Tracking The Parnassus Core Equity Fund - Q4 2016 Update

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Includes: AAPL, AGN, AMAT, CMP, CVS, DHR, DIS, FTV, GILD, GOOG, GOOGL, INTC, IRM, KLAC, MA, MDLZ, MDU, MKC, MSI, MU, NOV, NVS, PDCO, PNR, PX, PYPL, SCHW, SYY, TRI, UPS, VFC, VRSK, WDFC, WFC, WM, XYL
by: V is for Value

Summary

Including dividends, total return for the 3rd quarter was 2.20% versus 3.82% for the S&P 500 and 4.41% for the Lipper Equity Income Fund Average.

The top 10 holdings (39.2% of fund): Wells Fargo, Gilead Sciences, Alphabet, Charles Schwab, Apple, Disney, Danaher, Intel, United Parcel Service and Allergan.

During the fourth quarter the fund significantly added to its KLC-Tenecor position while taking some profits from its Wells Fargo and Charles Schwab positions.

This series tracks the Parnassus Core Equity Fund (PRBLX, PRILX). I describe in the fund in a previous article, which you can find here, or you can check out their website here.

Over the past 10 years the fund returned 9.47% versus 6.93% for the S&P 500.

For 2016 the Parnassus Core Equity Fund returned 10.41% versus 11.94% for the S&P 500. Underperformance for the year can be attributed to the fund's sector allocation. It was underweight the energy sector which gained the most this year, 27% on average. And it was slightly overweight healthcare, the worst performing sector for the year.

In fact the three biggest losers in the portfolio for the year were healthcare stocks.

Perrigo (NASDAQ:PRGO) dropped 36% for the year. Shares were hit when long-time CEO Joe Papa resigned to become CEO of Valeant (VRX) Pharmaceuticals. Further, the company had to cut earnings guidance three times.

Gilead Sciences fell 29.2% for the year. The main culprit was the Hepatitis C business declining in 2016. However, the fund still likes Gilead for its innovative and growing HIV franchise, promising drug pipeline, and dirt cheap valuation.

Finally, Allergan dropped 32.8% on the year. First, Pfizer (NYSE:PFE) terminated its plans to acquire Allergan. Then the company reduced guidance on weaker than expected sales. The fund still likes Allergan for its terrific product portfolio and rich pipeline.

The biggest winners for the year included Applied Materials, Xylem, and Sysco Foodservices.

Applied Materials rose 72.8% for the year as orders, revenues, and earnings all grew to the highest levels in company history. The fund continues to own shares as it expects the company to take advantage of additional opportunities for market expansion and share-gain.

Xylem surged 35.7% for the year. The company makes the pick and shovel products for the water industry such as pumps and filters. Utilities continue to invest in ageing water infrastructure and Xylem continues to be a leader in intelligent water solutions. The fund considered its acquisitions of Sensus and Visenti to be beneficial for the company.

Sysco rose 35% for the year. The company reported strong earnings growth during the year due to gross margin improvement, cash volume growth, and cost reductions. Further, the company expanded its international business materially by purchasing the U.K. based Brakes Group.

For 2017 the fund continues to closely monitor government policy changes and the impact of Donald Trump.

One area sensitive to these changes is healthcare. And in that area the fund plans to focus on companies that either offer novel science or cost-reducing products and services. No matter what, it believes the ageing population is a secular trend worth betting on.

The fund is also closely watching the Federal Reserve and believes we'll finish 2017 in a higher interest rate environment. To prepare for this they upped their allocation in financials during 2016 (from 5.1% to 11.5%) and decreased their allocation in utilities (from 5.3% to 2.2%).

Starting 2017 the fund is underweight consumer discretionary and energy. Both are highly cyclical and reduced exposure will protect the fund in a downturn. They are overweight in industrials and technology stocks.

Here's the activity for the third quarter of 2016:

New Stakes:

None

Stake Increases:

KLA-Tencor (NASDAQ:KLAC) is a company that sells equipment to semiconductor manufacturers. The company was in an agreed upon merger with Lam Research that was cancelled at the beginning of the third quarter of 2016. During the third quarter the fund picked up just over 1.1 million shares for a smallish 0.6% stake in the portfolio. The stock traded between $67 and $78 during this time. During the fourth quarter the fund picked up another 1.1 million shares. During this time KLAC traded between $72 and $83. It's now trading around $88.

Allergan (NYSE:AGN) develops pharmaceuticals and medical devices for therapeutic and cosmetic purposes. It's best known for Botox. The fund established a 2.3 million share position in the fourth quarter of 2013. Prices ranged from $88.48 to $111.08. The fund sold 845k shares, or 31% of its stake in the fourth quarter of 2014. Prices ranged from $176.86 to $214.00. In the first quarter of 2015 Actavis completed the acquisition of Allergan. Per the terms of the acquisition Allergan shareholders received 0.3683 of an Actavis ordinary share and $129.22 in cash for every share owned. The combined company also retained the Allergan name. Over the second quarter of 2015 the fund sold just over 615k shares, or 34.5% of the position as prices traded between $280 and $315. In the fourth quarter of 2015 the fund sold another 265k shares, reducing the position 22.7%. Prices ranged from $240 to $320. The fund used price weakness in the second quarter of 2016 to pick up 700k shares, upping its position by 70%. Allergan traded between $200 and $250 during this time. In the fourth quarter the fund upped its position by 20%, buying 372k shares. It now owns just over 2.2 million shares. Prices ranged from $186 to $242 during the fourth quarter.

VF Corp (NYSE:VFC) designs and manufactures branded apparel, footwear, and accessories in the US and Europe. It sells under several brands including North Face, Vans, Timberland, Wrangler and Eastpak. The fund bought just over 5.7 million shares during the fourth quarter of 2015, making VF Corp at top 10 position. Prices ranged from $62 to $74. According to the fund it bought at an average price of $63. It likes VF Corp for its growth potential, commitment to corporate responsibility and excellent management team and hopes to own the position for many years. During the fourth quarter of 2016 the fund boosted its position 12%, adding 826k shares. The price ranged from $52 to $58. With shares near $49 now this is a position you can get into at a better price than the fund.

Pentair (NYSE:PNR), Gilead Sciences (NASDAQ:GILD), and CVS Health Corp. (NYSE:CVS) saw minor (less than 10%) increases over the last quarter.

Stake Disposals:

None

Stake Decreases:

Wells Fargo (NYSE:WFC) is one of the big four US money center banks and provides retail, corporate and commercial banking. The fund picked up nearly 10 million shares over the second quarter. The fund considers Wells the best large bank and it's trading at a significant discount to the overall market. The stock traded between $44.50 and $51 during the second quarter. During the third quarter of 2016 the fund picked up just over 5 million shares, increasing its position by 53%. The shares traded between $41.50 and $51 during the quarter and for a large part stayed depressed due to the fake account scandal. During the fourth quarter the fund trimmed its WFC position by 11%, selling roughly 1.6 million shares. Prices ranged from $44 to $58 during the quarter.

Charles Schwab (NYSE:SCHW) operates in the brokerage, banking, and asset management business. The fund got into the stock in 2011, acquiring over 10 million shares when prices were in the $10 to $15 range. Over 2013 the fund sold nearly half of its position as prices ranged from $13 to $25. The fund sold 89% of its remaining position in the fourth quarter of 2014, when prices ranged from $25.17 to $30.67. That brought its total shares down to 775k. In the first quarter of 2015 the fund significantly increased its position, adding over 8.9 million shares as prices ranged from $25.50 to $31.50. The fund added just over 4 million shares in the first quarter of 2016. Prices ranged from $21.50 to $32. During the fourth quarter of 2016 the fund trimmed its SCHW position by 10%, selling 1.5 million shares. Prices ranged from $31 to $40.50.

Kept Steady:

Compass Minerals (NYSE:CMP), Praxair (NYSE:PX), Apple (NASDAQ:AAPL), MasterCard (NYSE:MA), Paypal (NASDAQ:PYPL), Sysco (NYSE:SYY), McCormick (NYSE:MKC), Mondelez (NASDAQ:MDLZ), Sysco , Disney (NYSE:DIS), WD-40 (NASDAQ:WDFC), Danaher (NYSE:DHR), Fortive (NYSE:FTV), Xylem (NYSE:XYL), Verisk Analytics (NASDAQ:VRSK), Alphabet (NASDAQ:GOOG) & (NASDAQ:GOOGL), Patterson Companies (NASDAQ:PDCO), MDU Resources (NYSE:MDU), National Oilwell Varco (NYSE:NOV), Novartis (NYSE:NVS), Iron Mountain (NYSE:IRM), Applied Materials (NASDAQ:AMAT), Intel (NASDAQ:INTC), Micron Technology (NASDAQ:MU), Thomson Reuters (NYSE:TRI), Motorola Solutions (NYSE:MSI), United Parcel Services (NYSE:UPS), and Waste Management (NYSE:WM) remained unchanged for the quarter.

Portfolio snapshot:

PRBLX Q4 2016

Disclosure: I am/we are long AAPL, GILD, GOOGL, DIS, INTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.