Value Added


The Best Socially Responsible Fund?

Steven Goldberg

Whether or not you inject social and political matters into your investment decisions, you’ll find Parnassus Equity Income appealing.



Finding good socially responsible funds is incredibly difficult. But Parnassus Equity Income (symbol PRBLX) fills the bill. In fact, I think it’s a fine choice for any investor, regardless of your political views.

The driving force behind the fund’s success is Todd Ahlsten, 41, its manager since 2001. Ahlsten started reading the Wall Street Journal when he was 13, and he interned at San Francisco-based Parnassus when he was a student across the bay at the University of California at Berkeley. He’s never worked anywhere else.

See Also: 5 Mutual Funds for Socially Responsible Investors

The fund, which doesn’t invest in companies involved in alcohol and tobacco, among other things, has delivered excellent results. Over the past ten years through July 11, the fund returned an annualized 9.1%—an average of 1.6 percentage points per year better than Standard & Poor’s 500-stock index. Yet the fund has been 8% less volatile than the S&P 500. It lost 40.9% in the 2007-2009 bear market compared with a meltdown of 55.3% for the index.

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Those kinds of numbers have attracted attention. The fund’s assets have grown to $6.7 billion from $867 million at the end of 2007. Ahlsten believes that’s still a manageable amount, even though he holds only 40 stocks, many of them midsize companies and even a few small ones. He doesn’t trade much, holding stocks an average of four years.

A dozen analysts assist Ahlsten and co-manager Ben Allen, who was promoted last year. The managers and analysts don’t make their decisions based on the big picture. But Ahlsten says, “There’s a lot of risk in the economy and the financial markets.” So they look carefully at worst-case scenarios—as well as best-case scenarios—when evaluating stocks. “We spend a lot of time examining a range of outcomes for a stock,” he says.

Ahlsten gravitates toward companies with sustainable competitive advantages over their rivals. In addition, he says, “We want sturdy businesses without that much economic sensitivity”—in other words, ones that should hold up relatively well in recessions. He also tries to pick companies run by top-flight executive teams.

About 75% of the fund’s assets are in dividend-paying stocks, although Parnassus doesn’t require that a holding pay a dividend or achieve some sort of yield threshold. The fund yields 1.3%, less than a point below the S&P 500. That yield figure is net of the fund’s annual expense ratio of 0.90%.

The managers try to limit sector exposure to no more than roughly double the S&P’s sector weightings, but they push those limits. Consumer staples—companies that make stuff people use every day, such as soft drinks and toilet paper—account for 21% of the fund’s assets, a bit more than double the S&P 500’s weighting. Industrials represent 22% of the fund, again just about double the benchmark weight. Parnassus also likes technology, which is 17% of the fund—just a hair over the index exposure.

But figuring out how the fund may perform in different environments by looking only at sector weightings can be tricky. Industrial holdings include Waste Management (WM), the nation’s largest garbage collector. Its business should hold up well even in a recession. Holdings also include C.H. Robinson Worldwide (CHRW) and Expeditors International of Washington (EXPD), logistics firms that aim to keep trucks, ships and airplanes efficiently filled with freight. These “asset-light” firms don’t carry the freight themselves, so they don’t have to issue a lot of debt to buy expensive equipment or have to worry about maintaining and storing it during bad times.

In technology, Ahlsten waited for, perhaps, just the right moment to buy Apple (AAPL). The fund’s average cost to buy the stock was $393, and Apple’s 52-week low is $385. Its 52-week high is $705. “It’s a fantastic brand,” Ahlsten says. “It has gotten into the fabric of people’s lives.” If everything goes right, he thinks Apple could rebound to $700.
He also likes Google (GOOG), even though it has had a “tremendous run.” In addition to its terrific advertising business, Google has made huge strides in software for mobile devices, such as smart phones and tablets. Ahlsten also likes Qualcomm (QCOM), which makes the chips that power smart phones, and Applied Materials (AMAT), which makes equipment that is used to produce chips.

Like most socially responsible funds, Parnassus won’t buy companies that get much of their revenue from gambling, alcohol, firearms, tobacco or nuclear power. But it also screens for companies with positive attributes—those, for example, with what the fund considers responsible environmental and labor-force policies. Parnassus believes the stocks of such companies will perform better than their competitors.

Maybe so. But most socially responsible funds that I’ve looked at charge high fees and have delivered pretty lousy returns. Parnassus, in my view, is the best socially responsible fund you can buy.

Steve Goldberg is an investment adviser in the Washington, D.C., area. He and several clients own shares in Apple and Applied Materials.



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