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Parnassus Mid Cap Growth Fund
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Fund Facts |
Investor Shares |
Institutional Shares |
|
Ticker |
(MUTF:PARNX) |
(MUTF:PFPRX) |
|
Net Expense Ratio1 |
0.80% |
0.68% |
|
Gross Expense Ratio |
0.80% |
0.70% |
|
Inception Date |
12/31/1984 |
04/30/2015 |
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Benchmark |
Russell Midcap Growth Index |
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Asset Class |
U.S. mid cap growth |
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Objective |
Capital appreciation |
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The strategy pursues long-term outperformance by owning a concentrated portfolio of 35 to 45 high-quality U.S. mid-cap stocks with the potential for long-term growth and business resiliency.
Market Review
Expectations for lower interest rates fueled a mid-cap rally
The Russell Midcap Growth Index posted a 9.50% return as data pointed to the continued expansion of the U.S. economy. The equity rally that started in 2023 extended through the first quarter, with the S&P 500 (SP500, SPX) hitting all-time new highs. Artificial Intelligence (‘AI’) helped lift earnings, particularly among technology stocks, though lofty expectations heading into earnings season tempered post-earnings market reactions. January and February inflation data came in hotter than anticipated, stifling any hope for a rate cut at the Federal Open Market Committee (FOMC) March meeting. While the FOMC held policy rates steady in the 5.25% to 5.0% range, US Federal Reserve (Fed) Chairman, Jerome Powell, guided toward multiple rate cuts later in 2024. Resilience in consumer spending and the labor market has allowed more time for the Fed to assess the durability of longer-term disinflationary trends. Sector performance was positive across all mid cap growth sectors, with Utilities and Financials leading outperformance.
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Performance |
Annualized Returns (%) |
||||
|
As of 03/31/2024 |
3 Mos. |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
|
PARNX – Investor Shares |
7.85 |
28.60 |
1.76 |
9.04 |
8.93 |
|
PFPRX – Institutional Shares |
7.88 |
28.77 |
1.88 |
9.17 |
9.06 |
|
Russell Midcap Growth Index |
9.50 |
26.28 |
4.62 |
11.82 |
11.35 |
|
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 (Parnassus Investments | Responsible Investing Since 1984). 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 Midcap Growth 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. |
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Performance Review
Stock selection in Consumer Discretionary and Health Care hampered overall returns
The Fund (Investor Shares) returned 7.85% for the first quarter of 2024, underperforming the Russell Midcap Growth Index’s 9.50% return. Selections within Consumer Discretionary and Health Care weighed on performance while selections within Information Technology and Financials contributed.
Contributors to relative performance included insurance company Progressive (PGR), which posted an impressive improvement in underwriting profitability, and KLA Corporation (KLAC), which reported better-than-expected earnings. Notable detractors included fitness apparel company Lululemon Athletica (LULU), which issued disappointing sales guidance, and e-commerce company MercadoLibre (MELI), which reported lower-than-expected margins.
Top Contributors
|
Security |
Avg. Weight (%) |
Total Return (%) |
Allocation Effect (%) |
|
Progressive |
3.01 |
30.50 |
0.56 |
|
Trane Tech. |
2.88 |
23.45 |
0.30 |
|
KLA |
2.72 |
20.44 |
0.28 |
|
Adyen |
1.23 |
31.29 |
0.25 |
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Block |
1.75 |
9.35 |
0.24 |
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Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees. |
Progressive, a leading underwriter of insurance for autos, trucks, motorcycles, boats, recreational vehicles and homes, contributed to performance. The company posted solid quarterly results in its Auto segment. The insurer’s underwriting profitability improved meaningfully while its net premiums written rose, reflecting its innovative, data-driven approach to policy pricing.
Trane Technologies (TT), a global climate solutions company, outperformed. Trane specializes in sustainable HVAC and building technologies. The company serves diverse industries, focusing on efficient and environmentally conscious solutions. The company reported continued growth in its commercial HVAC bookings and backlog, reflecting robust demand for its sustainable products.
KLA Corporation, a leading provider of process control and yield management solutions for the semiconductor and related nanoelectronics industries, continued its recent strong outperformance as the company reported quarterly revenue and earnings that topped analyst expectations.
Adyen (OTCPK:ADYEY), a global payments company that provides payment processing solutions for businesses, contributed to results. Specializing in online, mobile, and in-store transactions, Ayden facilitates seamless financial transactions by offering a range of services, such as end-to-end payments, combined with data and financial management in a single solution. Its quarterly revenue growth accelerated and its and profit topped analyst expectations.
Block (SQ), a payment service provider, outperformed on strong revenues in its Square and Cash App products and its positive full-year guidance. The company recently implemented broad cost-cutting initiatives, positioning itself to focus on its best growth opportunities.
Bottom Contributors
|
Security |
Avg. Weight (%) |
Total Return (%) |
Allocation Effect (%) |
|
Lululemon Athletica |
1.85 |
-23.60 |
-0.70 |
|
MercadoLibre |
2.82 |
-3.79 |
-0.37 |
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BioMarin |
1.78 |
-9.42 |
-0.37 |
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Nutrien |
1.73 |
-2.62 |
-0.28 |
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Workday |
2.60 |
-1.20 |
-0.28 |
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Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees. |
Lululemon Athletica, fitness apparel and accessory retailer, detracted. The stock plunged after the company issued disappointing guidance. Growth in the US has slowed as consumers stocked up on fitness apparel during the past few years and the company has faced increased competition from companies like Vuori and Alo. On a positive note, the company’s international growth rate remains strong.
MercadoLibre, Latin America’s leading e-commerce marketplace, detracted from performance. The stock slumped after the company’s operating margins came in lower than expected. The company offers shipping, payment, financing and advertising solutions to buyers and sellers through its platforms including MercadoEnvios and MercadoPago. Growth in its payments volume and merchandise sales remained healthy.
BioMarin Pharmaceutical (BMRN) detracted from performance as its hemophilia A drug, Roctavian, reported disappointing sales. BioMarin’s other key product, achondroplasia drug Voxzogo, reported strong uptake, helping drive BioMarin’s revenue growth.
Nutrien (NTR) is the world’s largest provider of crop products and services through online platforms and an extensive network of stores. The stock detracted as fertilizer prices remained low, pressuring margins, though fertilizer demand is recovering.
Workday (WDAY), a global provider of human capital management and financial management software, detracted. Shares fell after the company’s subscription revenue guidance indicated slowing growth. The company is a market leader in Global Enterprise Resource Procurement (ERP) and
Software-as-a-Service (SaaS) and continues to outgrow the category.
Portfolio Positioning
Opportunities in software, semiconductors and life science tools
Our portfolio is overweight several themes that we believe can drive outperformance.
We are overweight software, although we have reduced our exposure after the industry’s outperformance during the past year. The industry contains many innovative, secular growing and competitively advantaged companies with high incremental margins, and we are still finding new opportunities. We sold Ansys (ANSS) and Synopsys (SNPS) during the quarter due to their announced merger, and we initiated positions in PTC and Atlassian (TEAM).
Our semiconductor overweight increased as the stocks outperformed. Semiconductors are the building blocks of all technology, including artificial intelligence (‘AI’). We believe that the revolutionary potential of AI may drive a super-cycle in semiconductors, as we think AI technology will move from the data center to laptops and smartphones. During the quarter, we exited Lam Research (LRCX) and added to our position in Teradyne (TER) due to the difference in their stocks’ performance over the past year.
We have been building our overweight position in the life sciences tools industry, and we added to our position in Mettler Toledo (MTD). The industry is going through a cyclical downturn due to weak demand out of China and because of tepid spending from pharma companies. However, the secular trends toward ensuring quality control and developing new drugs remain intact, and we believe inevitably the cycle will turn.
We maintained our overweight exposure to the housing market. After a historic surge in mortgage rates, 2023 existing home sales were at their lowest level since 1995. We expect the housing market will recover toward historical levels as rates begin to move lower.
Outlook
A balanced stance amid rising valuations
The Russell Midcap Growth Index has staged a furious rally since it troughed in October 2022, rising nearly 50%. We understand the optimism as the economy has been resilient, inflation is decelerating and the Federal Reserve plans to reduce interest rates later this year – which could spur more borrowing and faster economic growth. Even with the rally, our index remains 7% below its prior peak in November 2021, while large cap indices have been hitting all-time highs, so there is room to run.
However, the market rarely goes straight up. Our portfolio currently has a balanced stance, as the improving economic outlook is offset by rising valuations and the magnitude of the recent rally. Our goal is to provide full upside participation with downside protection, which should result in better returns and less volatility over the long term. We avoid high-flying momentum stocks, companies with high leverage, businesses without a proven financial model and turnarounds, which we expect should support our downside during a correction. We focus on high-quality growth compounders – innovative companies that are market share gainers in secularly growing markets with competitive advantages, strong balance sheets and seasoned management teams.
Portfolio Activity
|
Activity |
Security Name |
Ticker |
Sector |
Rationale |
|
Bought |
PTC Inc. |
PTC |
Information Technology |
PTC is a best-in-class product lifecycle management (PLM) and computer-aided design (CAD) software provider for manufacturing, industrials, aerospace, automotive, healthcare, and high-tech verticals. The company has consistently outgrown the market due to a combination of consistent market share gains and a secular improvement in the strategic importance of PLM software. |
|
Bought |
Atlassian Corp. CL A |
TEAM |
Information Technology |
Atlassian innovative software allows IT developers and other employees to seamlessly collaborate on complex projects. Applications in their suite, such as Jira, are widely recognized as industry standards, hence they entail wide competitive moats. We had the opportunity to buy the stock at an attractive valuation as the company is migrating its software from an on-premises offering to the cloud, which is causing quarterly volatility in revenue trends and additional expenses to support both offerings. We believe that Atlassian has a long runway for growth, and we expect operating margins to revert to their historical peaks as the migration is completed. |
|
Sold |
Lam Research Corp |
LRCX |
Information Technology |
Lam Research Corporation is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. The stock had a tremendous 2023, and we believe our other semiconductor holdings have more upside after Lam’s big run. |
|
Sold |
Ball Corp. |
BALL |
Materials |
Ball Corp. supplies sustainable aluminum packaging solutions for beverage, personal care and household product customers. We see more upside in other stocks, as Ball’s growth rate will be lower after it divested its Aerospace business. |
|
Sold |
Ansys Inc. |
ANSS |
Information Technology |
Ansys develops and markets computer-aided engineering/multiphysics engineering simulation software for product design, testing and operation. In January, it was announced that Ansys would be acquired by electronic design automation firm Synopsys. |
|
Sold |
Synopsys Inc. |
SNPS |
Information Technology |
Synopsys is an electronic design automation company that supplies tools and services to the semiconductor design and manufacturing industry. In January, Synopsys announced that it was acquiring engineering simulation company Ansys. We exited as the merger integration may distract management. |
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Sector Weights |
As of 03/31/24 |
|
|
Sector |
% of TNA |
Russell Midcap Growth |
|
Information Technology |
26.0 |
23.7 |
|
Communication Services |
2.6 |
4.2 |
|
Industrials |
18.9 |
19.5 |
|
Health Care |
17.3 |
18.3 |
|
Financials |
12.2 |
10.4 |
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Consumer Staples |
0.0 |
2.5 |
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Materials |
3.5 |
1.6 |
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Real Estate |
3.8 |
1.7 |
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Consumer Discretionary |
14.7 |
13.9 |
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Energy |
0.0 |
3.8 |
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Utilities |
0.0 |
0.4 |
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Cash and Other |
1.0 |
0.0 |
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Ten Largest Holdings |
As of 03/31/24 |
|
Security |
% of TNA |
|
Guidewire Software Inc. (GWRE) |
4.4 |
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CoStar Group Inc. (CSGP) |
3.8 |
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Equifax Inc. (EFX) |
3.7 |
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Agilent Technologies Inc. (A) |
3.6 |
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Teradyne Inc. (TER) |
3.6 |
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Cintas Corp. (CTAS) |
3.4 |
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Morningstar Inc. (MORN) |
3.3 |
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The Progressive Corp. (PGR) |
3.2 |
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Ross Stores Inc. (ROST) |
3.2 |
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Trane Technologies plc (TT) |
3.1 |
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Holdings are subject to change. |
Ian Sexsmith, CFA, Portfolio Manager, Senior Analyst
Robert Klaber, Director of ESG Research, Portfolio Manager
|
Important Information PIL-524995-2024-04-09 The Russell Midcap® Growth Index is a widely recognized index of common stock prices. The Russell Midcap Growth Index measures the performance of the mid cap growth segment of the U.S. equity universe. It includes those Russell Midcap® Index companies with higher price-to-book ratios and higher forecasted growth values. An investor cannot invest directly in an index. Index performance includes the reinvestment of dividends and capital gains. An index reflects no deductions for fees, expenses or taxes. 1. The investment adviser has contractually agreed to reduce its investment advisory fee to the extent necessary to limit total annual fund operating expenses to 0.80% of net assets for the Parnassus Mid Cap Growth Fund (Investor Shares) and 0.68% of net assets for the Parnassus Mid Cap Growth Fund (Institutional Shares). This agreement will not be terminated prior to May 1, 2024 and may be continued indefinitely by the investment adviser on a year-to-year basis. 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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