As of September 30, 2023, the net asset value (“NAV”) of the Parnassus Value Equity Fund (Trades, Portfolio) – Investor Shares (“the Fund”) was $45.58. The Fund's total return for the quarter was a loss of 3.80%. This compares to a loss of 3.16% for the Russell 1000 Value Index (“Russell 1000 Value”). Year to date, the Fund posted a gain of 0.68%. This compares to a gain of 1.79% for the Russell 1000 Value.
Third Quarter Review
The Russell 1000 Value index lost 3.16% in the third quarter, retracing most of the gains notched in the first half of the year. The Parnassus Value Equity Fund (Trades, Portfolio) - Investor Shares lost 3.80%, trailing the index by 64 basis points. (One basis point is 1/100th of one percent.) Sector allocation negatively affected our performance. Specifically, resurgent oil prices drove gains in the Energy sector, so our avoidance of the sector as a fossil fuel-free fund* detracted from our relative return. The positive effect of stock selection on performance was overwhelmed by the negative effects of sector allocation since, outside of Energy, all other benchmark sectors delivered negative returns.
Each of our three largest detractors reduced the Fund's returns by 0.3% or more this period. Two of these were driven by a slowdown in consumer spending on food staples and restaurants. Our three largest contributors added 0.2% or more to the Fund's return. Information Technology and Communication Services were among our best best-performing sectors.
Ball Corp. (BALL, Financial), the largest maker of aluminum cans and packaging, was our largest detractor this quarter. Its stock fell 14.2% and clipped 0.4%** from the Fund's return. Weak sales at Ball's top beverage customers constrained can volumes and weighed on Ball's financial results. Separately, management announced it would sell its long-held aerospace business, allowing the company to pay down debt, repurchase shares and further improve its sustainability profile. We believe the end-market headwinds facing Ball's business should abate over the coming years and lead to a substantially higher share price.
The stock of medical-products company Baxter International (BAX, Financial) dropped 16.6%, reducing the Fund's return by 0.3%. A surge in medical procedures earlier in the year leveled off, contributing to weaker-thanexpected demand for medical supplies and instruments. Moreover, investors remained concerned about Baxter's restructuring plans, including the sale of the company's BioPharma assets to private equity for $4.25 billion. We believe the sale, when completed, will meaningfully reduce company leverage while simplifying business operations. Continued hospital spending, new product launches and increased medical utilization rates should benefit Baxter's sales and help drive shares higher.
Sysco's (SYY, Financial) stock fell 10.4%, cutting 0.3% from the Fund's return. Weaker consumer spending reduced the total food volume Sysco supplies to restaurants, while receding inflation provided less of a tailwind for pricing and profitability. Despite this temporary slowdown, Sysco's position as the largest distributor with only mid-teens market share positions the company well for continued long-term growth. Strategic investments in technology and distribution will further enable Sysco to emerge stronger from this downturn.
Our biggest contributor to fund performance was Global Payments (GPN, Financial). The payments processing firm's stock increased 17.4%, adding 0.4% to the Fund's return. The company achieved record financial performance, driven by its B2B business's expansion into multiple new geographies. New CEO Cameron Bready also set higher financial targets for the full year, allaying investor concerns that growth and marketshare gains had slowed. We continue to like the stock and believe that the company's low valuation and prudent capital allocation will drive investor interest and the stock price higher.
Western Digital's (WDC, Financial) stock surged 20.3%, boosting the Fund's returns by 0.4%. Higher prices in both spot and contract markets signaled a long-awaited bottom for memory demand and potential for the industry to resume growth. The company also indicated that its strategic review is nearing completion, which could result in a merger with its Japanese JV partner and unlock meaningful cost synergies. We remain optimistic that memory demand can inflect higher and that memory prices will benefit from industry consolidation.
Alphabet's (GOOGL, Financial)(GOOG, Financial) stock appreciated 9.3%, adding 0.2% to the Fund's return. The company posted strong results, driven by a recovery in digital advertising across Search and YouTube, and strength in its Cloud business. While investor sentiment has improved recently, Alphabet's competitive position in generative AI remains subject to heightened investor scrutiny. We're confident the company is positioned to benefit from the growing adoption of generative AI, which will further enhance and solidify its competitive positioning across its business segments.
Outlook and Strategy
Higher interest rates and surging oil prices dampened economic growth and stock markets this quarter. Compared to the first half of the year, investors turned cautious about the outlook for the U.S. economy as excess consumer savings are depleted, draining consumer confidence. Moreover, the Federal Reserve reiterated its resolve to tame inflation by keeping interest rates higher for longer, which raises borrowing costs for consumers and companies alike. Tighter credit conditions dampen the appetite to spend, which raises the risk of recession. The ongoing transition away from an era of easy money to tighter credit is sure to increase economic uncertainty, as we have already seen this year.
While we can't predict whether this period of uncertainty will be short or long, as stewards of your capital, we remain steadfast in our bottom-up investment process. At the heart of this process is investing in companies well-positioned to navigate challenges, emerge stronger and reward the patient investor. Such companies that are typically have strong competitive positions, profitable business models, good management teams and resilient balance sheets. These are also the characteristics that should shine when money is valuable and not free.
We are confident that the Value Equity portfolio today consists of a solid collection of companies that can offer both resilience and attractive upside potential over the long term.
We concluded a busy third quarter, buying five companies and exiting five others. We initiated stakes in Estee Lauder (EL, Financial), Disney (DIS, Financial), Cigna (CI, Financial), Bio-Rad Laboratories (BIO, Financial) and Brookfield Renewable Partners (BEP, Financial).
A key tenet of the Value Equity Strategy is to buy quality companies whose stocks are trading at discounted prices. In practice, this means we gravitate toward stocks that the market has left behind as a starting point for idea generation and further research. This year, few sectors have been as hard hit as consumer stocks, giving us the chance to buy Estee and Disney at discounts above 50% to their postpandemic high prices. Estee is a global beauty company that owns trusted brands such as Clinique, La Mer, MAC and Aveda. We want to see management stabilize growth and inventories in China and invest in their strong line of skincare products. Disney is the world's largest media and consumer experiences company. Concerns about streaming's drag on profitability, the ongoing decline in linear TV and a potential slowdown in theme parks are well reflected in Disney's poor price performance, which is approaching 10-year lows. We believe the new management's plan to prioritize profitability and divest under-performing assets should dramatically improve investor confidence in the stock.
We acquired two health care names in the quarter, recognizing the essential nature of their products and services. Bio-Rad Laboratories makes tools for life sciences and clinical diagnostics. The industry is facing temporary cuts in drug development budgets and a weak biotechnology funding environment, particularly in China. However, biologics innovation is a long-term secular growth trend that will enable Bio-Rad's industry-leading products to gain share. We also added health insurance provider Cigna. Cigna has grown earnings at a double-digit rate over the last decade, but the stock trades at just 10x earnings due to regulatory overhang going into an election year. These concerns should ease over time, as the company plays a key role in keeping drug costs lower.
Higher interest rates have battered utility stocks, which have fallen squarely into the market's bargain bin.
Yet global demand for electricity is resilient, even in recessions, and is projected to outpace GDP growth with the continued adoption of electric vehicles, generative AI and net-zero targets by corporations and governments. That disconnect led us to buy Brookfield Renewable Partners as its stock price sold off toward the third quarter's end. The company operates one of the world's largest pure-play renewable power utility platforms across hydroelectric, wind, solar and storage technologies. With an investment grade rating and one of the best balance sheets in the sector, we believe Brookfield is poised to benefit from secular growth in corporate renewable power demand.
To fund these purchases, we sold W. W. Grainger (GWW, Financial) at a substantial gain, and booked profits in Merck (MRK, Financial) and Applied Materials (AMAT, Financial). We also harvested tax losses from the sale of V. F. Corp (VFC, Financial) and Target (TGT, Financial). Both companies face higher-than-anticipated challenges that render the riskreward ratio unattractive.
Our aim is to constantly evaluate both new and existing investment ideas and recycle capital into companies that offer better prospects for risk-adjusted returns. Market volatility, while unsettling, can provide an opportune time for active managers with a value orientation to find more such companies trading at bargain prices. We are deeply committed to our timetested process and philosophy, which has a record of rewarding patient shareholders through economic cycles.
Thank you for your investment in the Parnassus Value Equity Fund (Trades, Portfolio).
Billy J. Hwan
Lead Portfolio Manager
Krishna S. Chintalapalli
Portfolio Manager
Earnings growth is not representative of the fund's future performance.
Effective December 30, 2022, the name of the Parnassus Endeavor Fund changed to the Parnassus Value Equity Fund (Trades, Portfolio), and Krishna Chintalapalli was named a portfolio manager of the Value Equity Fund.
Mutual fund investing involves risk, and loss of principal is possible. 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.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) 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.
The Parnassus Funds are fossil fuel-free funds, meaning they do not invest in companies that derive significant revenues from the extraction, exploration, production or refining of fossil fuels; the Funds may invest in companies that use fossil fuel—based energy to power their operations or for other purposes.
Price/Book (P/B) Ratio is the ratio of a stock's latest closing price divided by its book value per share.
The Russell 1000® Value Index and the Standard & Poor's 500 Composite Stock Price Index (the S&P 500 Index) are widely recognized indices of common stock prices. The Russell 1000 Value Index is a market capitalization weighted index that measures the performance of those Russell 1000 companies with lower price -to-book ratios and lower forecasted growth rates. The index is based on the performance of the largest publicly traded funds in the strategy group.The S&P 500 Index is an unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization. Index performance includes the reinvestment of dividends and capital gains. An individual cannot invest directly in an index. An index reflects no deductions for fees, expenses or taxes. Returns shown for the fund do not reflect the declaration of taxes a shareholder would pay on the fund distributions or the redemption of fund shares. The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Parnassus Investments. Copyright © 2023 by S&P Dow Jones Indices LLC, a subsidiary of McGraw- Hill Financial, Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC's indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor's Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions or interruptions of any index or the data included therein.
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