59 days
Parnassus Bond Fund
|
Fund Information |
Investor Share |
Institutional Shares |
|
Ticker |
MUTF:PRFIX |
MUTF:PFPLX |
|
Net expense ratio1 |
0.58% |
0.39% |
|
Total Expense Ratio |
0.82% |
0.59% |
|
start date |
August 31, 1992 |
April 30, 2015 |
|
standard |
Bloomberg U.S. Aggregate Bond Index |
|
|
Asset Class |
US Intermediate Core Plus Bonds |
|
|
objective |
Current Income |
|
The strategy seeks attractive levels of current income by holding a core-plus fixed income portfolio with a significant allocation to green/sustainable bonds that advance climate and sustainability goals.
Market Review
Inflation uncertainty led to weak first-quarter results
While deinflationary trends stalled in the first quarter, the U.S. economy continued to expand and the Federal Open Market Committee left its target interest rate unchanged. A delay in a potential rate cut pushed bond prices lower and yields higher. Corporate bonds and securitized assets outperformed Treasuries as investors took advantage of the delayed rate cut to lock in yields. Corporate bond spreads remained tight and high yield bonds rose as continued strength in the consumer and labor markets quelled recession fears. Meanwhile, rising interest rates have weighed on real estate transaction volumes, with the commercial real estate market in particular facing funding headwinds.
|
performance |
Annualized rate of return (%) |
||||
|
As of March 31, 2024 |
3 months |
1 year |
3 years |
5 years |
10 years |
|
PRFIX – Investor Shares |
-0.43 |
3.51 |
-2.31 |
0.25 |
1.30 |
|
PFPLX – Institutional Shares |
-0.39 |
3.67 |
-2.11 |
0.46 |
1.49 |
|
Bloomberg U.S. Aggregate Bond Index |
-0.78 |
1.70 |
-2.45 |
0.36 |
1.54 |
|
The performance data shown represents past performance and is not a guarantee of future returns. Current performance may be lower or higher than the performance data shown. Current performance information through the most recent month end is available on the Parnassus website (Parnassus Investments | Responsible Investing Since 1984). Investment income and principal value will fluctuate, so an investor’s shares may, when redeemed, be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes that shareholders may pay on fund distributions or redemptions of shares. The performance of the Institutional Shares will differ from the performance of the Investor Shares because the classes do not have the same expenses. The Bloomberg U.S. Aggregate Bond Index is an unmanaged bond index and you cannot invest directly in the index. The index figures do not take into account expenses, fees and taxes, which mutual fund returns do. |
|||||
Personnel evaluation
Corporate and government-related bonds supported earnings
Parnassus Bond Fund (Investor Shares) returned -0.43% in the first quarter, beating the Bloomberg U.S. Aggregate Bond Index’s return of -0.78%. The portfolio maintained duration relatively close to the index as interest rates rose.
An overweight to corporate bonds and sector holdings helped the fund’s performance as the sector continued to benefit from a strong economy and low corporate default rates. An overweight to government-related debt also boosted the relative results, while government bond selection was a negative.
The portfolio benefited from an overweight allocation to corporate bonds and selection within the asset class. Our corporate bond portfolio outperformed despite a longer duration than the benchmark (7.3 years vs. 7.0 years for the benchmark). A strong economy supported healthy corporate profitability and cash flows, resulting in robust returns. Higher initiating yields and narrowing credit spreads also contributed to the corporate performance. Within corporate bonds, finance company bonds performed well on both an absolute and relative basis. The peak of the interest rate cycle eased banking sector risks and recession concerns. Selection within government-related bonds was boosted by shorter duration than the benchmark (2.9 years vs. 5.3 years for the benchmark) amid upward interest rate pressures, contributing to relative performance. The portfolio’s overweight to asset classes also contributed to performance, with the government-related category performing best in the Bloomberg U.S. Aggregate Bond Index, despite declining on an absolute basis.
Treasuries weighed on the portfolio’s returns, but the portfolio’s underweight position in Treasuries helped limit losses as they were the worst performing category in the index. Exposure to securitized debt helped relative performance, but they underperformed other categories as mortgage rates remained elevated and technical and fundamental factors remained volatile in the first quarter.
Portfolio positioning
Finding return opportunities within tight spreads
The fund ended the first quarter with approximately 60% of its assets invested in corporate bonds, well above the index’s 25%. We continue to believe that corporate bonds offer the best long-term returns due to their high initial yields. Currently, credit spreads are historically tight, which investors view as low credit risk due to strong economic growth and low issuance. While tight spreads mean there is little room for bond prices to rise outside of a rally in the Treasury market, we believe overall yields today remain attractive. The fund is specifically overweight bonds issued by companies in the information technology, consumer discretionary and consumer staples categories.
During the quarter, we added several financial issuers to the fund, including securities from ARES Corp, Truist Financial (TFC) and Block (SQ), which we believe are undervalued and offer good yields and attractive upside opportunities. One new high-yield issuer was added during the quarter: Yum! Brands (YUM), owner of KFC, Pizza Hut and Taco Bell.
During the quarter, we also continued to increase our exposure to securitized mortgages. We increased our securitized mortgages by approximately 4%, with an emphasis on higher coupon mortgages. These securities trade at wider spreads relative to Treasuries and are a nice complement to our corporate bonds. We are significantly underweight securitized bonds relative to the index, 12% versus 28%, which we believe is justified due to the lower yields on these securities.
Outlook
As inflation remains unabated and the economy remains resilient, interest rates remain uncertain
The U.S. economy continues to defy economists’ expectations. So far, growth has remained solid, employment has been strong and inflation has receded, all at interest rates that should weaken the economy. The Federal Reserve has signaled three rate cuts in 2024, and the market has priced in similar expectations. The decision to cut rates from here will depend primarily on the trajectory of inflation, which remains stubbornly above the Fed’s target. We believe it’s likely the Fed will revise its forecasts further as 2024 progresses.
A strong economic climate is positive for corporate bond spreads as healthy profitability and cash flows support companies to repay debt. However, if interest rates rise further, rising inflation could dampen returns for government bonds and other asset classes. We believe that long-term interest rates may rise further, but most of the increase has already passed. As a result, we expect interest rate changes to be the primary driver of fixed income total returns, with interest rate changes having a smaller overall impact. We believe rising corporate yields relative to government bonds still offer attractive total return potential, and therefore maintain an overweight allocation to corporate bonds.
|
Sector Weight |
As of March 31, 2024 |
|
|
sector |
% of TNA |
Bloomberg US Composite |
|
Enterprise |
59.8 |
25.1 |
|
Government |
8.3 |
4.9 |
|
Securitized |
12.0 |
28.2 |
|
Ministry of Finance |
18.5 |
41.8 |
|
Cash and Other |
1.4 |
0.0 |
|
Largest Corporate Holdings |
As of March 31, 2024 |
|
safety |
% of TNA |
|
Morgan Stanley (MS) |
1.6% |
|
Cisco Systems, Inc. (SYY) |
1.4% |
|
Bank of America (BAC) |
1.3% |
|
Oracle Corporation (ORCL) |
1.3% |
|
Oklahoma Public Service Company |
1.3% |
|
Canadian Pacific Kansas City (CP) |
1.3% |
|
Alexandria Real Estate Equities (ARE) |
1.3% |
|
McCormick & Company (MKC) |
1.3% |
|
Global Payments, Inc. (GPN) |
1.3% |
|
C.H. Robinson Worldwide Co., Ltd. (CHRW) |
1.2% |
|
Holdings are subject to change. |
Samantha Palm, Portfolio Manager and Senior Analyst
Minh Bui, Portfolio Manager and Senior Analyst
|
Glossary Duration is expressed in years. When interest rates rise, bond prices fall and when interest rates fall, bond prices rise. The 30-day SEC yield is calculated using a standard SEC formula based on net income over the past 30 days. It is a “subsidized” yield, meaning it includes reimbursements for contractual expenses and the yield would be lower without these reimbursements. The unsubsidized 30-day SEC yield is calculated using the standard SEC formula based on the net income for the past 30 days. It excludes contractual expense reimbursements, which results in a lower yield. Important Information PIL-533917-2024-04-23 As described in the Fund’s most recent prospectus dated May 1, 2023, Parnassus Investments has contractually agreed to waive 0.10% of the management fee and reimburse the Fund for expenses to the extent necessary to limit the annual fund operating expenses of Parnassus Fixed Income Fund (Investor Shares) to 0.58% of net assets and the annual fund operating expenses of Parnassus Fixed Income Fund (Institutional Shares) to 0.39% of net assets. This agreement will not be terminated prior to May 1, 2024 and may be continued annually indefinitely by the Investment Adviser. The net expense ratio is the amount paid by investors. Environmental, Social and Governance (ESG) Guidelines: As part of its investment decision-making process, the Fund evaluates financially material ESG factors and considers various impacts they may have on future revenues, expenses, assets, liabilities and overall risk. The Fund also utilizes active ownership to promote more sustainable business policies and practices and greater ESG transparency. Active ownership strategies include proxy voting, dialogue with company management, sponsorship of shareholder resolutions and public policy advocacy. There can be no assurance that ESG strategies will be successful. Mutual funds involve risk and may result in the loss of principal. The Fund’s share price may fluctuate daily based on the value of the securities it holds. Bond prices are inversely related to interest rates. When interest rates fall, bond prices rise and when interest rates rise, bond prices fall. The value of securities may also be affected by the possibility that issuers of debt will not pay interest or principal to the Fund or that credit ratings may be downgraded by rating agencies. In addition, up to 20% of the Fund’s total net assets may be invested in convertible securities, which may not have an investment-grade rating. As a result, convertible securities carry greater risk than securities with investment-grade ratings. © 2024 Parnassus Investments, LLC. All rights reserved. PARNASSUS, PARNASSUS INVESTMENTS and PARNASSUS FUNDS are federally registered trademarks of Parnassus Investments, LLC. Parnassus Funds are distributed by Parnassus Funds Distributor, LLC. Before investing, investors should carefully consider the Fund’s investment objectives, risks, charges and expenses and read the prospectus or summary prospectus, which contains this and other information, available on the Fund’s website at www.parnassus.com or by calling (800) 999-3505. |
Original Post
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
