Market Recap – Third Quarter 2014
Let’s take a look at how the markets—and the Azzad Funds—performed during a volatile third quarter. A strong August for equities was followed by losses in September, when any rallies began to focus around selected winners rather than benefitting stocks across the board. Investors exhibited a decided preference for large caps; the S&P 500 closed above 2,000 for the first time ever, and the Dow industrials also set new all-time highs. The Nasdaq returned to a level it had not seen since March 2000 and regained the lead for 2014. However, the Russell 2000, which has struggled for most of the year, fell deeper into negative territory year-to-date, while the Global Dow suffered from political conflicts abroad and concerns about global growth. Bond investors continued to demonstrate surprising resilience. In early September, the yield on the benchmark 10-year Treasury fell to 2.35%--a level not seen in more than a year--as prices rose. However, as the Federal Reserve continued to taper its economic support and ramped up discussion of how and when to increase rates, demand began to wane. Geopolitical anxieties and a strengthening dollar kept the decline in check.
Azzad Ethical Fund (ADJEX)
The Azzad Ethical Fund gained 0.37% during the third quarter, managing to outpace the 0.73% decline in the Russell MidCap Growth Index. The Fund benefited this quarter from three merger announcements in which holdings were the acquisition target. These served as a good reminder that mid-cap stocks often are attractive purchases for large-cap stocks looking to buy growth. Other than these names, our exposure to growth relative to the benchmark drove returns higher, while the market’s preference for larger market capitalizations worked against us. A large part of the Fund’s outperformance could be traced to the health care sector, namely our stock-picking in the pharmaceutical space. The retail industry was another driver of returns. Our refocusing on names that have quality margin expansion opportunities paid off well. The semiconductor space continues to be a source of positive return, while the recovery in labor markets drove our picks in the commercial & professional services space higher.
Our names in the consumer staples space disappointed, as positive returns were concentrated in stocks where growth prospects were already priced in. The energy sector was hardest hit, especially as selling picked up in September. Crude oil prices fell towards the bottom of their long-term trading range, hurt by bearish supply dynamics, especially in the domestic market. While weathering the industry-wide selloff has been challenging, we look at it as an opportunity to pick up quality names at attractive prices. We will position the Fund in coming weeks to take advantage of the current investment environment. Cheaper energy prices could serve as a boon for consumer spending. And a resurgent US dollar has historically been a positive for consumer discretionary stocks, along with health care, industrials, and mid-caps, in general.
Azzad Wise Capital Fund (WISEX)
The Azzad Wise Capital Fund returned 0.16% for the period, outperforming the BofA Merrill Lynch Corp. & Govt. 1-3 Yr. Index, which returned 0.03%. The third quarter of the year is typically dominated by long, quiet summer months in fixed income markets. This year, however, we have seen a multitude of negative global events: Russia-Ukraine tensions and the resulting US and EU sanctions, Iraq turmoil, the Israel-Gaza conflict, and the Argentinean default saga. All these events, combined with the seasonal summer low liquidity, fear of rate hikes, and the looming end of the Fed’s bond-buying program, resulted in general market instabilities that were also evident in the sukuk market.
In spite of such macro worries, our core portfolio of UAE-based sukuk outperformed the markets on a total return basis over the quarter. Our top performing sukuk was Emirates Airlines 2023, delivering a healthy 2.21%--followed by 1.67% on the Dubai Islamic Bank Perpetual sukuk, 1.16% on the Emaar 2016, and 1.15% on Aldar properties 2018. With the improving fundamentals of the UAE economy, along with overall market liquidity, such outperformance comes as no surprise, and we expect to see further strength going into the fourth quarter. The market also saw new issues from non-conventional issuers such as Goldman Sachs, South Africa, and the Hong Kong Authority during the period, some of which we participated in. We welcome new issues as they add depth to the market and allow us to further diversify the portfolio.
During the reporting period, approximately 20% of Fund assets were invested in Islamic bank deposits. These positions performed well as they earned good income with limited exposure to interest rates. Looking ahead to the fourth quarter, we continue to be vigilant about rising rates and are positioning the Fund to limit exposure to US interest rates. We believe the portfolio is well-placed to continue to deliver stable, competitive returns.
Remember that risk is inherent in investing. Overreacting to market volatility by dramatically reducing the stocks in your portfolio means that you may lock in losses and miss the chance for asset price appreciation when markets recover. In other words, it is time in the market, not market timing that matters. To talk with an Azzad advisor about your portfolio, give us a call at 888.86.AZZAD (888.862.9923). We are here to help. 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 September 30, 2014. 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. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. 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 Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks measuring the performance of those Russell mid-cap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. The Dow Jones Sukuk Index is designed to track the performance of global Islamic fixed-income securities, also known as Sukuk. The index includes U.S. dollar-denominated, investment-grade Sukuk that have been screened for Shari’ah compliance.