Parnassus Growth Equity Fund Q2 2024 Investment Commentary

anyaberkut Parnassus Growth Equity Fund The strategy pursues strong long-term returns by owning a concentrated portfolio of innovative, high-quality U.S. large cap companies that are well positioned to benefit from long-term secular trends. Market Review U.S. equities advanced in the second quarter of 2024. Once again, as in recent periods, a concentrated group of large-cap stocks in the Information Technology and Communication Services sectors generated a disproportionate share of the returns. Investor enthusiasm for companies expected to benefit from soaring investment in artificial intelligence (‘AI’) continued to drive performance and greater concentration in the market. The U.S. economy stayed resilient, with continued growth, relatively robust employment data and moderating inflation. The market’s consensus expectation is now for one or two interest rate cuts by the Federal Reserve toward the end of the year. Within the Russell 1000 Growth Index, the Information Technology, Communication Services and Utilities sectors performed the best, while the Materials, Industrials, Financials and Real Estate sectors all posted negative returns. Fund Facts Investor Shares Institutional Shares Ticker MUTF:PFGEX MUTF:PFPGX Net Expense Ratio 1 0.84% 0.63% Gross Expense Ratio 2.89% 1.86% Inception Date 12/28/2022 12/28/2022 Benchmark Russell 1000 Growth Index Asset Class U.S. large cap growth Objective Capital appreciation
Click to enlarge Performance Annualized Returns (%) As of 06/30/2024 3 Mos. 1 Yr. 3 Yr. 5 Yr. 10 Yr. Since 12/28/2022 PFGEX – Investor Shares 3.74 31.95 N/A N/A N/A 41.74 PFPGX – Institutional Shares 3.78 32.21 N/A N/A N/A 42.03 Russell 1000 Growth Index 8.33 33.48 11.28 19.34 16.33 45.28 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 Growth 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.
Click to enlarge Performance Review AI-related narratives drove extreme market concentration The Fund (Investor Shares) returned 3.74% (net of fees), trailing the Russell 1000 Growth Index’s 8.33%, with underperformance driven primarily by our stock selection in the Information Technology sector, where a select few companies outgained most of the market. An overweight position and stock selection in the Financials sector and an overweight in the Materials sector also curbed results. Conversely, our stock selection in the Health Care, Consumer Staples and Communication Services sectors contributed to performance. The Fund’s top relative contributors included companies benefiting from the surge in AI investment (Alphabet, Taiwan Semiconductor Manufacturing Company and Applied Materials). Among our largest detractors were our underweight positions in Apple (AAPL) and NVIDIA (NVDA), two companies that gained largely on investor confidence in their AI-related growth prospects. Top Contributors Alphabet’s (GOOG,GOOGL) 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 buoyed investor optimism. Taiwan Semiconductor Manufacturing Company’s (TSM) 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. Natera (NTRA), an industry leader in genetic testing, reported favorable financial results for the first quarter of 2024. The company reached cash flow breakeven early and raised full- year guidance. We are optimistic that upcoming catalysts will continue to fuel growth in its women’s health and oncology businesses. AstraZeneca (AZN) gained after announcing robust first-quarter results and setting 2030 targets at an Investor Day that were above consensus expectations. We continue to believe that AstraZeneca’s robust pipeline and industry-leading innovation in oncology should support above-expectation revenue growth for the next several years. Applied Materials (AMAT) is the world’s largest supplier of wafer fabrication technologies used in semiconductor manufacturing. The company reported solid earnings for the quarter, and investors believe Applied Materials should continue to benefit from accelerated industry spend due to AI and share gains. Security Avg. Weight (%) Total Return (%) Allocation Effect (%) Alphabet Inc. Class A 8.10 20.82 0.51 Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR 1.68 28.07 0.30 Natera, Inc. 1.67 18.40 0.15 AstraZeneca PLC Sponsored ADR 1.63 15.11 0.11 Applied Materials, Inc. 1.96 14.64 0.08 Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees.
Click to enlarge Bottom Contributors Adyen (OTCPK:ADYEY) shares tumbled during the quarter as investors were disappointed that the payments processor met but did not exceed revenue expectations. Encouragingly, the company reported an expansion of its relationship with a key digital customer and reiterated optimistic medium-term guidance. Apple gained but detracted from relative performance due to our underweight. While the company’s overall and iPhone revenues declined year over year, the unveiling of an upgraded iPad Pro and iPad Air boosted investor sentiment. In particular, the introduction of generative AI features allayed concerns that Apple was not keeping pace with competitors. NVIDIA rallied but detracted from relative returns due to our underweight. The maker of generative AI chips once again reported exceptional quarterly results and increased its guidance for the upcoming quarter. Salesforce’s (CRM) growth continues to moderate, and investors question its prospect as it relates to AI. We remain confident that the company, which developed the original salesforce automation product and pioneered the SaaS (software as a service) delivery model, is well positioned to capitalize on emerging AI opportunities. Procore Technologies (PCOR) declined, even though the construction management software company reported solid earnings. Investors are concerned about weak demand among Procore’s client base and across industrials. We believe this weakness is temporary and still like the long- term growth prospects and digital transformation opportunity for the industry. Security Avg. Weight (%) Total Return (%) Allocation Effect (%) Adyen N.V. Unsponsored ADR 2.29 -29.80 -1.06 Apple Inc. 3.41 22.99 -0.96 NVIDIA Corporation 5.62 36.74 -0.92 Salesforce, Inc. 3.34 -14.64 -0.69 Procore Technologies Inc. 1.64 -19.30 -0.53 Return calculations are gross of fees, time weighted and geometrically linked. Returns would be lower as a result of the deduction of fees.
Click to enlarge Portfolio Positioning We made no material changes to our positions in the Consumer Staples, Communication Services or Materials sectors. We do not own any Energy, Real Estate or Utilities stocks. Outlook The market environment calls for a balanced approach We have maintained our balanced approach to portfolio positioning. The investment landscape remains favorable for stocks and risk assets, given moderating inflation, robust consumer demand, resilient wages and strong corporate earnings growth. In this environment, investor optimism has led to an elevated overall market valuation. We remain focused on companies that have dominant market positions and growth supported by long-term secular trends. We are taking advantage of volatility to add to what we believe are high-quality businesses with strong growth potential at reasonable valuations. We continue to anchor the Fund’s defensive exposure in Health Care, where we invest in businesses with cash flow that is less macro sensitive and in companies with strong catalysts. We are trimming some of our exposure to payments processors and Industrials companies with cyclical sensitivity in favor of those with more recurring revenue and must-have products within the Financials and Industrials sectors. Portfolio Activity Activity Security Name Ticker Sector Rationale Bought MSCI Inc. MSCI Financials MSCI, a global provider of market indices, demonstrates category leadership, high margins, stickiness of customer relations, and a strong history of careful capital allocation and shareholder returns. We acquired the stock at an attractive valuation due to weak earnings that we believe are short term in nature and should improve over time. Bought Workday Inc., CL A WDAY Information Technology Workday is a category leader serving a large, growing enterprise software market. Despite near-term macro uncertainty across software, we believe Workday is well positioned long term, and key initiatives such as its partnership with other service providers can drive incremental growth over the next few years. Sold Old Dominion Freight Line Inc. ODFL Industrials We have owned Old Dominion since the Fund’s inception, and it has been a profitable position. We believe the competitive landscape has consolidated into a stronger peer set, and MSCI offers more attractive returns. Sold Palo Alto Networks Inc. PANW Information Technology Palo Alto Networks has been a profitable position for the portfolio. Given its elevated valuation, we decided to sell it to fund the purchase of Workday, where we see greater opportunity and a clearer story of margin expansion potential.
Click to enlarge Sector Weights As of 06/30/24 Sector % of TNA Russell 1000 Growth Information Technology 44.2 47.0 Communication Services 11.0 12.7 Industrials 4.2 5.0 Health Care 14.7 10.1 Financials 10.4 5.5 Consumer Staples 1.9 3.7 Materials 2.8 0.6 Real Estate 0.0 0.7 Consumer Discretionary 8.7 14.1 Energy 0.0 0.5 Utilities 0.0 0.1 Cash and Other 1.9 0.0
Click to enlarge Ten Largest Holdings As of 06/30/24 Security % of TNA Microsoft Corp. 8.4 Alphabet Inc., Class A 8.1 NVIDIA Corp. 7.7 Amazon.com Inc. 4.9 Apple Inc. 4.5 Visa Inc., Class A 4.1 Eli Lilly & Co. 3.4 Salesforce Inc. 3.3 Broadcom Inc. 2.9 Intuit Inc. 2.4 Holdings are subject to change.
Click to enlarge Portfolio Managers Andrew Choi Portfolio Manager, Senior Analyst Experience: 12 years Shivani Vohra Portfolio Manager, Senior Analyst Experience: 11 years
Click to enlarge Glossary Cash Flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a fixed basket of consumer goods and services (such as food, transportation, shelter, utilities, and medical care), and is widely used as a cost-of-living benchmark. Earnings Growth is the change in an company’s reported net income over a period of time and is not a measure of future performance. 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-570871-2024-07-10 The Russell 1000® Growth Index measures the performance of the large cap growth segment of the U.S. equity universe. An individual cannot invest directly in an index. An index reflects no deductions for fees, expenses or taxes, but mutual fund returns do. The Standard & Poor’s 500 Composite Stock Price Index (the S&P 500 Index) is a widely recognized index of common stock prices. It 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. 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 © 2022 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 0.84% of net assets for the Parnassus Growth Equity Fund (Investor Shares) and to 0.63% of net assets for the Parnassus Growth 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.
Click to enlarge Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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