As of June 30, 2022, the net asset value (“NAV”) of the Parnassus Endeavor Fund (Trades, Portfolio) – Investor Shares was $44.30, so the total return for the second quarter was a loss of -13.07%. This compares to a decline of -12.21% for the Russell 1000 Value Index (“Russell 1000 Value”). For the year-to-date period, the Parnassus Endeavor Fund (Trades, Portfolio) –Investor Shares has posted a loss of -18.01% compared to the Russell 1000 Value’s loss of -12.86%. It has been a challenging year for stocks, but especially for the Fund. Technology stocks, where the Fund is overweight, led the decliners. Energy, in which we do not invest, is the only sector with a positive real return so far this year.
On the left is a table that summarizes the performances of the Parnassus Endeavor Fund (Trades, Portfolio), the Russell 1000 Value and the S&P 500 Index. The returns are for the one-, three-, five- and ten-year periods.
Second Quarter Review
For the quarter, the Parnassus Endeavor Fund (Trades, Portfolio) lagged our benchmark by 0.86%. While stock selection was neutral to positive, sector allocation was negative and explained all our underperformance. Our overweight positioning in technology was the biggest detractor, followed by our underweight positioning in the energy sector. Within stock selection, health care was our biggest contributor.
Shares of Charles Schwab (SCHW, Financial) fell by -24.8% in the quarter, which cut -0.4%* from the Fund’s return. The stock slid in April after the company forecast faster cash withdrawals than investors anticipated, lowering future earnings. The brokerage firm earns interest income on cash held within client portfolios, so it is one of the few beneficiaries of an aggressive Federal Reserve. However, higher interest rates also lead some customers to invest in lower-margin products within Schwab’s ecosystem rather than hold cash. We maintained our position since we believe the company can still grow earnings substantially as the Fed raises rates through the rest of the year.
Gap’s (GPS, Financial) stock returned -40.8% in the quarter, which detracted -0.4% from the Fund’s return. Gap is the parent company of Old Navy, the largest individual apparel brand by retail sales in the United States. Poor merchandising decisions, elevated freight costs and supply-chain disruptions related to COVID-19 shutdowns in China negatively impacted same-store sales and profitability. Meanwhile, persistently high oil prices also crowded out consumer demand for apparel. Finally, the stock took another leg down when Old Navy CEO Nancy Green abruptly departed. We believe these problems are known, temporary, and fixable, so we continued to hold our shares.
Hanesbrands (HBI, Financial), a global manufacturer of inner and activewear, slid -30.1% in the quarter, reducing the Fund’s return by -0.4%. The company is facing an incrementally more-challenging global macro environment, with higher input and freight costs expected for the rest of the year. As such, management no longer expects a second half margin expansion, and now forecasts earnings to be at the low end of its prior annual guidance. Investors are also concerned that excess inventory across some of the company’s wholesale partners, like Walmart and Target, may lead to slower ordering, potential canceled orders and additional markdowns to balance inventory.
Turning to our winners, global pharmaceutical giant Merck (MRK, Financial) was the Fund’s best performer in the quarter. The stock returned 12.0%, contributing a positive 0.6% to the Fund’s return. Merck’s sales grew faster than investors expected, driven by extensions in cancer drug Keytruda, greater adoption of HPV vaccine Gardasil and the launch of COVID-19 pill Lagevrio. In late June, Merck also entered talks to acquire biotech Seagen for $40 billion to bolster its oncology franchise. Investors praised Merck’s progress in diversifying its sources of revenue by bidding up the company’s shares.
Sysco (SYY, Financial), the world’s leading foodservice distributor, was also a positive contributor in the quarter with the stock returning 4.4%, adding 0.5% to the Fund’s return. Sysco is the largest-scaled player in its industry, and the lowest-cost supplier, so it uniquely benefits from the current inflationary environment. The company is gaining independent-restaurant market share faster than expected, thanks to solid execution of the company’s new pricing tool, loyalty program, and staffing levels. Sysco is also skillfully taking out structural costs while passing through elevated inflation, raising the prospect for enhanced profitability coming out of the pandemic.
Finally, Vertex Pharmaceuticals (VRTX, Financial) had another strong quarter, as its stock returned 8.0%, adding 0.3% to the Fund’s return. With AbbVie’s disappointing readout in cystic fibrosis, Vertex solidified its effective monopoly in the space. Vertex continues to grow its cystic fibrosis franchise internationally and invest in addressing the remaining patient population through its partnership with Moderna. Vertex has also had several pipeline wins, notably in later stage trials for APOL1-mediated kidney disease and its CRISPR partnership for sickle cell disease and beta thalassemia. We believe Vertex’s cystic fibrosis franchise is now fairly valued, but continue to be excited about the pipeline opportunities with five clinical programs with proof of concept.
Outlook and Strategy
The U.S. stock market, as measured by the S&P 500 Index, deflated -20% in the first half of 2022. Investors today confront a drumbeat of negative news—new virus variants, the war in Ukraine, lockdowns in China, and global supply-chain disruptions. For stocks, the focus is on the Federal Reserve’s plan to combat inflation through restrictive monetary policy. The effects have been dramatic. Asset values have collapsed, consumer demand has evaporated, and economic growth has slowed. If we are not already in a recession, we can surmise one is near. At the same time, this is not a typical downturn since consumer balance sheets are strong and jobs remain plentiful.
How are we investing in this unprecedented environment? First, our investment philosophy of buying good companies at discounted prices remains the same. Characteristics we look for in a good company include a long history of consistently high profitability, a conservatively financed balance sheet and a socially responsible enterprise. To buy at a discounted price means the stock is selling at an inexpensive valuation relative to our assessment of the company’s future potential. Certainly, compared to the end of 2021, stocks are selling at discounted prices. It is our job, then, to determine and assemble a portfolio of good, if not the best, companies out there.
To that end, we had an active second quarter, selling three positions and buying three others. We profitably sold cloud software company VMware (VMW, Financial) and electronic health records provider Cerner (CERN, Financial) when larger technology firms acquired them. Conversely, we exited PayPal (PYPL, Financial) due to worsening fundamentals in ecommerce retail, opting instead to harvest tax losses.
We initiated positions in Amdocs (DOX, Financial), Deere (DE, Financial), and Ross Stores (ROST, Financial). Amdocs is a leading IT consultancy that services the telecommunications industry worldwide. It is poised to benefit from the increasing competitive intensity of wireless and cable players as they undergo digital transformation, cloud migration, and 5G adoption. We purchased farming equipment company Deere when its stock price sank due to supply-chain concerns. Deere is a pioneer in precision agriculture, a promising field that aims to boost crop output while using less resources such as land, fertilizer and water. Finally, we bought shares of off-price retailer Ross Stores. The company is in a prime position to benefit from snarled supply-chains because it helps vendors and manufacturers sell excess inventory instead of throwing it away.
Finally, a note about our benchmark, the Russell 1000 Value. A recent reconstitution of this index by its owner resulted in surprising changes. This is due to the dramatic fluctuations in stock values this year, which got codified in June. Meta, formerly Facebook, now appears in our benchmark, as does Netflix, Zoom, and Pinterest. Even crypto wallet Coinbase, meme stock GameStop and electric vehicle startup Lucid Group have moved in. It is not clear what to make of these new neighbors or how long they will stay. Rest assured that we are committed to search the entire universe of stocks available in an effort to generate attractive, long-term risk-adjusted returns for our shareholders.
Thank you for your investment in the Parnassus
Endeavor Fund.
Sincerely,
Billy Hwan, Portfolio Manager
1As of 06/30/22.
2As of 06/30/22.
3As a percentage of total net assets.
4As of 06/30/22.
5As 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.
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.
