April 15, 2021
Dear Azzad Funds Shareholder,
The first quarter of 2021 was an eventful one. Additional federal stimulus payments lined many pocketbooks; a group of amateur traders banded together through social media to drive shares of video game company GameStop to astronomical heights; interest rates jumped, stoking fears that inflationary pressures were rapidly building; and equities ultimately enjoyed robust returns. Tech shares, which had driven the market for much of 2020, slumped during much the quarter, but still gained enough ground to push higher by the end of March.
Local governments also began relaxing lockdown-related restrictions during the period, allowing more businesses the ability to return to a bit of pre-pandemic normalcy. Coupled with the added stimulus in the pockets of consumers, the market began to reflect a broader economic recovery that had previously been only hope. The structural gyrations from growth to value that the market had demonstrated in previous quarters finally began to take shape, as value indexes strongly outperformed growth indexes and small caps outperformed large caps.
Interest rates rose through much of the quarter, leading to negative returns in certain fixed income assets like U.S. investment grade corporate bonds, but halal fixed income proved resilient due to less sensitivity to longer term rate increases.
Looking ahead, the U.S. economy is likely to continue its progress as more vaccines are rolled out and more jobs are made available. Investors will continue to watch for signs of escalating inflation, despite the Federal Reserve’s forecasts to maintain interest rates at their present levels through 2023.
Thank you for your continued trust and investment.
Azzad Ethical Fund (ADJEX)
The first quarter of 2021 saw Ivy Investment Management Company take over as the new sub-adviser to the Azzad Ethical Fund. According to Ivy, that period was one in which the market moved toward cyclicals and small-cap stocks. And the structural gyrations from growth to value that the market had demonstrated in previous quarters finally began to take shape, with value indexes strongly outperforming growth.
Looking at the Fund, stock selection was the most significant contributor to outperformance over the quarter. This is the focus of Ivy’s strategy–buying profitable companies with durable business models for the long term.
The industrials sector was the top relative contributor to performance, particularly non-benchmark holdings Middleby Corp. and A.O. Smith Corp. Stock selection in information technology also helped performance, as did the Fund’s relative underweight in the sector. Key contributors included Brooks Automation Inc., Microchip Technology Inc., and Keysight Technologies Inc.
Underperformance in the quarter was due to lack of exposure in the real estate and energy sectors, according to Ivy. Both rose sharply during the quarter but comprise small weightings in the benchmark.
Going forward, Ivy believes that economies will continue to recover and grow as vaccine distributions allow them to emerge from pandemic lockdowns. The strength of the recovery could be overestimated, however. Although markets go up more than they go down, Ivy says this may be a year in which the market takes a breather to digest the spectacular gains and sturdy valuations achieved over the second half of 2020.
And while stock picking is always key to their process and performance, Ivy believes that it will be paramount in this environment as they seek to manage valuation risk in the portfolio, while investing in durable growers, both secularly and cyclically.
U.S. interest rates rose throughout the first quarter. And the reflation/reopening sentiment that pushed yields higher following the U.S. presidential election continues to shape investors’ outlook.
According to Fund sub-adviser Federated Hermes Investment Management Company, despite the tough macro backdrop for fixed income markets globally, sukuk have outperformed the general malaise. The likely explanation for this, they say, is a technical one; sukuk are generally shorter duration and have a scarcity premium that works in their favor during down markets.
Federated Hermes has seen strong recoveries in several of the GCC real estate names in the Fund portfolio. Dar Al Arkan, a high-yield Saudi real estate name, led sukuk performance, returning 6.75 basis points over the quarter, followed by Emaar Mall Group and ESIC sukuk, returning 6 basis points and 4.7 basis points respectively. Sukuk such as Saudi Telecom 2029s, Kingdom of Saudi Arabia 2029s, and Indonesia 2027s detracted from performance. Slightly longer in duration and tighter in spread as sovereigns, these credits offered more modest protection against global interest rate increases during the quarter. The Fund’s allocation to Islamic trade finance has also been insulated from the rise in global rates, according to Federated Hermes, because profits are reset on a floating basis to reflect changes in the underlying rate environment. With the expectation of a continued rise in global rates, they expect Islamic bank profit rates to improve through the year and will look to increase allocations as they become more attractive in their estimation.
Looking ahead, Federated Hermes expects a robust increase in primary sukuk issuance in 2021 as issuers return to market. They report that some new sukuk will likely be aimed at tackling social problems arising from the pandemic and supporting a clean energy transition. Federated Hermes also expects the current global rate environment to continue and maintains a cautious view on extending duration in the Fund.
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 March 31, 2021. 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.azzadasset.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. Market indices listed are unmanaged and are not available for direct investment.