As of December 31, 2020, the net asset value ("NAV") of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares was $48.31, so after taking dividends into account, the total return for the quarter was 25.93%. This compares to a gain of 12.15% for the S&P 500 Index ("S&P 500") and 14.22% for the Lipper Multi-Cap Core Funds average, which represents the average return of the multi cap core funds followed by Lipper ("Lipper average"). For the quarter, then, our return was more than double that of the S&P 500.
Interestingly enough, the Lipper average did better than the S&P 500, which is unusual. Since the S&P 500 is heavily weighted toward very large companies, it shows that smaller stocks did better than the giant companies for the quarter.
For the year, the Parnassus Endeavor Fund (Trades, Portfolio) — Investor Shares gained 27.42% compared to 18.40% for the S&P 500 and 16.56% for the Lipper average, so we beat the S&P 500 by over nine percentage points and the Lipper average by almost 11 percentage points. It was a great year for the Parnassus Endeavor Fund (Trades, Portfolio)!
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. You will notice that we beat all the indices for all time periods, except for the S&P 500 for the three-year period when we were slightly behind. We did, however, beat the Lipper average for the three years by over two percentage points.
For the ten-year period, the chart on page 5 shows that an investor who put $10,000 in the Fund would have $41,188, compared to $36,664 for the S&P 500 and $29,301 for the Lipper average. That means an extra $4,524 over the S&P 500 and an extra $11,887 over the Lipper average.
Year in Review
Two companies reduced the Fund's return by more than 300 basis points each. (One basis point is 1/100th of one percent.) These companies' business models were directly impaired by the pandemic, so we sold our investments in both. Thankfully, our gains more than made up for our losses. Seven stocks each boosted the Fund's return by 190 basis points or more, which added up to a fantastic year for the Fund.
Private-label credit card issuer Alliance Data (ADS, Financial) cut 389 basis points from the Fund's return, as the stock dropped 61.7% from $112.20 to our average sales price of $42.99.* Alliance Data's retail partners were hit hard by the sharp drop in foot traffic caused by social distancing, so the company's revenue for operating retailers' credit card programs fell below the company's prior estimates. Meanwhile, investors dumped the stock, fearing that the jump in unemployment claims could lead to rising credit losses. Although we believed the company had the capital to withstand the year's economic turbulence, we sold our position to take advantage of more attractive long-term investments elsewhere.
Alaska Air Group (ALK, Financial) reduced the Fund's returns by 333 basis points, as the stock dove 42.8% from $67.75 to our average sales price of $38.70. Alaska is the fifth-largest airline in the country with routes primarily on the West Coast. The company stood out to us because of its fortress balance sheet, cost-efficient fleet, and shareholder-oriented management. Nonetheless, Alaska's stock hit the skids as the coronavirus outbreak engulfed the U.S., resulting in collapsing demand for air travel and a $50 billion bailout of the airline industry. Management took decisive action in response to the crisis, including cutting flights, suspending stock buybacks and the dividend to conserve cash, but it was not enough. We exited our position, since a rebound in passenger demand would be elusive for some time.
Turning to our winners, Micron Technology (MU, Financial) increased the Fund's performance by 513 basis points, as its stock jumped from $53.78 to $75.18, for a total return of 39.8%. Micron manufactures memory chips used in a variety of devices, including servers, phones and computers. Despite near-term headwinds from the loss of Huawei as a large customer, Micron executed well and had a strong year. We expect an even better 2021, with recovery in segments impacted by the pandemic, such as mobile, industrial and automotive, as well as improved pricing, particularly in DRAM. Increased volume and pricing, coupled with decreasing costs, should result in another strong year for Micron.
Applied Materials (AMAT, Financial) makes semiconductor equipment. It added 445 basis points to the Fund's performance, as its stock climbed from $61.04 to $86.30, for a total return of 43.3%. Executing well despite the trade tensions with China, the company had a very strong year fueled by increased equipment demand due to new and more complex applications for semiconductor chips. We expect this growth to continue into 2021, with double-digit growth in industry equipment spend and its ongoing share gain in the DRAM memory market.
Shares of transportation provider FedEx (FDX, Financial) contributed 396 basis points to the Fund's performance, as its stock soared from our cost of $148.83 to $259.62, for a total return of 70.0%. Earnings in FedEx's ground shipping segment jumped as the pandemic-induced surge in e-commerce led to a sharp acceleration in parcel shipments. FedEx's air cargo profits were also boosted by the pandemic, as the reduction in passenger air travel sharply reduced overall cargo capacity, and profits surged as FedEx's planes filled, and pricing rose. We believe these pandemic-induced effects will last, as we expect more consumers to shift purchases online while global air cargo capacity should remain constrained for several years by reduced international travel.
Apple (AAPL, Financial) added 348 basis points to the Fund's return, as its stock rose from $73.41 to $132.69, for a total return of 82.3%. Work-from-home trends significantly benefited the world's most valuable consumer electronics company. Results across Apple's products were strong and resilient throughout the year, as people increasingly relied on them to work and play from home. Investor optimism around the latest iPhone launch, coupled with the 5G upgrade cycle, also drove shares higher.
Lam Research Corporation (LRCX, Financial) had a strong year, as its stock surged from $292.40 to $472.27 for a total return of 64.0%, contributing 292 basis points to the Fund's performance. As a large player in the semiconductor equipment market, Lam Research Corporation benefited from increased investment. We believe elevated equipment spend is a multi-year tailwind due to growing semiconductor chip complexity from emerging technologies such as 5G, cloud and artificial intelligence. In 2021, we believe Lam Research Corporation will continue to benefit from more investment, particularly in memory and NAND.
Agilent (A, Financial), a leading life science tools company, contributed 193 basis points to the Fund's return, as its stock increased from $85.31 to $118.49 for a total return of 39.8%. This year, the company executed exceptionally well despite the COVID-19 pandemic affecting its more industrial end-markets. Agilent's best-in-class innovation, along with its top workplace and talent, led to even faster share gains than investors expected. While competitors had to furlough staff and cut pay, Agilent's workforce was focused on winning in the marketplace — which can be seen in the different growth rates reported. As the core business continues to take share, Agilent invested aggressively in the business to accelerate growth, as highlighted by the exciting oligonucleotide manufacturing business's capacity expansion. Agilent is doing a good job shifting toward higher growth and less cyclical consumables and services that should yield sustainable growth for years to come, with a significant margin expansion opportunity as well.
Discover Financial (DFS, Financial), the third-largest credit card issuer in the country, contributed 191 basis points to the Fund's return, as its stock soared from our average purchase price of $49.40 to $90.53, for a total return of 84.3%. We first bought shares in June, following the pandemic-induced sell-off, as investors feared that surging unemployment numbers would lead to a wave of credit losses at the bank. In actuality, credit performance was nowhere near as bad as anticipated, due to the powerful triple effects of government stimulus, conservative household balance sheets and the rapid economic recovery. Discover's record of disciplined underwriting also paid off, as monthly net charge-offs were consistently better-than-expected and even ended the year at rates lower than before the pandemic began.
Outlook and Strategy
2020 was a disruptive year for the stock markets, the country and the world. A deadly pandemic upended the lives of every person on earth. The casualty count is staggering: COVID-19 has infected 21 million people in the U.S. and killed 400,000 Americans so far. Over ten million people have lost their jobs due to government-mandated lockdowns. Fortunately, the year ended on a hopeful note. In one of the greatest scientific achievements in U.S. history, drug companies developed two vaccines in record time and have begun programs to inoculate millions of people against the virus.
The world shifted in other ways, too. President Trump became the third U.S. president in history to be impeached, and was ultimately acquitted. Americans grew more politically divided than ever, and in a fiercely contested election, chose Joseph Biden as the 46th president of the United States. A global movement for racial justice emerged out of the tragic and infuriating murders of George Floyd and others at the hands of police. Alarm bells rang around climate change as California and Australia faced devastating wildfires. As the pandemic grew, U.S. stock markets briefly collapsed 35%, then seemed to disconnect from reality by surging 70% to end 2020 with strong gains.
In a year that turned the world upside down, the Parnassus Endeavor Fund (Trades, Portfolio) ended up on top. How did we do it? It was not by anticipating the pandemic, the recession or the outcome of the presidential election. Our singular advantage is that we have a repeatable process and the right people in place to execute on our investment philosophy. Our philosophy seeks to invest in good and socially responsible companies that are trading at discounted prices to our estimate of intrinsic value. This is easier said than done, because it often requires going against conventional wisdom. Having the right people with the right temperament matters most in those moments. In stock after stock, Jerry and I honed our ability to identify opportunities and act on them. I'm delighted that our years of hard work have paid off handsomely with eye-popping returns for our shareholders.
As previously announced, I will be the Parnassus Endeavor Fund (Trades, Portfolio)'s sole manager starting in 2021. My priority in managing the Fund will be maintaining continuity. The same investment philosophy and process described above that has guided the Fund since inception will remain fully intact. Moreover, I will be supported by the collective talents of the 17-person Parnassus investment team I have grown with over my last eight years at the firm. I am also a firm believer in continuous improvement. The Fund has had a long history of outperformance, but its volatility has been a challenge. I plan to lower the Fund's overall risk through strategic diversification—for example, by trimming outsized positions. The goal is to increase the Fund's risk-adjusted returns for long-term shareholders.
I am optimistic about the economy in the year ahead. After years of gridlock, we have a unified government committed to economic recovery through accommodative fiscal and monetary policy. The housing market, which typically leads the economy into and out of recessions, remained resilient last year. This suggests that despite the twin health and economic crises the country is weathering, there was not also a structural credit crisis. Uncertainty over domestic and trade policy, which ballooned under Trump, should revert to a more predictable pace under a Biden administration. Global economies therefore may experience a simultaneous, vaccine-led relief rally, helping consumer confidence worldwide.
The fly in the ointment is that stocks are expensive. The S&P 500 trades at 23x expected earnings, its highest in 20 years, compared to the post-financial crisis average of 16x. Companies of all stripes rushed to sell their shares on stock market exchanges, another sign of overvalued public markets. I would expect a period of consolidation and occasional corrections as exuberance gives way to sober reality. I believe the Parnassus Endeavor Fund (Trades, Portfolio) is precisely designed to accommodate such market moves. With a valuation average of 17x expected earnings, our collection of stocks is already on sale if markets fall, and should have more room to rise if markets continue to march higher.
Thank you for your investment in the Parnassus Endeavor Fund (Trades, Portfolio).
Yours truly,
Billy Hwan, Portfolio Manager
Jerome L. Dodson, Portfolio Manager
Letter from Jerome L. Dodson
As of the first of the year, I am no longer the portfolio manager of the Parnassus Endeavor Fund (Trades, Portfolio). I'm retiring from active fund management, although I will continue as Chairperson of Parnassus Investments. Also, a lot of my personal money will remain in the Fund, as an expression of my confidence in Billy Hwan. Although Billy is the new lead portfolio manager, he is not new to the Fund. He has been at Parnassus for eight years and has been a portfolio manager with the Parnassus Endeavor Fund (Trades, Portfolio) for almost three years. He is a very capable manager, and I know he will take good care of your money.
At the age of 77, I've decided that managing investments for 36 years is long enough. As Chairperson and a shareholder, I will still keep an eye on things, but I plan to do a lot of traveling, reading and getting to know my grandchildren better.
It's been a wonderful career for me. I'm able to do well financially, while also contributing to social responsibility. At the beginning of 1985, socially responsible investing was not well known at all. Parnassus was one of the few funds that took social and environmental factors into account. Today, there are literally thousands of funds that consider social issues in making investment decisions. It's become mainstream, and I think it has influenced a lot of companies to consider social and environmental issues in the way they operate their businesses. When I first started Parnassus, I would go to company meetings and ask about how a company treated their employees or how a company made sure its operations did not have a negative impact on the environment. Many company managers expressed surprise that I would ask those kinds of questions. That would no longer happen now, as social and environmental responsibility is considered important by most corporations today.
When Parnassus Investments started operating in 1985, people were skeptical that a social responsibility fund could have good returns. I wasn't even sure myself that we would be able to beat the market or even outperform conventional mutual funds. As it turned out, the Endeavor Fund has been the best-performing mutual fund in its category since its inception on April 29 of 2005. According to the Lipper MultiCap Funds Average, which represents the average return of the multi-cap core funds followed by Lipper ("Lipper average"), the Parnassus Endeavor Fund (Trades, Portfolio) - Investor Shares has been the best-performing multi-cap core fund since the inception date: #1 out of 228 funds,* earning an average of 12.84% per year compared to 10.05% for the S&P 500 and 8.99% for the average multi-cap core funds in the Lipper average. This record has been achieved through many ups and downs, including the crash of 2008. Had you put $10,000 in the Parnassus Endeavor Fund (Trades, Portfolio) - Investor Shares at inception, you would have $66,395 today. By comparison, you would have $44,917 had you been able to invest in the S&P 500 and you would have had $39,761 had you been able to invest in the average multi-cap core funds followed by the Lipper average. I'm delighted that we've been able to give our shareholders such a good return.
Why has the Parnassus Endeavor Fund (Trades, Portfolio) done so well over the years? There are two reasons. First, I think that our social responsibility philosophy has helped. A company that treats its employees well has an advantage, because its staff will work harder and more efficiently for a company that cares for its workers. That means that the company will be more productive. A good place to work will not need to hire as many workers, so it will be more profitable. A firm with a strong environmental policy will be less likely to be prosecuted or fined. That kind of company will also be more efficient in its use of resources.
The other reason is our policy of investing in companies that are temporarily out of favor. This means that the market price will be low relative to its earning capacity. If you invest in a good company that's trading at a bargain price, you should have an excellent return, when that company bounces back from whatever caused the stock to drop in the first place.
How do you know that a company that's had a hard time will make a comeback and see its price rise more than the market? There's no easy answer to this question. Most of the time when I invest in a company whose stock has fallen on hard times, I'm very nervous. More often than not, they do come back, but there's no guarantee, and I've had many disappointments in my investing career. Fortunately, most of them do make a strong comeback and earn a good return. Things I look for are quality products, a strong management team, a good marketing strategy, low costs and other advantages. As the Fund's performance shows, most of our investments have been successful.
Best wishes to all of you in your investing career.
Yours truly
Jerome L. Dodson
Chairperson, Parnassus Investments
1As of Dec. 31, 2020.
2As of Dec. 31, 2020.
3As a percentage of total net assets.
The Fund's share price may change daily based on the value of its security holdings. Stock markets can be volatile, and stock values fluctuate in response to the asset levels of individual companies and in response to general U.S. and international market and economic conditions. In addition to large cap companies, the Fund may invest in small and/or mid cap companies, which can be more volatile than large cap firms. Security holdings in the fund can vary significantly from broad market indexes.
The Parnassus Funds are distributed by Parnassus Funds Distributor, LLC.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of a fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be found on the website, www.parnassus.com, or by calling (800) 999-3505.
