by Jerome Dodson, Parnassus Investments
Recently Cliff Feigenbaum, managing editor of the GreenMoney Journal, asked me to write about Parnassus Investments, so I decided to write about two of our funds: the Parnassus Workplace Fund and the new Parnassus Asia Fund.
Parnassus Workplace Fund
A good place to work makes for a good investment – that’s the basic premise of the Parnassus Workplace Fund. In other words, a company that treats its employees well should be successful as a business. Since its inception over eight years ago (on April 29, 2005), the Parnassus Workplace Fund has demonstrated the truth of this premise.
The idea for the Parnassus Workplace Fund was first presented to me by Milton Moskowitz, co-author of the annual Fortune magazine survey of The 100 Best Companies to Work For in America. Russell Associates, the analytics group and creator of the Russell 2000 Index and other benchmarks, had contacted Moskowitz and told him that they had done a study of the publicly-traded companies in the annual Fortune list, and found that the stock-market performance of those companies had been excellent, handily beating the S&P 500 over long periods of time.
Moskowitz called me with the news and urged me to start a mutual fund that invested in companies with good workplaces. I was hesitant at first, because studies are not the same as investing with real money, and the results can be very different. However, the idea struck a chord in me because I’d always felt that a company with a happy workforce made for a good investment, but until then I had no way of proving it. Despite my initial hesitation, I decided to go ahead and start the Parnassus Workplace Fund with Milton Moskowitz as a consultant to the Fund. The Fund has been successful, and as of June 30, 2013, it has over $350 million in assets.
We use two sets of criteria in making investment decisions: financial and workplace. Assessing the financial criteria involves doing fundamental analysis to find companies with high returns, good products and services, sustainable competitive advantages and solid balance sheets. Once we have done the financial analysis, we make an estimate of the value of the company. Usually, we will only buy a stock if it is selling for no more than two-thirds of its intrinsic value. This gives us an important margin of safety.
While the financial analysis is quantitative, the workplace assessment is qualitative. We think it is important to visit companies and talk with management to find out if a company has a good workplace. While almost all companies will say they have a good workplace, the ones that impress us the most are ones that can give specific examples and articulate policies that make them good places to work. Important characteristics include: some meaningful form of profit-sharing or stock-ownership; good health-care and retirement benefits; support for working mothers; an emphasis on training and personal development; job flexibility; and recognition for accomplishments. We like companies that respect their employees, genuinely care about them and don’t just treat them as hired hands.
I think that picking companies with good workplaces is one of the keys to the Fund’s success. Some of the extra return we get is because of our financial analysis and using a value approach to investing, but a lot of our edge comes from choosing companies that are great places to work. If people are happy at work, they will be more productive, and this means better results from the same number of people. It also means that that there will be lower turnover, and this results in less money spent on recruiting and training new people. More importantly, workers at this kind of firm will help to save money for their employer and also find ways to develop more business for the company. It’s impressive what can happen when happy workers are allowed to be creative and come up with ways to build a better business.
The Fund is careful about taking risks, making sure that there is the potential for more upside gain than downside risk. The market has really taken off so far in 2013, so we have to be careful to avoid stocks that may be over-valued. Right now, the economy is improving, so there should be more upside, but there’s no doubt that some valuations have gotten ahead of themselves, so it’s important to look at both potential risk and potential return.
Parnassus Asia Fund
On April 30, 2013, Parnassus started its first new fund in eight years: the Parnassus Asia Fund. This is our first venture into international investing. Asia is a very dynamic and creative place. It contains the world’s fastest-growing middle class, and it is the scene of much technological innovation. Asia is also a region with a lot of entrepreneurship, and it is developing deep financial markets. Given that the region is growing at a fast pace, and we expect that growth to continue, it makes sense to invest in Asia ahead of future positive developments and despite all of the complications in doing so.
There are some challenges in starting an Asia fund. Asian companies are much more difficult to research than U.S. companies, so it takes us a while to find good investments there. Information on ESG (environmental, social and governance) considerations is not as available for Asian companies as it is for U.S. companies. Also, the ESG record of many Asian companies is not as good as that of U.S. companies. It is taking us longer to find this kind of information on Asian companies, so this slows the investment process.
Making decisions on ESG factors is a very subjective process. No company, of course, American or Asian, is perfect, so we’re dealing with shades of gray. Sometimes it’s hard to decide where to draw the line, when balancing the good and bad factors about a company.
Despite all these difficulties, we do have some important advantages in managing the new Parnassus Asia Fund. Parnassus has almost 30 years of successful experience in making investment decisions, and we are one of the largest mutual fund companies in terms of assets managed in conjunction with ESG screens. Also, we have a great staff member helping me as a senior research analyst. Billy Hwan is a graduate of Stanford University and holds an MBA from the University of California at Berkeley. He also speaks Mandarin and Japanese. Previously, he served as an analyst at Dodge & Cox, a large mutual fund firm based here in San Francisco. Billy has also interned at Matthews Asia Funds, the biggest mutual fund company specializing in Asian stocks. Billy and I spent three weeks in Asia in May, visiting 30 companies in Thailand, Singapore, Indonesia, Hong Kong, Taiwan and Japan. This has given us a lot of intellectual capital in making investment decisions for the Fund.
More information about Parnassus Investments and the funds referenced above is available at www.parnassus.com
Article by Jerome Dodson, the Founder and President of Parnassus Investments. He is the lead Portfolio Manager of the Parnassus Fund and the Parnassus Small-Cap Fund and is the sole Portfolio Manager of the Parnassus Workplace Fund and the Parnassus Asia Fund. Prior to founding Parnassus Investments in 1984, he served as President and Chief Executive Officer of Continental Savings of America from 1976 to 1982, where he started the “Solar T-Bill” program to finance solar energy installations and also developed innovative programs to finance low and moderate income housing. Mr. Dodson received his bachelor’s degree in political science from the University of California, Berkeley and his master’s degree in business administration from Harvard Business School.
After graduating from Harvard Business School in 1971, Dodson worked for the San Francisco Local Development Corporation, a non-profit organization that gave business and technical assistance to minority-owned businesses. In 1976, he helped organize Continental Savings and Loan and became its first president. Continental made loans to finance housing and developed an innovative product for depositors to finance solar energy projects with competitive yields and capital preservation. In 1983, Dodson founded and became the first president of Working Assets Money Fund, a responsible investment money market fund.
Parnassus Investments was founded by Jerome L. Dodson in 1984 as an investment management company offering responsible investment funds to the public. This was the culmination of his desire to provide investment products in a responsible manner.
Jerome L. Dodson founded the firm’s namesake fund, Parnassus Fund, with $300,000 in initial seed capital from friends and family. The firm has grown to over $8.3 billion in assets under management as of June 30, 2013 and now manages seven funds: five fundamental, U.S., core equity strategies across multiple capitalizations, one Asia-Pacific equity strategy and one U.S., fixed-income strategy.