Q4 2019 NEWSLETTER
Understanding What you Own - Parnassus Endeavor
Many of you use our SRI model portfolios, but how many have actually taken a minute to look under the hood to see what’s in these models? Each quarter, we’ll take a minute to focus on one fund in the SRI portfolios to get a deeper understanding of what the fund’s objective is and how it invests your dollars with impact. This month, we’ll start with one of the foundational cornerstones of the SRI model – Parnassus Endeavor. Parnassus is one of the great granddaddy’s and pioneers of the SRI space going back to the mid 1980’s when their founder, Jerome Dodson, had this crazy idea that maybe it would be a good idea to invest in companies with high rates of employee satisfaction. Sure enough, that strategy paid off and over the last 35 years Parnassus has grown to into a powerhouse with $28.5B in assets. From an Impact standpoint, Parnassus proactively works to encourage companies to take positive environmental and social steps forward. In just the past few years, they’ve used their weight as an 800 lb gorilla to encourage companies like Mondelez International (owner of brands such as Oreo, Ritz, and Cadbury) to implement net zero waste packaging in their products. When Parnassus discovered that multi-national food distributor Sysco was sourcing fish from vendors employing slave labor, they forced Sysco through threat of divestment to audit and eliminate human rights abuses from their supply chain. Parnassus is one of only 11 large blend funds that takes an activist stance by raising resolutions and voting with their proxies on governance issues such as executive compensation, political lobbying and contribution disclosure, closing the gender pay gap, and instituting independent board chairs. From an investment standpoint, Parnassus Endeavor focuses on large cap value. What that means is that they buy extremely large companies that they see as “cheap” or undervalued. Value investing is the Warren Buffet strategy of finding companies with strong balance sheets and underlying fundamentals that are trading at a discount. Analysts take a number of factors into account including the Price-to-Earnings ratio and the Price-to-Book ratio. Like all things in life, investment strategies cycle and we’ve been in a phase for the past 10 years where growth stocks have been outperforming value stocks. However, if you go back in time and look historically at the trend lines of value vs growth, value is the clear winner. Over the last 26 years, value has
outperformed growth across all capitalization levels by .5 to nearly 2% with a lower standard deviation. Translated, value has outperformed growth with less volatility. Parnassus Endeavor is more concentrated than most mutual funds in that it only owns about 30 positions at any one time with 53% of the portfolio in it’s top 10 holdings. Of those 10 holdings, there’s a focus on information tech (particularly semiconductors), healthcare, and consumer discretionary like Hanesbrands and The Gap. Parnassus employs a best-in-class ESG approach meaning that they that look to buy companies that are not only selling at a discount, but that also score highly in Environment, Social, and Governance metrics relative to their peers. It’s 100% free of companies that derive revenue from fossil fuels, alcohol, tobacco, weapons, nuclear power, and gambling. Parnassus Endeavor is currently the #2 performing fund that we use firm wide and is up 27.71% year to date. Over 3 years the annualized returns are 12.29%, with 11.45% annualized over 5 years (vs 10.78% for the S&P 500), and 14.22% annualized over 10 years (vs 13.7% for the S&P 500). If you’d like to learn more about Parnassus Endeavor, you can visit their website. You can also download Parnassus’ ESG report here.
MARKET COMMENTARY
What’s Doing Well in the Markets and Why?
Knock on wood, but right now markets have largely stabilized after a highly volatile August and September. The S&P 500 and the Dow Jones have both touched new record highs this month and are holding close to those numbers. The 4th quarter has traditionally been a quarter where markets improve boosted by the year end Santa Claus rally. This year, the shopping season is off to a strong start and retailers like Target (TGT) and Walmart (WMT) are doing well. The National Retailers Federation is estimating retail sales in Nov and Dec to grow between 3.8% and 4.2% compared to a year ago. On the interest rate front, the Fed cut rates by another quarter point bringing the Fed Funds rate down to 1.75%. This rate cut has trickled down into money market and bond funds, lowering yields and driving investors to buy more equities rather than lend their money. On a macro level, there’s been a shift in market sentiment as the anticipated global economic slowdown hasn’t materialized as fast as expected, causing many to push out their recession predictions beyond 2020. As always, prepare for volatility as the impeachment hearings, the looming trade war with China, and the 2020 election have the potential to cause big waves.
SRI PORTFOLIO
Performance Update as of November 20, 2019
Our most aggressive model, SRIV6, has returned 19.47% year-to-date net of management fees. Similarly, the more conservative SRIV5 and SRIV4 have returned 15.74% YTD and 13.27% YTD net of management fees. On the taxable side, our tax-managed SRI portfolio has returned 15.34% YTD net of management fees.
GOOD READS
Articles
Green Money – How Community-Focused Municipal Bond Investments can Drive Social Impact by Emily Robare Barron’s – Sustainable Funds Set to See ‘Tsunami’ of New Capital by Leslie P. Norton Forbes – ESG Stocks Are Beating the S&P by 45% This Year by Brendan Coffey Investment Advisor – Why It’s Time to Take ESG Investing Seriously by Donald Calcagni
As always, we love digging into your ideas as well so please feel free to reach out with questions, comments, thoughts, ideas, or concerns. We’re all in this together. LC
Lee Clay, CSRIC™ Financial Advisor, ESG & Impact Investing Specialist REGATTA CAPITAL GROUP, LLC 880 Apollo St., Ste. 129 El Segundo, CA 90245 Phone: 310-220-9158 Fax: 310-725-9158 Cell: 310-429-1131 Lee@regattainvest.com www.regattainvest.com
The intent of this newsletter is to inform, inspire, and incite conversation around all things ESG (Environment, Social, and Governance) as it relates to investments and how we can use our money to generate financial returns alongside positive social and environmental returns.