Global Courant
While much has changed in the market over the past three decades, the Parnassus Non-Core Equity Fund still holds the original principles to heart. Established in 1992, the fund aims to provide investors with an actively managed strategy related to the broader US economy. Although now considered compact with 40 holdings, portfolio manager Andrew Choi said it has become known for its buffer when the market goes through a rough patch. “The things we’re thinking about and working on today are reflective of the current market environment versus, obviously, then,” said Choi, who joined the firm in 2018 and became co-manager of the fund at the start of 2022. ” But the core ethos and type of need this product meets is basically the same.” The investor share class of the fund has a fee of 0.82% and a minimum investment of $2,000. It has a five-star rating from Morningstar compared to other large-blend funds. It’s in the 37th percentile of funds this year, according to Morningstar, and has performed essentially in line with its benchmark, the S&P 500, over the year. The fund has returned 10.9% annually since inception, compared to an annual gain of 9.9% over the same period for the broad S&P 500. PRBLX .SPX YTD mountain The fund vs. . the S&P 500 ‘Dancing in the right places’ fund was founded in 1992, about eight years after the company itself started. Current manager Todd Ahlsten, who is also the company’s CIO, began his role in the fund in 2001. Choi said little has changed in terms of core strategy since Ahlsten took over. One thing Choi highlighted was the company’s early adoption of responsible investing, which he says is Warren Buffett-esque, with a focus on good companies with good returns. It has been a quality since its inception, making the company’s commitment “authentic”. He said the fund has been able to perform over time without going against these principles, even as some investors have changed their stances on environmental, social and governance guidelines due to recent rebukes from Republicans. In March, the House GOP was unable to override President Biden’s veto of a ban on the investment framework. “We started in ’84 and we’ve never changed our tune,” he said. “And I think a lot of tunes have changed from some of our competitors.” It is also known as a fund that can provide a buffer in times of market turmoil, with Choi referring specifically to the early 2000s and the Great Financial Crisis. But he noted a more difficult landscape in 2022 as the fund struggled without exposure to energy (which was the only positive S&P 500 sector) and as quality names were hit harder. Still, he said those unique headwinds in 2022 should not detract from the fund’s deserved reputation. Choi said the company has averaged about 95% upside and 90% downside catches over the past five years, highlighting the strategy’s success over time. “If you think of it as a dance, when the music is playing, you want to get up and you want to dance to join the rally,” Choi said. “But the people who stay on the dance floor too long when the music stops usually have to pay more for it than the profit they made. So we make sure that when the music plays, we dance in the right places and we go off the dance floor before things start spinning and the music stops.” How that was actually done? Choi’s team does the math to make sure that valuations are fair for what they’re paying and that they’re not giving up too much money for a stock that’s rising on speculation. Of course, the market has shifted since late 2022, as hopes for a better interest rate environment and excitement around artificial intelligence have pushed stocks higher. Choi said his team bought names from Salesforce and homebuilders late last year on a bet that they would perform if the economy did better than many expected — a prediction he says has paid off. Salesforce was the fund’s best relative performer in the first quarter, with a gain of 50.7% contributing 1.4% to the fund’s total return. Semiconductor names Advanced Micro Devices and Nvidia contributed 0.6% and 1.1% respectively to the fund’s returns, as both rose sharply amid growing investor enthusiasm around AI. On the other hand, Charles Schwab and Bank of America were among the strongest opponents as financial stocks struggled amid the wider sector crisis. Apple was also an opponent, but that’s because the company was underweight the stock, not because of how the stock performed. Microsoft and Alphabet join Apple in big tech names in the top 10 as of the end of the first quarter. Microsoft, the largest holding company, traded at all-time highs on Friday, underscoring the strength of Big Tech’s comeback this year. But some less expected names are also part of the top 10 given the fund’s focus on responsible business and quality. Farm equipment maker Deere, chemical company Linde and consumer goods manufacturer Procter & Gamble are also among the largest holding companies. The top 10 names typically account for about 40% of the fund’s holdings. Looking Ahead According to Morningstar analyst Stephen Welch, it’s unusual to offer downside protection while being on the more consolidated side. Concentration can generally lead to more volatility. He said the fund finds stocks that can provide downside cushioning by looking at moats and management teams. And he described the focus on responsible investing as twofold, noting that the fund uses exclusion screeners as well as looking for stocks with material ESG risks. To be sure, Choi said the company’s ESG principles have evolved over time and have not superseded any others. While the fund’s underperformance in 2022 was partly due to its lack of energy holdings, Choi said it’s not just ESG concerns that are keeping those stocks unheld. (The company has made changes to ESG-related principles over time, including a move earlier this year to end nuclear power exclusions given its role in reducing carbon use.) While its team is still following energy trends to see if there are opportunities to make money, they see better opportunities in technology areas such as semiconductor stocks. Semis are an example of “those kinds of tailwind secular industries that have a lot of cyclical elements in them that give people the chance to get euphoric and also manic-depressive,” he said. “But throughout the period, there are all these cycles to take advantage of.” Rolling returns over the past five years show that the fund outperformed the S&P 500 and Russell 1000 about 60% of the time. But looking at five-year returns with the Sharpe ratio, which measures risk-adjusted returns, the fund outperformed almost 90% of the time. That shows it has lower volatility and can hold up well in downturns, Welch said. Looking to the second half of 2023, Choi said he continues to like semiconductor stocks and also looks out for companies like Adobe and Salesforce that benefit from AI in ways he says are not yet fully appreciated in the stock price. Adobe mounted a rally this week on strong earnings and guidance. And Choi is also keeping an eye on the payments space, which he says still has companies with good businesses but becoming more attractive in terms of valuation as the industry doesn’t get as much love as it deserves. (Mastercard was the fund’s fifth-largest holding as of Q1.)
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