As of September 30, 2021, the net asset value (“NAV”) of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares was $58.21, so the total return was a loss of 4.53% in the third quarter. This compares to a loss of 0.78% for the Russell 1000 Value Index (“Russell 1000 Value”), a gain of 0.58% for the S&P 500 Index (“S&P 500”), and a loss of 1.17% 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 substantial lead we achieved in the first half of the year narrowed in the quarter as our cyclical stocks sold off. The Fund fell behind the Russell 1000 Value by 375 basis points, the S&P 500 by 511 basis points and our Lipper peers by over 3%. (One basis point is 1/100th of one percent.) However, we are well ahead of all three benchmarks for the year to date and all time periods (one-, three-, five- and ten-year periods).
With this report, we are introducing the Russell 1000 Value as the primary index for measuring and communicating the performance of the Parnassus Endeavor Fund (Trades, Portfolio). This index fits the Fund’s existing investment strategy and portfolio better than the S&P 500, which has become dominated by mega cap technology stocks. Only the index is changing; the Fund’s investment strategy remains the same.
To the left is a table that summarizes the performance of the Parnassus Endeavor Fund (Trades, Portfolio), Russell 1000 Value, S&P 500 and Lipper Average. Even though our index changed starting October 1, 2021, we are keeping the S&P 500, our old index, in the table until May 2022 for ease of comparison. Note that the one-year performance of the Russell 1000 Value exceeded that of the S&P 500, so the change was not made to make the portfolio manager’s job easier.
Third Quarter Review
Our three biggest losers each reduced the Fund’s return by 58 basis points or more. In comparison, our three biggest winners each increased the Fund’s return by only 14 basis points or more. Among the winners this quarter are high-quality, more expensive stocks, whereas the losers this quarter were less expensive cyclical names.
Our biggest detractor was transportation provider FedEx (FDX, Financial). It took 77 basis points from the Fund’s return, as its stock sank from $298.33 to $219.29, for a total return of negative 26.3%.* FedEx’s quarterly earnings disappointed investors, as wage hikes and labor availability issues caused its profits to fall. We’re holding onto our position, because we see these pressures as temporary. Unemployment remains relatively high, and FedEx offers flexible jobs with good pay and benefits. Moreover, the company operates with difficult-to-replicate scale in an industry that benefits from long-term growth in ecommerce.
Specialty retailer Gap (GPS, Financial) cut the Fund’s return by 76 basis points, as its stock sank from $33.65 to $22.70 for a total return of negative 32.3%. Gap sells clothes and accessories under the Old Navy, Banana Republic, Athleta and other brands. Investors lost faith in the company’s turnaround due to larger concerns over supply-chain disruptions in Vietnam and higher shipping and labor costs. Nevertheless, management is focused on factors they can control, such as consolidating the U.S. store base, closing international operations, and optimizing customer lifetime value. In our view, these actions should allow Gap to take market share in the company’s key categories for years to come.
Data infrastructure provider Western Digital (WDC, Financial) reduced the Fund’s return by 58 basis points, as its stock fell from $71.17 to $56.44 for a total return of negative 20.7%. Investors grew concerned that the semiconductor cycle has peaked, as recent pricing trends have turned down due to supply-chain bottlenecks constraining demand in some of Western Digital’s key end markets. This is a cyclical business, but we’re holding onto our position because we believe the longer-term secular trends are as strong as ever, as the amount of data being created, stored and analyzed is increasing exponentially. Once the short-term bottlenecks are cleared, we expect the uptrend in semi-conductors to continue.
Life sciences tools company Agilent (A, Financial) was our biggest winner. It added 17 basis points to the Fund’s return, as the stock climbed from $147.81 to $157.53, for a total return of 6.7%. The company again beat earnings and raised guidance, as the business continued to fire on all cylinders. Management is executing very well with significant market-share gains and best-in-class sales growth in wide-moat markets. Agilent specifically pointed to sustained momentum and a continued recovery in its more cyclical chemical and energy markets. Going forward, we believe the company will benefit from shifts in the portfolio toward applications such as large-molecule research for biopharmaceutical customers, as well as further margin expansion.
Next, Alphabet (GOOG, Financial)(GOOGL, Financial) contributed 17 basis points to the Fund’s performance, as its stock rallied from $2,441.79 to $2,673.52, for a total return of 9.5%. The company, formerly named Google, reported another strong quarter that beat expectations handily. Web search and YouTube growth accelerated, while the company’s cloud business continued to scale and achieve better margins. From a capital-allocation perspective, we appreciate management’s increased willingness to return cash through share repurchases. All these trends should continue to benefit shareholders.
Lastly, Accenture (ACN, Financial) increased the Fund’s return by 14 basis points, as the stock moved higher from $294.79 to $319.92, for a total return of 8.8%. Accenture is a global professional-services company that specializes in information technology services and consulting. The company reported strong growth in bookings in both consulting and outsourcing, an indication that its enterprise clients continue to turn to Accenture for help mapping out digital transformations in the face of increased market uncertainty. The company’s board also repurchased more shares and increased the quarterly dividend, giving the stock price a boost.
Outlook and Strategy
U.S. stock markets ended flat for the quarter, after rising steadily through July and August and falling for most of September. No single event caused the S&P 500 to crest. Instead, multiple worries, including peak government stimulus, disrupted supply chains and moderating consumer demand outweighed optimism that the economy could recover decisively from the coronavirus pandemic and its variants. High stock market valuations also played a role in the pullback, as investor expectations overshot earnings growth.
Today’s demand environment generally benefits rapidly expanding growth stocks due to the scarcity premium. This echoes what we saw in the early months of the pandemic. From March 2020 to September 2020, growth stocks soared when economic activity contracted due to mandatory government lockdowns. However, value stocks, which make up the majority of the Parnassus Endeavor Fund (Trades, Portfolio), caught up from October 2020 to May 2021, as growth became more broad based. This summer, market leadership by value stocks began to reverse again. Companies operating in economically sensitive sectors such as hardware and retail struggled, contributing to the Parnassus Endeavor Fund (Trades, Portfolio)’s underperformance this quarter.
The Parnassus Endeavor Fund (Trades, Portfolio) has long been, and will continue to be, managed as a large cap value stock fund, a categorization validated by mutual fund rating agency Morningstar. As a result, the Parnassus Endeavor Fund (Trades, Portfolio)’s primary benchmark changed from the S&P 500 to the Russell 1000 Value. We did not make this decision lightly, and did so solely in the interest of shareholders. The Russell 1000 Value is the most used benchmark for large cap value funds and therefore the most appropriate benchmark for the Parnassus Endeavor Fund (Trades, Portfolio). Our value-oriented investment approach will not change. Indeed, our goal for the new benchmark is to assure shareholders that the Fund’s investment style is intentional and durable well into the future.
Why does a commitment to value investing make sense now? Inflation and valuations offer two compelling reasons. Inflationary forces are creeping up everywhere, and many of them, such as housing, commodities and wages, could prove to be sticky. Massive fiscal stimulus by the government may have peaked, but its effects on future inflation and growth have yet to be fully felt. Secondly, investors ignore valuations at their peril.
A single company priced for 20% growth in perpetuity must take over the world to justify some of today’s prices, and the idea that hundreds of such companies can exist simultaneously smacks of madness. The Parnassus Endeavor Fund (Trades, Portfolio)’s approach of buying good companies at bargain prices isn’t necessarily a panacea, but it can offer a much-needed hedge.
1As of 09/30/21.
2As of 09/30/21.
3As a percentage of total net assets.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE GUIDELINES The Fund evaluates financially material ESG factors as part of the investment decision-making process, considering a range of impacts they may have on future revenues, expenses, assets, liabilities and overall risk. The Fund also utilizes active ownership to encourage more sustainable business policies and practices and greater ESG transparency. Active ownership strategies include proxy voting, dialogue with company management and sponsorship of shareholder resolutions, and public policy advocacy. There is no guarantee that the ESG strategy will be successful.
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.
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