As of December 31, 2023, the net asset value (“NAV”) of the Parnassus Value Equity Fund (Trades, Portfolio) – Investor Shares (“the Fund”) was $50.54. After taking dividends into account, the Fund's total return for the year was a gain of 13.70%. This compares to a gain of 11.46% for the Russell 1000 Value Index (“Russell 1000 Value”). For the fourth quarter of 2023, the Parnassus Value Equity Fund (Trades, Portfolio) – Investor Share posted a gain of 12.92%. This compares to a gain of 9.50% for the Russell 1000 Value.
On the left is a table that summarizes the performances of the Parnassus Value Equity Fund (Trades, Portfolio) and the Russell 1000 Value over multiple time periods. The Fund's performance is in line with our benchmark over the three-year period and remains highly competitive over all other periods.
Year in Review
After three quarters of lackluster performance, the Russell 1000 Value posted most of its annual gains in the fourth quarter. On an equal-weighted basis, the Communication Services and Information Technology sectors outperformed the most, at 41% and 36%, respectively. However, the biggest contributor to the benchmark's return came from the Financials sector, which appreciated 15%. This is because Financials represent 20% of the index, more than twice the 9% weight of Information Technology, and more than three times the 6% weight of Communication Services. The Energy sector underperformed as crude oil prices declined. The Utilities and Health Care sectors were the worst performers.
The Parnassus Value Equity Fund (Trades, Portfolio) - Investor Shares returned 13.70%, beating the Russell 1000 Value's 11.46%. Sector allocation accounted for most of the outperformance, with stock selection largely neutral. Within sector allocation, our overweight in Information Technology and underweights in Energy and Utilities were the biggest contributors, while our overweight to Health Care was the biggest detractor. Within stock selection, our biggest contributor was Information Technology, followed by Consumer Discretionary.
D.R. Horton (DHI, Financial), a homebuilding company, was our biggest winner in 2023. Its stock soared 72.1%, adding 1.4%* to the Fund's relative return. Shares outperformed as the company's newly finished homes sold faster than expected. While higher mortgage rates made homes less affordable, builder confidence and new home demand ultimately proved resilient due to the limited supply of existing homes. The company delivered strong financial results and skillfully offsetmacroeconomic headwinds to new orders through sales incentives, price reductions and smaller floorplans. Less expensive input costs and scale advantages also supported the company's profitability.
Micron's (MU, Financial) shares rose 71.9% during the year, contributing 1.0% to the Fund's relative return. The memory semiconductor market has begun to recover, after more than a year of declining prices and excess inventory. Industry-wide supply cuts and new demand from artificial intelligence (AI) applications are rapidly restoring the balance of supply and demand, with a positive impact on per unit pricing. Additionally, existing end markets such as PCs and smartphones have bottomed after one of the worst corrections in over a decade. We are maintaining our position, as we believe we are still in the early stages of this inflection in industry fundamentals.
Microsoft (MSFT, Financial) appreciated 58.2% in price, boosting the Fund's relative return by 0.9%. Positive sentiment around generative AI's capacity to drive future growth outweighed slower enterprise IT spend, while Microsoft's cloud computing business, Azure, stabilized in the year's second half. Microsoft remains the dominant global enterprise software platform— providing our portfolio both offense and defense. This technological leadership and the breadth of its productivity suite enables Microsoft to not only win in secular growth areas like cloud, but also benefit from vendor consolidation as IT budgets contracted.
Signature Bank (SBNY, Financial), our only regional bank stock, was the Fund's worst relative performer. It sliced 1.5% from the Fund's relative return after regulators seized the company, effectively rendering it worthless. Higher interest rates set by the Fed to tackle high inflation culminated in a regional bank crisis in March. In the crisis, Silicon Valley Bank, a regional bank focused on start-up companies, failed suddenly after massive losses on its bond portfolio caused a run on the bank. While Signature did not have the same investment losses or industry concentration as Silicon Valley Bank, contagion from the panic spread to Signature and other banks as their customers' feared losing money in a similar bank run.
Moderna's (MRNA, Financial) stock returned -45.3% over the year, impacting the Fund's relative return by -1.1%. Although the company boasts a robust pipeline with significant potential, the extended timeline for material revenue contribution from these assets created an air pocket of uncertain cash burn. Uncomfortable with this risk and lack of meaningful catalysts, we opted to sell our shares and reallocate capital to opportunities with higher conviction.
Finally, Charles Schwab (SCHW, Financial) shares returned -16.0%, contributing -0.9% to the Fund's relative return. Schwab's profits fell as clients moved cash from lucrative deposit accounts to better-yielding vehicles. Secondly, the company recorded losses on its investment portfolio, which is primarily composed of bonds. These problems became more acute during the regional bank crisis in March, forcing investors to consider whether Schwab's earnings would be impaired for several years. We reduced our position early, believing that the market was too optimistic about the company's future earnings, but see the company's strong wealth management franchise remains intact. We believe Schwab can return to healthy earnings growth in the next few years as the immediate impact of rising rates passes.
Outlook and Strategy
Despite its challenges, the Parnassus Value Equity Fund (Trades, Portfolio) ended 2023 on a good note. We surpassed our benchmark, the Russell 1000 Value index, by 224 basis points in one of the most turbulent stock markets in recent memory. (One basis point is 1/100th of one percent.) Investors grappled with a host of dilemmas: Will inflation fall or become entrenched? Can Fed officials execute a never-before-seen economic soft landing? When will consumers exhaust their excess pandemic savings? How will AI transform entire industries? What will be the spillover effects of the Russia-Ukraine and Israel-Hamas conflicts? Investor sentiment vacillated from ebullience over AI in January, despair about the regional bank crisis in March, optimism for a soft landing in July and panic over spiking Treasury yields in October.
Although as managers we did not resolve every dilemma perfectly, we stood by our process to navigate the market's inevitable uncertainties.
Notably, we strongly outperformed our benchmark in the final months of the year. In the fourth quarter of 2023, the Value Equity Fund – Investor Shares appreciated nearly 12.92%, or 3.4% more than the Russell 1000 Value Index's gains of 9.50%. Several factors turned in our favor and drove this acceleration. First, oil prices fell due to an unexpected surge in petroleum supplies. This contributed to our relative performance as we avoid investing in fossil fuels*. Our varied investments in cyclical stocks ranging from semiconductors and homebuilders to Financials and Consumer Discretionary companies also outperformed, as falling inflation moved the economy into a more solid footing. Finally, stocks surged as yields fell from their mid-October highs. As has long been the case, the Parnassus Value Equity Fund (Trades, Portfolio) is constructed to capture greater upside when stocks rise, which historically occurs in most years.
Indeed, the 10-year Treasury yields steadily climbed all year, only to fall after breaching 5% in October. The rate, which serves as the cost of capital, has profound implications for the valuation of financial assets and is influenced by the actions and words of Fed officials. Since early 2022, the Fed has focused intently on tackling record-high inflation through the fastest series of rate hikes in recent history. Between October and November, though, the cumulative data in inflation began to look more benign, suggesting the Fed's long rate-hike cycle was nearing an end. Investors, who were bearishly positioned and fearful of a policy error, suddenly changed their minds and jumped into the market, spurring a furious rally.
Given the Fed's dominance over financial markets, it is worth pondering what its next move could be. Currently, Fed officials are forecasting three rate cuts in 2024 with markets predicting even more. However, recall the Fed has a dual mandate of price stability and full employment. Once inflation is no longer the economy's biggest risk, it is logical that the Fed should shift its focus to the labor market. The labor market is healthy, with unemployment ending the year at 3.7%, the lowest reading since 1969. The economy added 2.7 million jobs in 2023, the highest number since 2015. A strong job market is beneficial, except when it contributes to inflation. But, if the Fed can apply the same vigilance to maintaining full employment as it has to tackling inflation, the outlook for the economy should be favorable.
We saw buying opportunities in the market's volatility at year end and added three new positions to the portfolio. Canada-based Nutrien (NTR, Financial) is one of the largest producers of agricultural fertilizers in the world. Low potash prices have pressured the stock, but demand for this essential input should recover next year as supply discipline re-enters the market. We also added TSMC (TSM, Financial) (Taiwan Semiconductor Manufacturing Co.), the world's leading semiconductor foundry. The stock is down due to geopolitical friction between the U.S. and China, as well as a post-pandemic slump in global smartphone shipments. However, the company's highperformance chip segment should grow strongly from developments in AI, while the smartphone cycle is poised for a cyclical rebound. Finally, we have long admired commercial real estate broker (CBRE (CBRE, Financial)) and initiated a position when the spike in Treasury yields brought the entire sector to historically low valuations. Unlike most real estate companies, CBRE has an assetlight business model, attractive recurring revenue streams and a strong balance sheet that is not dependent on debt financing.
Even with this report's discussion of macroeconomic factors, we are now and always bottom-up stock pickers. We believe that evaluating the relevancy of a company's products and services, the durability of its competitive advantages and the quality of its management provides a more secure foundation for assessing the suitability of any investment. Moreover, we believe that buying good companies at a discounted or reasonable price increases the likelihood of outperformance over economic cycles. Like 2023, 2024 will no doubt have its share of twists and turns. Year after year, we remain committed to our time-tested process designed to build wealth responsibly for long-term shareholders.
Thank you for your investment in the Parnassus Value Equity Fund (Trades, Portfolio).
Billy J. Hwan
Lead Portfolio Manager
Krishna S. Chintalapalli
Portfolio Manager
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.
