"Some of the seeds were sown in the selloff of 2018 with the trade war," said CIO and portfolio manager Todd Ahlsten. "We used that weakness, that really big downdraft in the [2018] fourth quarter to establish very large positions in companies like Microsoft and Nvidia. We saw and took advantage of that downturn to really add some very nice pieces to the portfolio."
Some of the bigger 2019 wins for the $18 billion strategy included Mastercard (with Microsoft, a "great long-term compounder"), as well as cloud computing and other technology stocks bought in 2018, such as Cadence Design and Synopsys, a designer of smart computer chips.
A pioneer in environmental, social and governance investing, the Parnassus team builds around its core technology stock strategy and looks for companies that design for the future. For example, John Deere was a major purchase in 2019.
"Those [iconic] green tractors have become data centers on wheels and are connected to a cloud computing network. In the spirit of ESG, it shows how farmers can use less water, less fertilizer and less pesticides," said Ahlsten. "Technology can interact with the value of land for farmers to get return on capital. … The thesis here is looking for high-quality companies that are transforming for the future."
The company also divested from fossil fuel stocks, though the impact on the Core Equity Fund was minimal. "From a business standpoint, we see fossil fuels as being less relevant in the future. Clearly there is a movement to renewables," he explained, adding that fossil fuel firms don't have "wide moats and innovation."
Further, the team wasn't "very good at determining oil price direction, that's not really our wheelhouse," according to Ahlsten. Plus, the oil industry in general "has a wide range of outcomes … there's a lot of debt and leverage around oil."
The fossil-fuel move is one example of how the mostly employee-owned firm "has a skin in the game mentality," says Ahlsten, who was named PM of the fund in 2001 and CIO in 2008: "We act like owners and think like fiduciaries."
Rolling into 2020, the strategy outperformed the S&P 500 by 275 basis points in the first quarter, he says, largely due to "trying to focus on companies with essential demand and with strong balance sheets, like Clorox and Costco," as well taking a stake in the digital software company Adobe Systems.
The firm also added Applied Materials, which builds semiconductor chips, and Micron, a memory chip manufacturer. Such firms help make data centers be more efficient and use less electricity. "It's a play on innovation and energy," he said.
The portfolio team thinks it will be a long way back to normalcy for the economy, "so we exited a couple longstanding holdings like Starbucks and Sysco Foods, the big food distributor," explained Ahlsten. "We really hope the economy comes back, but we think restaurants could have a long road to recovery."
Other changes made to the portfolio — tied to the pandemic and to longer-term economic trends — included selling American Express and dramatically reducing holdings in companies like Bank of America. For the Parnassus team, the overall view is that "the real economy will be a slow slog," he said, "and there will be a lot of loan losses." — Ginger Szala
