The strategy pursues strong risk-adjusted returns by owning a concentrated portfolio of U.S. large cap stocks that are poised to rise but are temporarily out of favor relative to their history or peers.

KEY TAKEAWAYS

• Parnassus Value Equity Fund (Trades, Portfolio) (Trades, Portfolio) (Investor Shares) returned -3.81% (net of fees) for the quarter, underperforming the Russell 1000 Value Index's -2.17%.
• Stock selection in the Health Care sector drove most of the underperformance. Selection in the Consumer Staples and Industrials sectors detracted to a lesser degree.
• The portfolio's positioning remained steady. The Fund maintained its overweights in Information Technology, Communication Services and Financials. We sold Cisco Systems and bought Broadcom for more attractive networking exposure, while adding to our existing cable positions.
• We believe the Fund is well positioned for future returns. Our artificial intelligence–related (AI-related) investments in Information Technology are complemented by holdings that should benefit if performance across other sectors improves. If investor uncertainty around interest rates and the political landscape heightens, we anticipate finding more bargain opportunities.

Market Review

After strong gains in the first quarter of 2024, U.S. large-cap value stocks pulled back as investors remained focused on AI-related storylines and expected Federal Reserve (Fed) interest rate cuts later in the year. The U.S. economy remained resilient, buoyed by a continuation of consumer spending growth, relatively steady employment data and moderating inflation. Amidst this backdrop, most sectors within the Russell 1000 Value Index posted negative returns, with only the Utilities and Consumer Staples sectors ending the quarter in positive territory. The Consumer Discretionary sector was the worst performer, followed by Health Care and Materials.

Performance Review

Selection in Health Care weighed on relative return

The Fund returned -3.81% (net of fees), trailing the Russell 1000 Value's -2.17%. From a sector perspective, stock selection in the Communication Services sector contributed the most to relative performance, followed by selection in the Information Techno-logy and Utilities sectors. The Fund's overweight in Financials also aided results. Stock selection in Health Care, Consumer Staples and Industrials, on the other hand, hindered relative return. The Fund's top contributors were Alphabet, Micron Technology and Taiwan Semiconductor Manufacturing Company, while the bottom contributors were Global Payments, Intel and NICE.

Top Contributors

Alphabet's (GOOG, Financial) stock rose on the strength of robust first-quarter revenue growth underpinned by noteworthy gains in search advertising, YouTube advertising and the cloud business. Signs that the company is accelerating its development of AI solutions sparked investor optimism.

Micron Technology (MU, Financial) posted fiscal-third-quarter results that met expectations. Micron's DRAM (dynamic random access memory) and NAND (non-volatile storage technology) segments grew revenue strongly, continuing the company's recovery from a cyclical downturn last year. We believe Micron is well positioned to capitalize on AI-driven demand for greater memory.

Taiwan Semiconductor Manufacturing Company's (TSM, Financial) leading position in AI chip production continued to boost investor sentiment on the stock. During the quarter, announcements by several large technology companies to expand their AI investments signaled insatiable demand for TSMC's chips and contributed to the stock's rise.

Oracle (ORCL, Financial) stock surged in June after management forecasted double-digit revenue growth for fiscal year 2025, powered in part by growth in its cloud infrastructure business. Investor sentiment was further bolstered by the company's announcement of a new partnership with ChatGPT-maker OpenAI and Microsoft and another with Google Cloud.

Brookfield Renewable (BEPC, Financial) shares climbed sharply after the firm announced a $10 billion agreement with Microsoft to expand its renewable power capacity. The agreement is the largest corporate clean energy deal to date. Focusing largely on wind and solar, the buildout will seek to address rising electricity demand from data centers.

Bottom Contributors

Global Payments (GPN, Financial) stock fell on investor fears that a slowing economy could weigh on payment processing companies. The company will host an investor day focused on improving efficiencies and strategic redeployment of assets in the fall, which we believe will unlock hidden value in the undervalued shares.

Intel (INTC, Financial) disappointed investors with a less-than-stellar second-quarter forecast, driving shares lower, despite first-quarter results that largely met expectations. Additionally, the company revealed greater losses than anticipated in its foundry operations during the quarter.

NICE (NICE, Financial) reported first-quarter earnings that exceeded consensus estimates. However, the stock fell on news the company's CEO plans to leave at the end of the year and on concerns that its contact center software would be replaced by generative AI. We believe the concerns are overblown and anticipate instead that the firm will integrate AI features successfully.

Align Technology (ALGN, Financial), the manufacturer of leading dental aligner Invisalign, logged solid first-quarter earnings and improved guidance. Shares fell over concerns of weakening consumer sentiment since orthodontic costs are often not covered by insurance. We maintain our view that Align will take market share from metal braces.

Baxter International (BAX, Financial) saw its shares decline after reporting disappointing results for its Hill-Rom subsidiary amid weakness in the primary care market. If Baxter's management follows through on its stated intention to sell or spin off its kidney care segment this year, the transformation should rekindle investor optimism.

Portfolio Positioning

Portfolio positioning remains steady with slight adjustments

The Fund's largest overweights relative to the benchmark as of June 30, 2024, were in the Information Technology, Communication Services and Financials sectors, while the Fund's three largest underweights were in the Energy, Consumer Staples and Industrials sectors.

During the second quarter, the Fund's overweight position in the Information Technology sector decreased slightly as we sold our position in Cisco Systems (CSCO, Financial) and used most of the proceeds to buy Broadcom (AVGO, Financial), a leading semiconductor company and provider of custom silicon products. Both stocks provide similar exposure to networking technology, but we believe Broadcom offers more upside from AI infrastructure spend and defensiveness due to its software assets.

The Fund's exposure to the Communication Services sector increased slightly as we used proceeds from the Cisco exit to increase our existing exposure to Comcast (CMCSA, Financial) and Charter Communications (CHTR, Financial). We consider both Comcast and Charter to be trading at attractive valuations following a period of soft performance. These moves increased the Fund's overweight position in the Communication Services sector.

In the Financials sector, we tapered our positions across multiple holdings, including Bank of America (BAC), Bank of New York Mellon (BK), Fidelity National Information Services (FIS), Charles Schwab (SCHW), Progressive (PGR) and American Express (AXP). After more than a year of uncertainty, investors now accept the idea that the U.S. economy could experience a soft landing, which has driven these stocks higher. While there is room to run if capital markets continue to recover, we reduced the Fund's overweight in Financials slightly to add to our existing positions in cable and other stocks with more upside potential.

With stocks pushing multiple record highs, there are fewer bargains in the market. We therefore made fewer new purchases this quarter, consistent with our disciplined investment process. Our bottom-up approach allows us touncover quality businesses and invest only when they are trading at attractive valuations.

Outlook

Finding bargain opportunities amid economic uncertainty

We continue to maintain the Fund's balanced positioning between offensive and defensive sectors, given that available economic data suggests a balanced mix of risks and opportunities. After peaking at over 9% in 2022, headline inflation is trending lower in response to restrictive monetary policy by the Fed. However, the unpredictable timing of Fed rate cuts, concerns that economic growth could stall and tensions over the upcoming presidential election are all expected to increase investor uncertainty. Our strategy is to capitalize on such volatility by investing in quality businesses when they reach attractive valuations.

We remain confident in our portfolio's positioning and strategy for potential future returns. The possibility of Fed rate cuts creates a favorable environment for equities, benefiting our holdings in the Financials sector. Our strategy focuses on undervalued stocks of quality companies, which are likely to rise quickly if the market rally broadens. Additionally, advancements in AI should boost our strategic investments in the Information Technology sector, where we carefully balance the upside potential against high market expectations.

Our positioning today is an outcome of our bottom-up investment process. While it is tempting to bet on specific macroeconomic outcomes, in our experience, fundamental factors can far outweigh near-term macroeconomic factors for generating attractive returns. This thesis informs our approach for building concentrated portfolios with high conviction and high active share.

Macroeconomic drivers, however, can result in temporary dislocations in the market, which create opportunities for active managers. During the rest of the year, if uncertainty around interest rates, geopolitical events and the domestic political environment increases, we anticipate discovering more bargain opportunities to invest in for the long term.

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.

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.