Full Video Transcript Below:

CAROLINE WOODS: OK joining me now is Todd Ahlsten, CIO of Parnassus investments. Todd, Thanks so much for being here.

TODD AHLSTEN: Thanks Caroline, I hope you had a great Labor Day weekend.

CAROLINE WOODS: I did, you as well. So, Todd, we’re kicking off September, though, on a pretty downbeat note. The major averages all firmly in negative territory. What is your investment outlook for the rest of this year. Is there room to run or is this rally just out of steam.

TODD AHLSTEN: Well, we started the year feeling pretty constructive on the markets. And there’s really four pillars to that where we thought the market could have a double digit year and the market being the S&P 500. The first thing is we still believe in American exceptionalism, just the S&P 500. Just a great collection of assets, growing markets and just very innovative. And, you know, 40% of the companies in the S&P 500 have 60% margins in terms of gross margins. So just great companies. Number two, the AI build out is very real, very tangible and going to drive growth and earnings. Number 3 is we thought the economy could grow this year. And so good economic growth. And number four we think the liquidity cycle being lower interest rates eventually and growing global liquidity M2 and private credit would grow. So those four factors seemed like they would have a positive gradient this year. And we still, you know, believe that’s the case. Looking for double digit returns for the market this year.

CAROLINE WOODS: OK so can you be a bit more specific when you say double digit returns. Because at this point the S&P 500 is up. What about 8% year to date. So is there 2% more to rally here or is there 12% more?

TODD AHLSTEN: So we like to think long term. But we began the year and you know walked down memory lane. The S&P was a bit below 6,000. And we said through the four factors we talked about that, double digit S&P earnings growth, along with a stable PE multiple in the low 20s, could yield a S&P target of 6,500 to 6800 by the end of the year, and we’re pushing up close to the bottom of that range now, and we’re not updating the targets. But I think that landing spot is still very valid. And if the earnings come in strong, you could see the markets continue to push towards potentially the higher end of that range that we still believe is in play.

CAROLINE WOODS: So talk to us about what could drive the market to 65 6800. And at this point, are there still some overlooked opportunities for investors right now. Because, you know, we’ve seen some really impressive run UPS in a lot of names.

TODD AHLSTEN: We have. And I think so some of those areas that have done well, say hyperscalers and semiconductors, those companies have shown some really strong growth. And I think going forward, though, there could be some areas that have not participated as much that could here in the second half of the year, and I would just highlight two of those areas. Number one is software companies. Your traditional software as a service or SaaS companies have just not participated this year as there’s concerns about AI displacing software. But when you look at companies like Salesforce in Workday and ServiceNow, those type of companies have not participated this year. But software is still going to be very important in the economy, and those companies are still growing and the multiples are quite low. So there could be an unlock in software. Also, some areas of health have underperformed this year. And ironically, health is an area that’s showing pretty strong earnings at relatively low multiples. Just the market hasn’t really rewarded those companies yet. So, you know, think about life sciences companies like Thermo Fisher or a Danaher. And some of those areas have just have lagged and think about even medical device companies. So when you think about health care software. And then there’s some other areas that could participate, say, in housing if we started to get some, you know, rate cuts that have lagged a bit. Companies that are levered to that could do well. And also just outside of the Mag seven, there’s some areas that have gone through some cyclical weakness that could start to participate later this year.

CAROLINE WOODS: OK and you also have your ETF picks as a core select ETF. Tell us why an investor would want to invest in a core select ETF versus a broader market ETF and how you’re evaluating growth potential in your holdings there?

TODD AHLSTEN: Yeah so for us really the main thing is consistent process of high quality, great American companies. And in this structure it’s quite concentrated. So whereas our mutual fund strategy, the Parnassus core equity fund has 40 stocks. The active ETF core select has only 25 stocks. So I think high conviction high active share where it’s benchmark aware, but you’re really getting the highest exposure to our highest conviction ideas. And as we talked about areas that would be like software, life sciences, some other areas that we feel have, you know, exceptional opportunities over the next several years. So that’s really what you’re getting in is that high conviction, high active share, long term great American companies, but only 25 stocks. And that’s the real advantage of it.

CAROLINE WOODS: Yeah I was taking a look at your holdings. And I see Nvidia Microsoft, Apple Amazon, Alphabet. So basically the majority of the Mag Seven but not a name like Meta. So tell me is that strictly a valuation call or why would those names be in there and not a Meta for example?

TODD AHLSTEN: Yeah so from a big picture standpoint, Caroline, our Mag seven exposure, we like to own the stocks that trade at cheaper multiples and are growing earnings faster. And we feel have really good 3 year prospects. So when would you look at, you know, some of the larger exposures we have and probably would highlight, Microsoft and obviously Google at the top of that. You know, those companies are generating pretty good earnings at, you know, relatively lower multiples than some companies say, like a Tesla, which has, you know, a higher multiple and has kind of more kind of volatile earnings path going forward. So we’re really looking for durable growth, reasonable multiples. And at some point as an active manager, you have to own your best ideas, which also means not owning others. And while meta and Tesla may be good investments down the road, we’re really focusing on other names like, you know, Microsoft, Google, Amazon, and Nvidia as being our main opportunities that we want to overweight versus the benchmark. And then the rest of the portfolio has a lot of active share, meaning it looks a lot different than the S&P 500, which is what people would want in an active ETF.

CAROLINE WOODS: OK, so I also see yeah Danaher waste management, Applied Materials, Mastercard, Bank of America in there. So just quickly what differentiates PRCs from other core equity ETFs and what could be considered a pretty crowded market?

TODD AHLSTEN: Yeah so a couple of things. We have a very consistent process. Humbly, I’ve been managing our mutual fund strategy through seven presidential administrations. And so we have a long term team. So I think long term process focused. We really, you know, think about the durability of companies and quality great American companies. We want you to sleep well at night, keep the blood pressure low, and just own companies that we think are on the right side of history. So as you said, when you think about companies like Costco and Mastercard and, you know, John Deere and Google and Amazon, these are just share gainers in the economy, durable under levered. And even in environments like today where you have, concerns on tariff and inflation and geopolitics and economic cycles. These are the durable compounders that through economic cycles come out of volatility stronger. And we believe they’re resilient and robust. And so that’s what we’re really kind of going long if you think about it. And we’re going to underweight companies in the market that might have some other challenges of fragility. Or there are more competitive markets have more debt, more economically sensitive and maybe higher valuations. Those are the companies we have a tendency to avoid and go overweight quality. And in the very long term let that generate the alpha in that core ETF.

CAROLINE WOODS: OK. And just quickly because we’re out of time. So you have to keep this like seconds the biggest risk to S&P 6800 this year?

TODD AHLSTEN: I think higher inflation and no rate cuts.

CAROLINE WOODS: All right. We’ll leave it there. Todd Ahlsten, CIO of Parnassus Investments, Thank you for that concise answer and for your picks. Really appreciate it.

TODD AHLSTEN: Thanks so much.