Market Review
The Russell Midcap Index ended a turbulent quarter with a 9.21% gain. Two sharp selloffs in the quarter, during the first weeks of August and September, were met with rallies. Investors bought the dips on reassuring economic data, including a positive revision to second quarter GDP and better-than-expected second quarter earnings. Inflation continued to ease, allowing the Federal Reserve to focus on the labor market, where some weakness in employment tempered optimism of a soft landing. In anticipation of a rate cut, interest-rate-sensitive stocks rose through the quarter. The market rally spread from the Magnificent 7 and broadened across sectors and market caps, as midcap stocks outperformed large caps. The Fed’s aggressive rate cut of 50 basis points in September signaled that employment uncertainties and cyclical pressures could weigh on growth.
|
Fund Facts |
Investor Shares |
Institutional Shares |
|
Ticker |
MUTF:PARMX |
MUTF:PFPMX |
|
Net Expense Ratio 1 |
0.96% |
0.75% |
|
Gross Expense Ratio |
0.98% |
0.76% |
|
Inception Date |
04/29/2005 |
04/30/2015 |
|
Benchmark |
Russell Midcap Index |
|
|
Asset Class |
U.S. mid cap blend |
|
|
Objective |
Capital appreciation |
|
Performance (%)
| Annualized Returns | |||||
|
As of 09/30/2024 |
3 Mos. |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
|
PARMX – Investor Shares |
12.36 |
30.29 |
3.32 |
6.98 |
8.78 |
|
PFPMX – Institutional Shares |
12.42 |
30.54 |
3.53 |
7.22 |
9.01 |
|
Russell Midcap Index |
9.21 |
29.33 |
5.75 |
11.30 |
10.19 |
|
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 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. Mid cap companies can be more sensitive to changing economic conditions and have fewer financial resources than large cap companies. |
Performance Review
Stock selection broadly aided results
The Fund (Investor Shares) returned 12.36% (net of fees) for the quarter, outperforming the Russell Midcap Index’s 9.21% return. Stock selection drove the outperformance this quarter, headlined by our Financials holdings. The Fund’s limited exposure to the Utilities sector weighed on relative results.
For the year-to-date, the Fund returned 14.68%, slightly ahead of the benchmark return of 14.63%. Selection within Communication Services and Financials helped relative performance, while the primary detractors were selection within Industrials and an underweight to Utilities.
Top Contributors
|
Security |
Avg. Weight (%) |
Total Return (%) |
Allocation Effect (%) |
|
Lam Research Co. (LRCX) |
1.89 |
-23.13 |
-0.78 |
|
KLA Corp. (KLAC) |
2.97 |
-5.91 |
-0.50 |
|
Roper Technologies (ROP) |
3.44 |
-1.15 |
-0.38 |
|
Western Digital Corp. (WDC) |
1.88 |
-9.87 |
-0.38 |
|
BILL Holdings (BILL) |
0.92 |
-6.65 |
-0.30 |
TransUnion, a credit reporting and consumer information and insights company, delivered solid results primarily due to benefits from prior acquisitions and increased lending activity as central banks lowered rates.
Guidewire Software, the leading software provider for property and casualty insurers, is reaping the benefits of its cloud migration efforts as it continues to penetrate the market with its comprehensive platform of claims, billing and policy management solutions.
CBRE Group is a global leader in commercial real estate services. Its operations outsourcing business has helped CBRE succeed during a challenging commercial real estate market. As it recovers, we see a potential tailwind for its transactional and capital markets segments.
D.R. Horton, the largest U.S. homebuilder, caters to the often-overlooked first-time buyer and budget-conscious consumers which benefitted from interest rate cuts. We expect demand for this segment to strengthen further.
Sherwin-Williams Company, the largest residential paint provider, has managed to maintain strong growth in lessthan-ideal macro conditions by offering compelling value and further stands to benefit from an improving real estate market.
Bottom Contributors
Lam Research Corporation, a global manufacturer of semiconductor equipment, fell amid a broad sell-off in semiconductor-related stocks and downturn in the NAND memory market. We believe Lam Research remains well positioned to capture rebounds in memory demand driven by increasingly complex circuit designs.
KLA Corporation, a provider of process control and yield management semiconductor equipment, also fell during the market rotation away from semiconductor stocks during the quarter. It is also well positioned to benefit once market sentiment returns to the semiconductor segment.
Roper Technologies, a diversified technology company, provided disappointing third quarter guidance due to weakness in several of its business sectors, resulting from difficult freight-market conditions, an entertainment industry strike and a production hiccup in the firm’s water metering business.
Western Digital Corporation, a leading supplier of data storage devices, saw its stock price fall after management delivered weaker-than-expected quarterly guidance, due to weak NAND pricing and higher expenses related to the upcoming spin-off of its flash memory business.
BILL Holdings, a payments platform provider, suffered from decelerating growth metrics. Given this new information, we exited the position due to our concerns around its competitive moat.
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
Deepening focus on quality, relevancy and valuation
The portfolio’s largest weights are in the Industrials and Information Technology sectors, accounting for nearly half of the portfolio. Our overweight allocations increased in both sectors quarter-to-quarter. The expanded Industrials overweight was driven by robust performance of our existing holdings and a decreased allocation to Industrials in the benchmark. In the Information Technology sector, we exited Bill Holdings on concerns around its competitive moat. However, our overweight allocation in this sector grew, bolstered by strong stock performance with existing holdings and the addition of Atlassian Corporation, a provider of industry-standard collaboration software. Although the stock has faced pressure due to higher expenses and greater revenue volatility as it migrates its customers to the cloud, we believe its long-term potential is compelling.
We reduced our underweight allocation to the Real Estate sector by initiating a position in Realty Income Corporation (O), a real estate investment trust that owns 15,450 properties in the U.S. and Europe. The company is attractively valued, exceptionally well-run and known for its high ownership share of consumer-experience properties. The interest-rate sensitive Real Estate sector can benefit from the Fed’s rate cuts.
Portfolio Activity
|
Activity |
Security Name |
Ticker |
Sector |
Rationale |
|
Sold |
Idacorp Inc. |
IDA |
Utilities |
We exited Idacorp in order to redeploy the capital into what we believe are business with faster future growth and higher returns on capital. |
|
Sold |
Nutrien Ltd. |
NTR |
Materials |
We exited Nutrien in order to redeploy the capital into what we believe are businesses with faster future growth and higher returns on capital. |
|
Sold |
BILL Holdings, Inc. |
BILL |
Information Technology |
We sold BILL because we developed concerns around its competitive moat. |
|
Activity |
Security Name |
Ticker |
Sector |
Rationale |
|
Bought |
Realty Income Corp. |
O |
Real Estate |
We purchased Realty Income in part to reduce the Fund’s underweight to the Real Estate sector. Given the Fed has initiated interest rate reductions, interest rate sensitive sectors like Real Estate could outperform. Realty Income has a strong management team that has expertise in properties focused on the consumer experience. |
|
Bought |
Atlassian Corp., Class A |
TEAM |
Information Technology |
Atlassian’s 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. We believe that Atlassian has a long runway for growth, and we expect operating margins to revert to their historical peaks as the company completes its migration from an on-premises software offering to the cloud. |
With our exit of Nutrien, the portfolio shifted from an overweight allocation to an underweight allocation in the Materials sector. We also sold our only Utilities sector holding, IDACORP, during the quarter. In both cases, we redeployed the proceeds to opportunities we view as higher-quality and faster-growing. The Utilities sector comprises nearly 6% of the benchmark, but given the sector’s 30%+ rise for the year to date, we view the sector’s potential reward relative to its risk as unfavorable. We continue to have no exposure to Consumer Staples, and our underweight to that sector contributed to year-to-date performance.
Outlook
Downside risk buoyed by portfolio quality, upside from coiled springs
Optimism regarding the Federal Reserve’s rate cuts drove mid cap stocks higher this quarter. In early September, the Fed lowered rates for the first time in four years as it focuses on preserving economic resilience. Market expectations are for more cuts through 2025, which we believe should prevent a prolonged decline in market performance. We continue to keep a close eye on key factors such as the labor market and consumer goods trends, but history tells us to stay bullish in rate cutting cycles. The main risks to sustained economic growth include rising concerns over the national deficit, political gyrations around the upcoming presidential election and ongoing geo-political instability. We are confident that our quality-biased portfolio is well-positioned to protect investor capital in down markets and participate nicely in up markets.
Certain pockets of the economy that have been lagging now stand a better chance of recovering as the rate-cutting cycle takes hold. Freight transportation and housing, areas where we have significant investments, should benefit as lower rates and continuing fiscal stimulus spur economic activity. Similarly, life sciences tools, another area where we have invested heavily, are poised for upside as we approach 2025, with Covid-era inventories clearing and demand for sophisticated drug manufacturing on the rise.
Broadly, our strategy remains focused on curating a portfolio of well-managed, competitively advantaged businesses that demonstrate secular growth and increasing market share. This approach positions the Fund for healthy upside potential in optimistic markets. Conversely, if the tide turns, our emphasis on quality, strong balance sheets, and valuation discipline should help protect investor capital.
Sector Weights As of 09/30/24 Ten Largest Holdings As of 09/30/24
|
Sector |
% of TNA |
Russell Midcap |
|
Information Technology |
23.1 |
13.4 |
|
Communication Services |
2.7 |
3.4 |
|
Industrials |
24.0 |
17.2 |
|
Health Care |
8.8 |
10.2 |
|
Financials |
18.2 |
15.1 |
|
Consumer Staples |
N/A |
4.9 |
|
Materials |
5.0 |
6.0 |
|
Real Estate |
6.4 |
8.1 |
|
Consumer Discretionary |
11.2 |
10.9 |
|
Energy |
N/A |
5.0 |
|
Utilities |
N/A |
5.8 |
|
Cash and Other |
0.7 |
N/A |
|
Security |
% of TNA |
|
Guidewire Software Inc. |
4.6 |
|
TransUnion |
4.1 |
|
Fidelity National Information Services |
4.0 |
|
Cboe Global Markets Inc. |
3.6 |
|
J.B. Hunt Transport Services Inc. |
3.4 |
|
CBRE Group Inc., Class A. |
3.4 |
|
Roper Technologies Inc. |
3.4 |
|
Sherwin-Williams Co. |
3.1 |
|
Bank of NY Mellon |
3.1 |
|
D.R. Horton Inc. |
3.0 |
|
Holdings are subject to change. |
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Portfolio Managers
Glossary Earnings Growth is the change in an company’s reported net income over a period of time. Price/Earnings (P/E) Ratio is a ratio of a stock’s current price to its per-share earnings over the past 12 months (or “trailing” 12 months); whereas, a Forward Price/Earnings Ratio is calculated using forecasted earnings. Forward Price/Earnings Ratio is calculated using forecasted earnings. Return on Equity is the measures of a company’s net income divided by its shareholders’ equity. Important Information PIL-618085-2024-10-08 The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. The Russell Midcap® Index is a widely recognized index of common stock prices. The Russell Midcap Index is a market capitalization-weighted index that measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 30% of the total market capitalization of the Russell 1000 Index. 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. 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 0.96% of net assets for the Parnassus Mid Cap Fund (Investor Shares) and 0.75% of net assets for the Parnassus Mid Cap 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 GUIDELINES: The Fund evaluates 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, Parnassus Investments | Responsible Investing Since 1984, or by calling (800) 999-3505. |
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