Quarterly Azzad Funds Shareholder Letter

October 15, 2020

Dear Azzad Funds Shareholder,

The third quarter of 2020 produced the second consecutive quarter of notable market gains, with volatility (as measured by the CBOE Volatility Index or “VIX”) decreasing consistently throughout the quarter.

Behind the headline numbers, however, there was still cause for concern. Three large themes emerged during the quarter, especially during the latter half. First, U.S. dollar weakness beginning late March reversed course and strengthened 1.9 percent in September. In our view, U.S. dollar strength signaled that effects of monetary stimulus began to wane. Second, expectations for another round of fiscal stimulus appeared to fade quickly in September, which lead to increased equity market volatility. Finally, the sluggish recovery in jobs and announcements of additional job cuts indicated structural damage to the labor market.

July kicked off the third quarter with a bang as stocks surged throughout much of the month. Investors were encouraged by solid employment growth, a rise in personal income and consumer spending, a surge in the housing sector, and an increase in industrial production. All news was not positive, however. The second-quarter gross domestic product fell more than 31% and many states saw an increase in the number of reported COVID-19 cases. Nevertheless, investors stayed with equities, pushing values higher for the fourth consecutive month.

The positive run for stocks continued in August, as major benchmark indexes advanced. Throughout the month, states struggled to settle on appropriate protocols for reopening schools. Testing for the virus increased, and the number of reported COVID-19 cases and deaths rose.

September saw stocks fall on waning hopes of a second round of stimulus. Also, discord between the United States and China ramped up following President Trump’s threatened recourse against American companies that create jobs overseas or that do business with China. Technology shares took a sizable hit, particularly early in the month. September saw several days of favorable returns, likely due to bargain hunters. Unfortunately, there weren’t enough buyers to prevent the benchmark indexes from falling lower by the end of each week of the month.

Looking ahead, uncertainty looms large. And if an unclear economic growth outlook, timing and amount of fiscal stimulus, and political concerns were not enough, corporations will release third quarter earnings in the coming weeks. With an abundance of macroeconomic and political risks fraying investor resolve, we advocate for maintaining an established strategic asset allocation rooted in long-term fundamentals. We encourage investors to keep their investment horizon in focus and to not allow emotions to influence portfolio positioning. Please contact your Azzad advisor if you have questions about your accounts.

In the next few weeks, Azzad Ethical Fund shareholders will receive a proxy statement to vote on a new sub-adviser for the Azzad Ethical Fund and a manager of managers structure. Azzad Wise Capital Fund shareholders will receive a proxy to vote on the manager of managers structure. We highly encourage you to vote in favor of these proposals as we feel they are in our shareholders’ best interests. Please follow the instructions on your ballots and return your votes on or before the shareholder meeting to be held on December 28, 2020.

Thank you for your continued trust and investment,

Joshua A. Brockwell, CSRICTM

Director, Investment Communications

Azzad Ethical Fund (ADJEX)

The Azzad Ethical Fund returned 6.94% compared to the Russell MidCap® Growth Index which returned 9.37% for the period ended September 30, 2020. Amid widespread market gains, quality and profitability continued to build on their long-running leadership in Q3, as Covid-19 second wave concerns eroded confidence in the pace of the recovery. The popularity of financially stronger, less-indebted stocks has also been a key driver of quality outperformance this year. Within the index, low debt, lower profitability and high valuation companies outperformed in Q3, a stark contrast to Q2.  

The real estate and consumer cyclicals sectors contributed most to the overall portfolio returns while information technology, communications services, and industrials contributed the least.

Looking at top contributors, Square, the payment processing provider, benefitted from increased market share and an expanding customer base. Solid acquisition of new Cash App customers continues to drive top-line growth. (The company’s Cash App is an ecosystem of financial products and services designed to help individuals manage their money.) Square’s stock has outperformed its industry on a year-to-date basis. EPAM Systems, which provides software product development and digital platform engineering services to clients located around the world, was another strong performer during the period. Acquisitions have been a key catalyst, enabling the company to penetrate new markets and broaden its product portfolio. Quanta Services, a specialty provider of infrastructure solutions for the electric power, energy, and communication industries, also contributed. Quanta appears set to deliver a resilient performance in 2020 despite a challenging environment.

Top detractors during the period included Equity Lifestyle Properties, a real estate investment trust primarily engaged in the ownership and operation of manufactured home communities and recreational vehicle (RV) campgrounds throughout the US. The company, like many residential REITs, underperformed due to pressures from COVID-19. We eliminated this position in September. Zynga, the U.S.-based company that develops, markets, and operates social games, also hurt performance. Due to intense competition, the company is spending more on software development and marketing, keeping margins under pressure. Lastly, online car seller Carvana underperformed during the period. The company has not yet turned a profit amid increasing capital expenditures, and rising debt levels also weighed on results.

Azzad Wise Capital Fund (WISEX)

The Azzad Wise Capital Fund returned 1.47% for the second quarter period ended September 30, 2020, 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, September marked a pause in the COVID-19 recovery. For the first time since March, global investment grade fixed income saw flat to slightly negative performance for the month, while high yield and subordinated bonds posted solidly negative total returns. A second wave of COVID-19 infections that could disrupt economic recovery and the looming U.S. presidential election seemed to weigh on investors’ minds.

Nevertheless, despite September’s poor performance, the quarter posted decent returns as economies recovered from their post-lockdown lows and continued liquidity provided by central banks maintained the demand for paper. Fixed income markets continue to expect central banks to step in if a sell-off becomes too disorderly, providing a floor for spread widening. With no concrete progress at quarter end on a U.S. stimulus package or negotiations for an orderly Brexit, markets were left watching headlines on the U.S. presidential election and Supreme Court as they awaited further news of progress on the vaccine and therapeutic fronts. 

Gulf Cooperation Council (GCC) and Asian sukuk markets remained robust throughout the quarter, outpacing emerging markets. Market technicals continue to favor sukuk, according to Federated, as reduced new issuance continues to increase scarcity. Investors, however, continue to show caution with regards to the economic and political situation in Turkey and the corresponding sell-off in the lira. In addition, higher-beta banks and financial institutions in the GCC, particularly in the UAE, are raising concerns related to pending asset quality deterioration in the region.

Drilling down into the Fund, top contribution returns for the quarter included the following sukuk: Indonesia 2024, Indonesia 2025, Equate 2024, Oman 2025, and Sharjah Islamic Bank 2021.  Sukuk detracting from performance included Bahrain 2027, Sharjah 2026, ICD 2027, and Turkey 2026.

Looking ahead, Federated maintains that continued central bank intervention will limit the attractiveness of Islamic deposit profit rates in the near term. They believe the current positive technicals in the sukuk market should remain at least through year’s end and will continue to analyze opportunities in high-quality, well-funded issuers at all points along the curve. Islamic trade finance remains an attractive risk-mitigated asset class for them, as well.

In addition, they see several possibilities for increased volatility in the coming months. U.S. elections, a Brexit crash-out, a COVID-19 surge, and worse than expected fundamental deterioration in the GCC/UAE present a good deal of risk going forward. They believe that this warrants a cautious approach to opportunities with a higher risk/return profile currently in the market.

The performance quoted below 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 September 30, 2020. 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 S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. 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. Market indices listed are unmanaged and are not available for direct investment.

Azzad Asset Management

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