As of June 30, 2020, the net asset value (“NAV”) of the Parnassus Endeavor Fund (Trades, Portfolio) — Investor Shares was $35.23, so the total return for the quarter was 23.10%. This compares to a gain of 20.54% for the S&P 500 Index (“S&P 500”) and a gain of 21.12% for the Lipper Multi-Cap Core Funds Average, which represents the average return of the multi cap core funds followed by Lipper (“Lipper Average”).
Although we’re ahead of both benchmarks for the quarter, we’re still behind them for the year-to-date, because we underperformed in the first quarter. The Parnassus Endeavor Fund (Trades, Portfolio) — Investor Shares is still down 7.73% for the year-to-date, compared to a loss of 3.08% for the S&P 500 and a loss of 5.78% for the Lipper Average.
To the left is a table, showing the returns for the Parnassus Endeavor Fund (Trades, Portfolio) for the one-, three-, five- and ten-year periods. We’re ahead of the Lipper Average for the one-year period, but behind the S&P 500. For the three-year period, we’re behind both the S&P 500 and the Lipper Average because of our difficult first quarter. However, for the five-year period, we’re ahead of the Lipper Average, and we’re ahead of both indices for the ten-year period, so we still have a good long-term track record.
Second Quarter Review
Technology stocks contributed the most to our strong gains for the quarter, with five of our seven best-performing companies coming from that sector. Interestingly enough, the other two winners came from the low-tech apparel industry
The best-performing issue was Applied Materials (AMAT, Financial), which added 318 basis points to the NAV, as its share price increased 31.9%* from $45.82 to $60.45. (One basis point is 1/100th of one percent.) The stock’s performance mirrored what happened to the market as a whole. In the first quarter, it dropped 24.9% from $61.04 to $45.82, then in the second quarter, Applied gained back virtually everything it lost in the first quarter. In the March quarterly report, we wrote that Applied was seeing strong growth because of increased manufacturing complexity and the demand for more chips—a demand that should keep growing for years because of increased manufacturing complexity. We indicated that the stock price sank due to concerns around possible disruptions in the supply chain and lower customer spending, but we saw this weakness as temporary, and we were confident of Applied’s future growth. That’s pretty much what happened. The company is one of only two major suppliers of the equipment used in manufacturing semiconductors, so it has a very strong position in the marketplace.
The same thing happened with Micron Technology (MU, Financial), which added 247 basis points to the value of each share, as its stock price rose from $42.06 to $51.52 for a total return of 22.5%. In the March quarter, Micron’s stock fell 21.8% from $53.78 to $42.06, so the stock basically did a round-trip, much like Applied Materials. The company had fairly good results in the first quarter, but the stock dropped because of concerns about consumer demand and possible disruption of the supply chain.
In the last quarterly report, we wrote, “The disruption will be temporary and Micron should survive the global pandemic because of its strong balance sheet and brisk demand for the quality memory chips that it supplies.”
This is exactly what happened, and the share price is almost back to where it began the year, at $53.78.
Specialty retailer The Gap (GPS, Financial) boosted the Fund’s return by 243 basis points, as its stock soared from $7.04 to $12.62 for a total return of 79.3%. Gap sells clothes and accessories under the Old Navy, Banana Republic, Athleta and other brands. Even as mandatory store closures depressed Americans’ demand for apparel, the company reported an acceleration in its e-commerce business, which now accounts for over one-quarter of total sales. Gap stores across the country also reopened with new safety protocols, and investors bid up the stock anticipating a return to full capacity. Finally, on June 26, Gap struck a 10-year partnership with popular rapper and artist Kanye West to bring West’s YEEZY brand into Gap stores and online in 2021.
Lam Research (LRCX, Financial), the second member of the duopoly (with Applied Materials) that controls the semiconductor equipment market, followed a pattern very similar to Applied Materials and Micron Technology. The stock started the year at $297.40 a share, then dropped to $240.00 on March 31, before rising to $323.46 on June 30 for a gain of 35%. Unlike Applied and Micron, which ended the second quarter essentially where they started the year, Lam actually had a nice gain of almost 9% for the quarter. Lam faced headwinds from COVID-19 supply-chain disruptions and U.S. and China trade tensions just like Applied and Micron, but finished the quarter with strong demand and a backlog of orders. Lam will continue to play a critical role in semiconductors for years, with strong demand and new technologies requiring complex manufacturing processes.
Hanesbrands (HBI, Financial), a leading manufacturer of undergarments and athletic apparel, added 143 basis points to the Fund’s return, as its stock price jumped from $7.87 to $11.29 for a total return of 45.8%. Management noted some improving consumer demand as retail stores began to gradually reopen. The company also saw online sales accelerating through April, reaching triple-digit growth rates across several retail partners’ websites. Finally, the board of directors appointed Stephen Bratspies as CEO effective August 3. He joins Hanesbrands with over 25 years of experience, including 15 at Walmart, where he most recently served as the chief merchandising officer. His considerable experience with consumer products and knowledge of the evolving retail landscape should help the company capitalize on growth opportunities.
Apple (AAPL, Financial) added 127 basis points to the Fund’s return, as its stock appreciated from $254.29 to $364.80 for a total return of 43.8%. The company reported results that were better than expected despite store closures and supply chain disruptions. The near-term shift to remote work environments benefitted hardware sales, while services continued to demonstrate strong growth. In response to the volatile environment, management also increased their buyback authorization. We believe Apple stock should continue to benefit as we approach the 5G smartphone upgrade cycle.
Cisco Systems (CSCO, Financial) added 113 basis points to the Fund’s return, as its stock appreciated from $39.31 to $46.64 for a total return of 19.7%. The company reported better-than-expected quarterly results despite significant headwinds from COVID-19. Many of Cisco’s customers have paused spending due to the uncertainty, but the company was still able to deliver healthy margins, while their software portfolio benefitted from the accelerated adoption of digital tools. We believe Cisco’s scale and incumbency along with their strong balance sheet will help them emerge stronger from this pandemic.
Outlook and Strategy
By Jerome L. Dodson
In the last quarterly report, I wrote that the stock market’s plunge was not a reasonable indicator of economic value, and that the disconnect between market price and intrinsic value was the most I had seen in 35 years. Well, the market has made a strong recovery, so I’m not surprised that we have gained back almost all that we lost, but I am surprised that it happened so quickly. The coronavirus is having a very negative effect on the economy, so I had expected the stock market to stay depressed for a while longer.
What seems to be happening is that investors are looking beyond the pandemic, expecting that science will find a cure very soon and the economy will be back to normal. This has to be one of the fastest U-turns in history! The stock market started dropping in late February, hit bottom on March 23, then started climbing sharply to the point where now we’ve recovered virtually the entire loss. This experience shows why it’s important to stay invested at all times and not to try to time the market.
Although the market appears to be fully valued right now, it could still keep moving higher and go into an overvalued situation. For the most part, though, the stocks in the Parnassus Endeavor Fund (Trades, Portfolio) are not overvalued, and I suspect that they will keep moving higher if the market stays strong.
Thank you for investing in the Parnassus Endeavor Fund (Trades, Portfolio).
Yours truly,
Jerome L. Dodson
Lead Portfolio Manager
Billy Hwan
Portfolio Manager
The average annual total return for the Parnassus Endeavor Fund (Trades, Portfolio) – Institutional Shares from commencement (April 30, 2015) was 8.99%. Performance shown prior to the inception of the Institutional Shares reflects the performance of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares and includes expenses that are not applicable to and are higher than those of the Institutional Shares. The performance of the Institutional Shares differs from that shown for the Investor Shares to the extent that the classes do not have the same expenses. Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate, so an investor’s shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The S&P 500 is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. The estimated impact of individual stocks on the Fund’s performance is provided by FactSet. As described in the Fund’s current prospectus dated May 1, 2020, Parnassus Investments has contractually agreed to limit total operating expenses to 0.95% of net assets for the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares and to 0.71% of net assets for the Parnassus Endeavor Fund (Trades, Portfolio) – Institutional Shares. This agreement will not be terminated prior to May 1, 2021, and may be continued indefinitely by the Adviser on a year-to-year basis.
