark’s holdings. Tableau Software posted solid gains after announcing better-than-expected earnings and signing their largest client deal yet.
It was a similar story with Workday: strong earnings, a growing backlog, and an impressive client list of Fortune 500 companies. Finally, AutoZone managed to post a gain during the quarter and is seen as a relatively safe name in brick-and-mortar retail, with steady earnings growth and free cash flows.
Top Contributors to Total Return (9/30/2018 to 12/31/2018)
Top Detractors from Total Return (9/30/2018 to 12/31/2018)
Sharp downturns in the stock market usually result in some of the year’s best performers selling off. Within the portfolio, Align Technology followed that pattern. According to Ziegler, the company will have to deal with a number of well-funded competitors in the orthodontic aligner space.
Square also fits this profile, Ziegler reports, as strong subscription and services growth did not quell sell-off momentum. Steel Dynamics posted solid earnings and announced the construction of a new mill in the American Southwest, but concerns over steel prices led to the stock’s decline.
TransUnion posted impressive sales growth figures, but margin concerns from recent acquisitions drove price action lower. Finally, JB Hunt sold off as analysts expressed concern about the U.S. trucking industry.
Ziegler recently increased the Fund’s portfolio weight in the information technology sector, picking up a few of the stocks whose valuations have become more attractive in the wake of last quarter’s downturn. This was done in part by selling consumer staples and health care stocks that held up well over the last three months. Ziegler believes that as tariff and global growth issues in the U.S. economy sort themselves out, the Fund will be positioned to benefit.
Azzad Wise Capital Fund (WISEX)
The Azzad Wise Capital Fund returned -0.61% for the fourth quarter, underperforming its benchmark, the ICE BofAML 1-3 Yr. U.S. Corp. & Govt. Index, which returned 1.17%.
According to sub-advisor Federated Investment Management Company, the Fund’s sukuk allocation returned a total of 24 basis points. Top performers during the quarter were the Petronas 2020 sukuk, which contributed 7 basis points, the Goldman Sachs 2019 sukuk, which contributed 6.5 basis points, and the Axapta 2020, which returned 4.5 basis points. Underperformers for the quarter were dominated by sukuk from Oman, after the country lost an investment grade rating from Fitch. As a result, the Oman government 2024 sukuk, the Mazoon 2027 sukuk (an Omani utility), and the Oman government 2025 lost 12, 14, and 15 basis points, respectively. Federated reports that investors are concerned about Oman’s fiscal position, citing a drawdown of the net foreign asset balance to zero as a cause for concern. The drawdown led to heavy selling of Omani assets during the quarter, but Federated believes that these fears are overdone, and they expect to see a recovery.
The Islamic bank deposit allocation in the Fund stood at 29.5% at quarter-end, with an approximate yield of 2.75% and a duration of 0.25 compared to 1.95% and 0.27 at the end of 2017. Rates have continued to reset upward throughout the year, and Federated expects to see additional resets in the first quarter of 2019.
Islamic trade finance represented roughly 6% of the Fund at quarter-end, with an average yield of 4% during the quarter. Federated added to the Fund’s Moroccan trade finance position.
Looking forward to the first quarter of 2019, Federated anticipates that the negative impact of rising U.S. rates on emerging market (EM) debt, which has been weighing on markets, will be less than expected given the data-dependent approach communicated by the U.S. Federal Reserve. In addition, while the potential fallout from ongoing trade tensions between the U.S. and China has material implications for EM debt as a whole, Federated reports that it is likely to have less impact on the sukuk market and the GCC region. China is a large importer of oil from the GCC, and any decline in its GDP will have some knock-on effects on for oil revenues. But overall they believe the sukuk market is less exposed to these risks than the market as a whole.
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, 2018. 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.