Jerome Dodson, the legendary guru of environmental, social and governance (ESG) investing, has a lot to cheer about these days. A strong stock market, growing consumer confidence and solid economic indicators are all good signs for investors and for his firm, San Francisco-based Parnassus Investments.
The promise of the new Donald Trump administration to lower corporate taxes and improve aging infrastructure seems to be moving the stock market forward, despite valuations that are high based on historic averages.

Things have also been going well closer to home as Parnassus’s stable of six mutual funds continue to churn out some impressive performance numbers. The $3.3 billion Parnassus Endeavor Fund, which the 73-year-old Dodson has managed since its inception in 2005, delivered nearly twice the return of the S&P 500 last year and has beaten the market over the long term. Parnassus Investments, which he started in 1984 with $300,000 in initial seed capital from friends and family, now manages over $21.6 billion.

Yet lurking in the shadows is a creeping anxiety Dodson and others feel about promises from the new administration to roll back financial and environmental regulations, among other things.
Earlier this year, he wrote on the firm’s website that “while relaxing the rules could make for short-term economic boosts, the long-term implications could be far-reaching, particularly on issues related to ESG investing.”

He worries that the administration will reverse many regulations designed to protect current and future generations. These include the Dodd-Frank rules, curbs on the production of coal and other fossil fuels and transparency requirements for companies reporting financial results. Since he penned those words, the new administration has pushed to limit overseas manufacturing, invoke tariffs on foreign goods and abolish the Affordable Care Act.

The shake-up has left Dodson wondering where the notoriously unpredictable Trump will go from here. “The bad news is that he has threatened a trade war with other countries with a focus on China and Mexico,” he says. “If he actually carries out those threats, it will be a disaster, and we’ll be plunged into a deep recession. The same is true of his threat to build a wall between the United States and Mexico.”

Parnassus has good reasons for concern. Many of its funds are overweight in technology companies that manufacture many of their parts in foreign countries. Hefty tariffs on these parts could raise consumer prices and slow sales. Health care, another big sector in some of the firm’s funds, could also suffer if the Affordable Care Act is repealed without a suitable replacement.

At the same time, he sees reason for optimism about the president’s desire to lower corporate taxes and expand infrastructure investments. Both moves, he believes, would help increase corporate earnings and stimulate economic growth. “If the Donald can forget about building a wall next to Mexico, drop his ideas of starting a trade war with China and others, and focus on tax reform and infrastructure investment, it would be a winning strategy,” Dodson maintains.

As the drama unfolds, Dodson continues his long tradition of zeroing in on stock picks that most would classify as contrarian. To find them, he sifts through companies that are suffering what he considers temporary misfortunes such as missed earnings numbers or falling sales, but that otherwise have enough long-term stamina to eventually recover. They must be selling at a steep discount relative to their five-year historic averages (according to their price/earnings ratios and other metrics). Once he buys them, he’s willing to wait several years for his investment thesis to pan out.

American Express, which he started buying back in February 2015, exemplifies his approach. Investors have punished the stock because of the increased competition the company faces from prestige cards and the loss of a longtime partnership with Costco.

Dodson believes that the company can turn things around, however, because it has innovative management and its cardholders spend more. The company is also known as a great workplace for employees, which falls under Parnassus Investments’ good governance banner. Amex’s price-to-earnings ratio is well below both the market average and its historic range, so the stock is also a bargain.

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