WISEX Shareholder Update

5/31/2013 11:07:17 AM

WISEX Shareholder Update
May 30, 2013

 Volatility has picked up on Wall Street in recent days. Yesterday’s selloff in stocks was prompted in part by growing concerns that the U.S. Federal Reserve may soon start to ease up on the economy-boosting stimulus. This notion is based on the recent encouraging data on the economy, which included Tuesday’s fairly positive numbers on consumer confidence. Historically, concerns that the central bank will begin to scale back its bond purchases has hurt stocks and helped Treasury yields, which have risen recently.

Amid these market conditions, the Azzad Wise Capital Fund (NASDAQ: WISEX) returned -0.48% yesterday. Following is a brief overview of the factors contributing to its recent results.

Sector breakdown
First, let’s take a look at the three asset classes the Azzad Wise Capital Fund invests in. Those are (in order of percentage weighting):

·         Sukuk (Islamic bonds)

·         Islamic bank deposits

·         Dividend-paying stocks 

This chart shows you the portion of assets allocated to each asset class in the Fund as of May 29, 2013:


WISEX asset allocation as of 5/29/13


This information is useful because it shows the Fund isn’t made up of just one type of investment. The big three—sukuk, Islamic bank deposits and dividend stocks—all contribute to the overall performance of the Fund. So, what happened yesterday? In keeping with the recent erratic behavior of markets, two of these components, sukuk and dividend-paying stocks both declined. Islamic bank deposits actually helped protect the Fund against further downside risk. To understand better what happened, we need to examine each asset class individually.

Simply put, the sukuk portion of the drop was due primarily to changes in the rate on the 10-Year U.S. Treasury Note. When rates go up, prices go down. And that meant a down day for sukuk investors, who were affected across the board. Case in point: the Dow Jones Sukuk Index, which represents a large universe of global sukuk, dropped -0.42% on the day. The Wise Capital Fund sukuk component was even further impacted due to a greater allocation to Malaysian sukuk, which are more sensitive to interest rate changes in the United States. So, a rise in interest rates in the U.S. results in more downward pressure on Malaysian sukuk, thereby adversely impacting the sukuk segment of the Fund. The Wise Capital Fund holds a higher concentration of Malaysian sukuk as part of a strategy of diversification away from the sukuk-heavy Gulf Cooperation Council (GCC) nations.

And remember that although sukuk do not have income streams based on interest, they are still affected by interest rates because we live in an interconnected global economy.

Dividend-paying stocks
As mentioned above, the stock component of the Fund declined, as well. Stocks held by the Fund dropped -1.33% compared to the S&P 500 Index which fell only -0.69%. Why the bigger drop? It’s because of the kind of stocks held in the Fund. The Wise Capital Fund holds more defensive, higher dividend-yielding names in traditionally safer sectors like Consumer Staples, Health Care, Utilities and Telecommunications. Those each sectors fell by -1.90%, -1.51%, -1.50%, and -1.49%, respectively.

Islamic bank deposits
These holdings did their job. As the sukuk and stock sectors sold off, Islamic banks deposits held steady. This shows the power and wisdom of a diversification strategy. Although losses in sukuk and stocks amounted to -0.62% and -1.33%, Islamic bank deposits returned 0.01%, allowing the Fund to avoid much steeper declines.

So, what’s the takeaway? The losses we saw yesterday are part of the naturally occurring ups and downs of the market. As we always tell our clients, investing involves risk. And volatility can be your friend. “Up days” in the markets are also a type of volatility. You have to take the bad with the good.

A note about mutual fund investing
One characteristic of mutual fund investing that investors should keep in mind is that there will always be an ongoing fluctuation in price, or net asset value. While a single bond purchased at par value can be held to maturity with no apparent loss of principal, funds like the Azzad Wise Capital Fund, which constantly buy and sell new investments, are priced daily. This means that mutual funds are subject to price fluctuation, and investors can lose money.

Reducing risk
How do you reduce risk? The most common answer is to diversify. By developing a balanced portfolio of investments, you as an individual investor don't put all your eggs in one basket. This is known as diversification. According to Modern Portfolio Theory, a portfolio that mixes a variety of asset classes generally has a lower risk for a given level of return. Diversification works because it broadens your investment base (though it can't guarantee a profit or protect against a possible loss). Just as diversification can help you reduce your personal portfolio’s risk, diversification within a mutual fund can help guard against losses. This is what happened, in part, on Wednesday. The Azzad Wise Capital Fund’s Islamic bank deposit holdings protected the Fund from steeper losses.

Patience can be rewarded
In addition to diversification, remember that investing is a process—not an event. You should not make rash moves in response to occasional market moves.

Historically, time has helped moderate the riskiness of some investments (though there is no guarantee this will continue in the future). The standard deviation, or risk, associated with the average rate of return on an investment, the extent to which returns vary from historical norms, tends to decrease over time. In plain English, the longer you remain invested, or the longer your time horizon, the less likely you are to suffer from outsized risk.

As we noted, just as there are surprises to the downside and losses that can occur, positive surprises often happen without notice. It’s when those good things happen that you enjoy a good return on your investment. But you have to be in the market to gain exposure to those “upside events.” The important thing is to stay invested, remain patient and stick to your plan. If you don’t have a plan, we can help. Give our investment advisors a call at 1.888.86.AZZAD. We’d be happy to discuss your risk tolerance, investment goals and time horizon.

Thank you for your continued trust and investment.


The performance quoted represents past performance, which does not guarantee future results. This summary represents the views of the portfolio manager as of May 30, 2013. 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.

Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.

Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for Azzad Ethical Fund current top 10 holdings. Click here for the Azzad Wise Capital Fund current top 10 holdings.

Past performance does not guarantee future results.

The Azzad Ethical Fund is non-diversified and may invest a larger percentage of its assets in fewer companies exposing it to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. Stock markets and investments in individual stocks can decline significantly in response to issuer, market, economic, political, regulatory, geographical, and other conditions. Investments in mid-cap companies can be more volatile than investments in larger companies. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the stock market in general. Because the portfolio may invest substantial amount of its asset in issuers located in a single country or in a limited number of countries, it may be more volatile that a portfolio that is more geographically diversified. See the prospectus for more details about risks.

Investments in smaller and medium sized companies involve additional risks such as limited liquidity and greater volatility. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a great risk of loss to principal and interest than higher rated securities.

The Azzad Wise Capital Fund is non-diversified with a high concentration of securities in the financial sector which can expose the Fund to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. The Fund mainly invests in securities issues by foreign entities which expose the Fund to country specific risks such as market, economic, political, regulatory, geographical, and other risks. The Fund intends to invest in certain instruments that may be illiquid. As a result, if the Fund receives large amount of redemptions, the Fund may be forced to sell such illiquid investments at a significant loss to be able to meet such redemption requests. See the prospectus for more details about risks.