DNY59
Parnassus Fixed Income Fund
|
Fund facts |
Investor shares |
Institutional stocks |
|
tape |
MUTF:PRFIX |
MUTF:PFPLX |
|
Net Expense Ratio1 |
0.58% |
0.39% |
|
Total expenses ratio |
0.82% |
0.59% |
|
Date created |
08/31/1992 |
04/30/2015 |
|
Standard |
Bloomberg US Bond Index |
|
|
Asset class |
US Core Bonds Plus Bonds |
|
|
objective |
Current income |
|
The strategy seeks to achieve an attractive level of current income by owning a core bond portfolio as well as a significant allocation to green/sustainable bonds that advance climate and sustainability goals.
Market review
Inflation fluctuations led to weak results in the first quarter
The deflationary trend stalled in the first quarter, while the US economy continued to expand, prompting the Federal Open Market Committee to keep target interest rates steady. Delays in potential interest rate cuts have sent bond prices lower as yields rise. Corporate bonds and securitized assets outperformed Treasury bonds as investors took advantage of the delay in interest rate cuts to secure returns. Corporate interest rate spreads remained tight and high-yield bonds rose as continued consumer and labor market strength eased recession fears. At the same time, rising interest rates have impacted transaction volumes in real estate, with the commercial real estate market in particular facing financing headwinds.
|
performance |
Annual returns (%) |
||||
|
As of 03/31/2024 |
3 moss. |
1 year. |
3 years. |
5 years. |
10 years. |
|
PRFIX – Investor Stocks |
-0.43 |
3.51 |
-2.31 |
0.25 |
1.30 |
|
PFPLX – institutional stocks |
-0.39 |
3.67 |
-2.11 |
0.46 |
1.49 |
|
Bloomberg US Bond Index |
-0.78 |
1.70 |
-2.45 |
0.36 |
1.54 |
|
The performance data quoted represents past performance and does not guarantee future returns. Current performance may be lower or higher than the performance data stated, and current performance information is available as of the end of the most recent month 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 cost. The returns shown in the table do not reflect the tax deduction that a shareholder may pay when distributing funds or redeeming shares. The performance of institutional stocks differs from the performance shown for investor stocks to the extent that the classes do not carry the same expenses. The Bloomberg US Aggregate Bond Index is an unmanaged bond index, and it is not possible to invest directly in the index. Index numbers don’t take into account any expenses, fees, or taxes, but mutual fund returns do. |
|||||
Performance review
The results were helped by corporate bonds and government bonds
The Parnassus Fixed Income Fund (Equity Investors) returned -0.43% during the first quarter period, outperforming the Bloomberg U.S. Aggregate Bond Index by -0.78%. The portfolio maintained a duration relatively close to the index duration as interest rates rose.
The overweight of corporate bonds and holdings within the sector has helped the fund’s performance as the sector has benefited from the continued strong economy and low corporate default rates. The overweight in government-related bonds also helped relative results, while the selection in Treasuries detracted from them.
The portfolio benefited from its over-allocation to corporate bonds in addition to its asset class selections. Our corporate bond portfolio outperformed despite a longer duration than the benchmark (7.3 years vs. 7.0 years for the index). The strong economy has supported healthy corporate profitability and cash flows, and thus strong returns. Higher starting yields and tighter credit spreads also helped corporate bond results. Among corporate bonds, finance company bonds performed well on an absolute and relative basis; The peak of the interest rate cycle has eased banking sector risks and recession fears. The choice among government-linked bonds helped the relative performance, supported by a shorter duration than the benchmark (2.9 years compared to 5.3 years for the benchmark index) amid upward pressure on interest rates. The portfolio’s overweight relative to the asset class also contributed to the performance, as the government-linked bond category, although down on an absolute basis, was the best performer in the Bloomberg US Aggregate Bond Index.
Treasuries diminished the portfolio’s return, although the portfolio’s low position in this category helped limit losses, as Treasuries were the worst-performing category in the index. Although exposure to securitized bonds contributed to relative performance, it underperformed other categories as mortgage rates remained high and technical and fundamental factors remained volatile in the first quarter.
Determine the position of the wallet
Find return opportunities amid tight spreads
The fund ended the first quarter with about 60% of its assets in corporate bonds, which is much higher than the 25% recorded by the index. We continue to believe that corporate bonds provide the best returns over the long term because they have higher initial yields. Today, credit spreads are historically tight, meaning investors see less credit risk due to strong economic growth and lower levels of issuance. While tight spreads mean there is less upside for bond prices outside of the Treasury market rally, we still find today’s total returns compelling. The fund particularly enjoys overweight bonds issued by companies in the information technology, consumer discretionary and consumer staples categories.
We added several financial issuers to the fund this quarter, including securities from ARES Corp, Truist Financial (TFC), and Block (SQ). We believe these securities are undervalued and offer a good yield and attractive upside opportunity. A new high yield issuer was added this quarter – Yum! Brands (YUM), owner of KFC, Pizza Hut and Taco Bell.
This quarter, we also continued to add to our exposure to secured mortgage loans. We have added approximately 4% to our securitized mortgages, with a focus on higher coupon mortgages. These securities trade at wider spreads compared to Treasuries and provide a great complement to our corporate bonds. While we remain significantly underweight securitized bonds relative to the index, at 12% versus 28%, we believe this is justified by the lower yields available on these securities.
Prospects
Uncertain price path amid stubborn inflation and economic resilience
The US economy continued to defy economists’ expectations. So far, growth has remained strong while employment has remained strong and inflation has fallen, all at interest rates that should have weakened the economy. The Federal Reserve has indicated that it will cut interest rates three times in 2024, and the market is making similar expectations. The decision to cut interest rates from here depends primarily on the path of inflation, which remains stubbornly above the Fed’s targets. We believe it is likely that the Fed will revise its forecasts further as 2024 progresses.
A strong economy is a positive for corporate bond spreads, as profitability and cash flows support the company’s debt servicing. However, higher inflation could reduce yields on Treasuries, and other asset classes by proxy, if interest rates are pushed higher from here. We believe that longer-term interest rates may rise from here, but most of that increase is behind us. As a result, we expect yields to be the primary driver of overall bond returns, with less overall impact of changes in interest rates. We maintain our over-allocation to corporate bonds, as we believe the higher yields in corporate bonds relative to Treasuries still provide a compelling total return.
|
Sector weights |
As of 03/31/24 |
|
|
section |
% of TNA |
Bloomberg US AG. |
|
Big company |
59.8 |
25.1 |
|
related to government |
8.3 |
4.9 |
|
Securitization |
12.0 |
28.2 |
|
treasury |
18.5 |
41.8 |
|
Cash and others |
1.4 |
0.0 |
|
The largest holding companies |
As of 03/31/24 |
|
protection |
% of TNA |
|
Morgan Stanley (MS) |
1.6% |
|
Cisco (SYY) |
1.4% |
|
Bank of America Corp (BAC) |
1.3% |
|
Oracle Corporation (ORCL) |
1.3% |
|
Public Service Corporation of Oklahoma |
1.3% |
|
Canada Pacific Kansas City Limited (CP) |
1.3% |
|
Alexandria Real Estate Equities Company (ARE) |
1.3% |
|
McCormick & Company (MKC) |
1.3% |
|
Global Payments Corporation (GPN) |
1.3% |
|
CH Robinson International (CHRW) |
1.2% |
|
Holdings are subject to change. |
Samantha Palm, Portfolio Manager, Senior Analyst
Minh Bui, Portfolio Manager, Senior Analyst
|
Glossary of terms The duration is expressed in a number of years. Higher interest rates mean lower bond prices, while lower interest rates mean higher bond prices. The 30-day SEC return is calculated under the SEC’s uniform formula based on net income earned over the past 30 days. It is a “leveraged” return, meaning it includes contractual expense reimbursements and would be lower without these offsets. The unlevered 30-day SEC return is calculated under the SEC’s uniform formula based on net income earned over the past 30 days. It does not include reimbursement of contractual expenses, which results in a lower return. important information Bill-533917-2024-04-23 As described in the Fund’s current prospectus dated May 1, 2023, Parnassus Investments has contractually agreed to waive 0.10% of its management fees and to reimburse the Fund for expenses to the extent necessary to limit the Fund’s total annual operating expenses to 0.58% of net assets. for Parnassus Fixed Income Fund (Institutional Equities) and 0.39% of the net assets of the Parnassus Fixed Income Fund (Institutional Equities). This Agreement will not terminate prior to May 1, 2024, and may be continued by the Investment Adviser indefinitely on an annual basis. The net expense ratio is what investors pay. Environmental, Social and Governance (‘ESG’) Guidelines: The Fund evaluates material environmental, social and governance (‘ESG’) factors as part of its investment decision-making process, taking into account a range of impacts they may have on future revenues, expenses, assets, liabilities and overall risks. The fund also uses active ownership to encourage more sustainable business policies and practices and increase environmental, social and governance transparency. Active ownership strategies include proxy voting, dialogue with company management, sponsorship of shareholder resolutions, and public policy advocacy. There is no guarantee that an ESG strategy will succeed. Investing in mutual funds involves risk, and it is possible to lose capital. The Fund’s share price may change daily based on the value of its holdings of securities. Bond prices are inversely related to interest rates. As interest rates fall, bond prices will rise, and as interest rates rise, bond prices will fall. The value of a security may also be affected by the possibility that issuers of debt obligations will not pay interest or principal to the Fund, or that their credit rating may be downgraded by a rating agency. In addition, up to 20% of the Fund’s total net assets may be invested in convertible securities, which may not have an investment grade rating. This would make them riskier than investment-grade securities. © 2024 Parnassus Investments, LLC. All rights reserved. PARNASSUS, PARNASSUS INVESTMENTS and PARNASSUS FUNDS are federally registered trademarks of Parnassus Investments, LLC. Parnassus Funds are distributed by Parnassus Funds Distributor, LLC. Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund, and should carefully read the prospectus or prospectus summary containing this and other information. The prospectus or prospectus summary can be found at www.parnassus.com or by calling (800) 999-3505. |
Original post
Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
