As of December 31, 2021, the net asset value (“NAV”) of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares was $54.03, so after taking dividends into account, the Fund’s total return for the year was 31.12%. This compares to a gain of 25.16% for the Russell 1000 Value Index (“Russell 1000 Value”), a gain of 28.71% for the S&P 500 Index (“S&P 500”), and a gain of 26.22% for the Lipper Multi-Cap Value Funds Average, which represents the average return of the multi cap value funds followed by Lipper (“Lipper Average”). It was a terrific year for the Parnassus Endeavor Fund (Trades, Portfolio), driven by our holdings in financials and information technology stocks. We surpassed each of our closest benchmarks, the Russell 1000 Value and the Lipper Average, by over 490 basis points, while exceeding the S&P 500’s return by over 241 basis points. (One basis point is 1/100th of one percent.)
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 over multiple time periods. I am delighted to report that the Fund beat all the indices for all time periods shown, often by a substantial margin. The Fund’s returns are especially strong over the three-year period during which I have served you as portfolio manager, but since we invest money for the long term, we’re most proud of our five- and ten-year track records. Over those periods, the Parnassus Endeavor Fund (Trades, Portfolio) - Investor Shares has produced an annual total return of over 18%, earning us the ranks of #3 (out of 538 funds) for the five-year and #1 (out of 393 funds) for the ten-year in Lipper‘s Multi-Cap Value Funds Category, based on total return.** I am thrilled to offer our long-term shareholders such impressive results.
Each of our three largest detractors reduced the Fund’s return by 25 basis points or more. These stocks hail from different sectors, so the problems pressuring their share prices are idiosyncratic. Happily, our winners dominated our losers in both number and magnitude. Each of our three biggest contributors added 167 basis points or more to the Fund’s return. Financial and information technology firms were well represented in the winners list, reflecting the economy’s strong growth in 2021.
Our biggest loser was wireless carrier Verizon (VZ, Financial). It reduced the Fund’s return by 33 basis points, as its stock slipped from our average cost of $56.94 to $51.96, for a total return of negative 5.8%.* The company executed relatively well in a tough environment, but the stock failed to keep up with the broader market. Investors grappled with intensifying competition in the form of more promotional activity from peers and new entrants in the form of cable companies. The near-term capital requirements of building out a 5G network with less-certain long-term monetization potential also weighed on the stock.
Biopharmaceutical company Biogen (BIIB, Financial) subtracted 26 basis points from the Fund’s return, as its stock sank from our average cost of $272.24 to $239.92, for a total return of negative 10.3%. Biogen develops drugs that treat neurological and neurogenerative disease, including multiple sclerosis and spinal muscular atrophy. The stock soared after the FDA approved Biogen’s experimental Alzheimer’s treatment, but subsequently crashed as the approval decision was beset with controversy. At under 13x next year’s profits, Biogen’s stock price is on the floor. We see upside potential, as this wide-moat business continues to produce both life-saving therapies and abundant cash flow.
Specialty retailer VF Corp. (VFC, Financial) cut the Fund’s return by 25 basis points, as its stock fell from $85.41 to $73.22, for a total return of negative 12.0%. The company reported lackluster results as their margins and growth outlook fell short of investor expectations. Disruptions throughout the supply chain, including temporary lockdowns, capacity constraints and logistics delays continued to negatively impact sales and margins. Management also noted limited operational leverage in the near term, as the company outlined incremental expenses to support demand creation and digital transformation investments. These investments should allow the company to better capitalize on long-term trends around increased outdoor activities, active lifestyles and more casual wear.
Semiconductor equipment manufacturer Applied Materials (AMAT, Financial) was our biggest winner. It contributed 433 basis points to the Fund’s return, as its stock soared from $86.30 to $157.36, for a total return of 83.6%. Applied continues to benefit from multi-year trends for increasing chip demand and complexity. Industry-wide equipment spend and the company’s backlog are also at record highs. The company did miss expectations this quarter due to supply chain shortages, but we are confident that this is an issue with supply, not demand, and should be remedied within a few quarters.
Charles Schwab (SCHW, Financial), the online brokerage firm and bank, returned 60.2% and contributed 268 basis points to the Fund’s performance, as its stock surged from $53.04 to $84.10. Schwab earns interest revenue on its clients’ cash balances, and the stock rallied as traders anticipated that the Federal Reserve would increase its benchmark Fed Funds rate. Over the course of the year, market expectations increased from zero Fed Funds rate hikes over the next twelve months to three hikes. If the market is correct, Schwab’s interest revenue should increase meaningfully in 2022.
Capital One (COF, Financial) added 167 basis points to the Fund’s return, as its stock jumped from $98.85 to $145.09, for a total return of 49.3%. 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 marched higher following a string 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.
Outlook and Strategy
U.S. stock markets posted another strong year of double-digit gains following the onset of the pandemic in early 2020. Despite worrisome outbreaks of the Delta and Omicron coronavirus variants, the S&P 500 marched steadily higher on the back of robust corporate earnings growth and fiscal stimulus. Market valuations also remained lofty, leading the index to hit 70 all-time highs over the course of President Biden’s first year in office.
2021 was a transition year, not just for the U.S. presidency, but for the Parnassus Endeavor Fund (Trades, Portfolio) as well. As the new lead portfolio manager, I implemented a series of risk-management measures that diversified our holdings and steadied our returns. ESG has been further integrated into our investment process, with our emphasis on good workplaces extended to all Parnassus funds. In October, the Russell 1000 Value Index replaced the S&P 500 as the Parnassus Endeavor Fund (Trades, Portfolio)’s primary benchmark. This substitution was made to acknowledge the role the Parnassus Endeavor Fund (Trades, Portfolio) can play as the foundational large cap value fund in client portfolios.
What hasn’t changed is the Parnassus Endeavor Fund (Trades, Portfolio)’s long-standing investment philosophy of buying good and socially responsible companies at bargain prices. This means we develop our shopping list of quality stocks we’d like to buy and wait for a sufficiently discounted price. We call this approach relative-value, or clean-value, investing. It was designed to combine the best of traditional value investing with the quality bias of an active ESG manager.
Why does a commitment to value investing make sense now? Inflation and valuation offer two compelling reasons. High housing costs and rising wages are fueling broad-based inflation that could spur higher interest rates this year. Such a scenario would benefit value stocks that generate cash flow now, compared to growth stocks that promise cash far into the future. Secondly, growth stocks are priced at levels rivaling those seen during the late 1990s tech bubble. As it did then, a sudden change in market sentiment could spark a dramatic rebalancing of investor dollars from growth to value. Most of the companies in the Parnassus Endeavor Fund (Trades, Portfolio) are poised to take advantage of such a market rotation.
Thank you for your investment in the Parnassus Endeavor Fund (Trades, Portfolio).
Yours truly,
Billy Hwan, Portfolio Manager
1As of 12/31/21.
2As of 12/31/21.
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. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived.
Also check out:
