Parnassus Value Equity Fund Q2 2024 Investment Commentary

Parnassus Value Equity Fund

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.

Fund Facts

Investor Shares

Institutional Shares

Ticker

MUTF:PARWX

MUTF:PFPWX

Net Expense Ratio 1

0.88%

0.65%

Gross Expense Ratio

0.93%

0.72%

Inception Date

04/29/2005

04/30/2015

Benchmark

Russell 1000 Value Index

Asset Class

U.S. large cap value

Objective

Capital appreciation

Performance

Annualized Returns (%)

As of 06/30/2024

3 Mos.

1 Yr.

3 Yr.

5 Yr.

10 Yr.

PARWX – Investor Shares

-3.81

15.13

2.56

14.34

12.58

PFPWX – Institutional Shares

-3.74

15.38

2.79

14.59

12.81

Russell 1000 Value Index

-2.17

13.06

5.52

9.01

8.23

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, and 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 shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The Russell 1000 Value Index is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. The estimated impact of individual stocks on the Fund’s performance is provided by FactSet.


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 Technology 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 (GOOG,GOOGL), Micron Technology (MU) and Taiwan Semiconductor Manufacturing Company (TSM), while the bottom contributors were Global Payments (GPN), Intel (INTC) and NICE.

Top Contributors

Alphabets 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 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 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) 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) 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.

Security

Avg. Weight (%)

Total Return (%)

Allocation Effect

(%)

Alphabet Inc. Class A

2.72

20.82

0.54

Micron Technology, Inc.

3.84

11.57

0.44

Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR

1.44

28.07

0.38

Oracle Corporation

3.06

12.78

0.35

Brookfield Renewable Corp. Class A

1.44

16.81

0.23

Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees.

Bottom Contributors

Global Payments 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 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 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), 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) 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.

Security

Avg. Weight (%)

Total Return (%)

Allocation Effect (%)

Global Payments Inc.

2.53

-27.46

-0.69

Intel Corporation

2.42

-29.60

-0.62

NICE Ltd. Sponsored ADR

1.54

-34.02

-0.57

Align Technology, Inc.

1.85

-26.38

-0.50

Baxter International Inc.

1.64

-21.07

-0.33

Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees.

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) and used most of the proceeds to buy Broadcom (AVGO), 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) and Charter Communications (CHTR). 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 to uncover 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.

Portfolio Activity

Activity

Security Name

Ticker

Sector

Rationale

Bought

Broadcom Inc.

AVGO

Information Technology

Broadcom, a leader in semiconductor and infrastructure software, offers promising AI upside via data center ethernet and custom ASICs and can benefit if the iPhone’s new AI features gain traction this year. Additionally, the strength of its enterprise software assets in VMware, Symantec and CA Technologies could provide defensiveness if enterprise IT spending continues to be muted.

Sold

Cisco System Inc.

CSCO

Information Technology

We sold Cisco to fund the purchase of Broadcom, which offers similar exposure to networking with more attractive upside potential.

Sector Weights

As of 06/30/24

Sector

% of TNA

Russell 1000 Value

Information Technology

17.6

9.7

Communication Services

12.2

4.5

Industrials

9.1

14.0

Health Care

15.9

13.9

Financials

27.4

22.7

Consumer Staples

2.9

7.9

Materials

4.4

4.7

Real Estate

4.0

4.6

Consumer Discretionary

4.5

5.0

Energy

0.0

8.0

Utilities

1.5

5.0

Cash and Other

0.5

0.0

Ten Largest Holdings

As of 06/30/24

Security

% of TNA

Verizon Communications Inc.

4.2

Bank of America Corp.

3.5

Oracle Corp.

3.3

S&P Global Inc.

3.0

Alphabet Inc., Class A

3.0

Sysco Corp.

2.9

Ball Corp.

2.8

The Bank of New York Mellon Corp.

2.8

Micron Technology Inc.

2.7

Microsoft Corp.

2.7

Holdings are subject to change.


Portfolio Managers

Billy Hwan, CPA, CFA

Portfolio Manager, Senior Analyst

Experience: 23 years

Krishna Chintalapalli

Portfolio Manager, Senior Analyst

Experience: 12 years

Glossary

Earnings Growth is the change in an company’s reported net income over a period of time.

Active Share: A measure of the percentage of stock holdings in a manager’s portfolio that differ from the benchmark index.

Allocation Effect: The allocation effect measures the impact of asset allocation decisions on the active return. It reflects the difference between the portfolio weights and benchmark weights, multiplied by the benchmark returns

Important Information

PIL-571121-2024-07-10

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.

1. As described in the Fund’s current prospectus dated May 1, 2024, Parnassus Investments has contractually agreed to reduce its investment advisory fee to the extent necessary to limit total operating expenses to 0.88% of net assets for the Parnassus Value Equity Fund (Investor Shares) and 0.65% of net assets for the Parnassus Value Equity Fund (Institutional Shares). This agreement will not be terminated prior to May 1, 2025, and may be continued indefinitely by the investment adviser on a year-to-year basis. The net expense ratio is what investors pay.

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.

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.

©2024 Parnassus Investments, LLC. All rights reserved. PARNASSUS, PARNASSUS INVESTMENTS and PARNASSUS FUNDS are federally registered trademarks of Parnassus Investments, LLC. The Parnassus Funds are distributed by Parnassus Funds Distributor, LLC.

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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