As of June 30, 2021, the net asset value (“NAV”) of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares was $60.97 and the total return for the quarter was 8.01%. This compares to a gain of 8.55% for the S&P 500 Index (“S&P 500”) and 5.61% for the Lipper Multi-Cap Value Funds Average, which represents the average return of the multi-cap value funds followed by Lipper (“Lipper Average”). The Fund lagged the S&P 500, but beat our Lipper peers by over 200 basis points. (One basis point is 1/100th of one percent.) Longer term, the Parnassus Endeavor Fund (Trades, Portfolio) is well ahead of both benchmarks for all time periods (one-, three-, five- and ten-years). See the table to the left for the details.
Second Quarter Review
Three companies each reduced the Fund’s return by more than 10 basis points, while three companies each increased the Fund’s return by 60 basis points or more.
Semiconductor manufacturer Intel INTC was the Fund’s biggest detractor this quarter. It cut 53 basis points from the Fund’s return, as its stock sank from $64.00 to $56.14, for a total return of negative 11.8%.* The company delivered better-than-expected results overall, but showed weakness in their datacenter segment, which is a key area of scrutiny. Intel is a turnaround story that will take multiple quarters. We believe the new CEO and the assets the company has amassed over decades of innovation present significant options that should eventually benefit the stock at these levels.
Memory-chip maker Micron MU subtracted 29 basis points from the Fund, as its stock fell from $88.21 to $84.98, for a total return of negative 3.7%. Pricing and demand for memory remained strong across all key markets, but Micron’s stock underperformed due to expectations for slowing volume growth and higher costs from more advanced and expensive chips. We continue to believe in the long-term technology trends across all sectors, such as enterprise, mobile, data centers, and auto, that drive demand for Micron’s memory chips.
Apparel manufacturer Hanesbrands HBI subtracted 13 basis points from the Fund’s return, as its stock slipped from $19.67 to $18.67, for a total return of negative 4.4%. Despite strong innerwear and activewear sales during the first quarter, management tempered its earnings expectations for the remainder of the year, reflecting higher incremental brand investments and the exit of its European innerwear business. Management also provided more details on its new strategy, which is directed toward a more streamlined and performance-driven company. This includes reducing product assortment, exiting underperforming businesses and embracing a more consumer-centric approach.
Our biggest winner was Capital One Financial COF. It contributed 67 basis points to the Fund’s return, as the stock jumped from $127.23 to $154.69, for a total return of 21.9%. Capital One is best known for its credit card business, but it offers a wide range of financial products and services to consumers, small businesses and commercial customers. The stock soared after the company posted its third consecutive quarter of record profits, driven by the exceptionally strong credit profile of its customer base. A combination of government stimulus, loan forbearance and fewer opportunities to spend doubled savings rates for the average consumer, benefitting Capital One by nearly eliminating bad debt.
Biopharmaceutical company Biogen BIIB added 61 basis points to the Fund’s return, as its stock surged from $279.75 to $346.27, for a total return of 23.8%. Biogen develops drugs that treat neurological and neurogenerative disease, including multiple sclerosis and spinal muscular atrophy. The stock soared 40% after the FDA approved Biogen’s experimental Alzheimer’s treatment. More than one hundred other Alzheimer’s drugs have failed in clinical trials over the past 20 years, so the decision is as historic as it is controversial. Investors cheered the breakthrough, which offered new hope to patients and opened a large new frontier for the company.
Credit card issuer Discover Financial DFS increased the Fund’s return by 60 basis points, as its stock leapt from $94.99 to $118.29, for a total return of 25.0%. Discover is a digital bank and payment services company. It offers a variety of consumer banking products and operates one of the largest payment networks. Like Capital One, Discover benefitted from an extremely favorable consumer credit environment. The company’s charge-off rates were significantly below pre-pandemic levels and remained low month after month. Lower credit losses, combined with higher efficiency and cost controls at the company, resulted in explosive profits for investors.
Outlook and Strategy
In the second quarter, the stock market posted gains that exceeded those achieved in the first quarter of the year. This acceleration of returns shows just how powerful the U.S. economic recovery has been coming out of the COVID-19 pandemic. The rise in stock prices has also been remarkably steady. Only reports of higher-than-expected inflation and fears of an early hike in interest rates perturbed markets. By the end of June, investors had all but forgotten these worries, and stocks continued their march to all-time highs.
There is a flip side, however, to ever-increasing stock prices. One concern today is that both stocks and bonds appear overvalued based on historical norms. Smoothly ascending markets also invite investor complacency. Vivid imaginations are required to grasp the potential of some of the market’s highest-flying darlings.
How should one pick stocks in this environment? One very common approach is to go with the flow, or basically buy expensive stocks with captivating stories in the hope that one can sell those stock with an even better story at a higher price. Conversely, one can go against the tide, doing the difficult work of buying undervalued stocks and generating returns by selling them at a fair price. The Parnassus Endeavor Fund (Trades, Portfolio) unquestionably embraces this latter philosophy. Our job is to construct a portfolio of high-quality and socially responsible companies trading at discounted prices. The Fund’s exceptional performance over multiple market cycles has been the investor’s reward.
The Fund made five new investments in the period. Simon Property Group operates premium malls and outlets that are poised to benefit from renewed tourism and the retail relief boom. Becton Dickinson is a medical technology company that provides equipment and supplies critical to the increase in elective health care procedures. Vertex Pharmaceuticals is the market leader in cystic fibrosis therapies. These companies stand out not only on the merits of their business fundamentals, but also for their undervaluation relative to the broader stock market.
We are bottom-up fundamental stock pickers, but equally, I monitor and manage risk at the portfolio level. I am happy to report that tracking error for the Fund has been cut in half compared to the end of 2020. This means the Fund should provide substantially more consistency versus the benchmark going forward, with the goal of improving risk-adjusted returns.
Thank you for your investment in the Parnassus Endeavor Fund (Trades, Portfolio).
Yours truly,
Billy Hwan
Portfolio Manager
1As of 6/30/21.
2As of 6/30/21.
3As a percentage of total net assets.
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.
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.
