Dodson’s willingness to hang on to a company for the long term is apparent in his long history with IBM. He began buying the stock in 2013 when it dropped on disappointing earnings news, and earnings growth since then has been modest because of declining hardware sales. Still, the company’s software sales have been on the rise and at some point, he believes, those rising sales will more than compensate for hardware sales declines. In the meantime, the stock is selling at an extraordinarily low price-to-earnings ratio and yielding an attractive 3.15% to boot.
Parnassus Investments’ mutual funds couple bargain hunting and faithful tenacity with screens that weed out companies in alcohol, tobacco, weapons manufacturing, gambling and other “sin” industries. The funds also avoid companies involved with the exploration or production of fossil fuels, while pursuing companies that meet environmental, governance and social criteria in a broad swath of sectors.
In Parnassus Endeavor, once called Parnassus Workplace, the most important criteria for companies are their corporate policies toward and treatment of employees. Among the attributes Dodson likes are generous profit sharing and bonus plans for employees, companies’ open communications with shareholders, and corporate boards of directors with more independent members. He tries to suss out that kind of information through publicly available documents, as well as by speaking with employees and managers. “A good workplace environment is crucial to a company’s success because satisfied employees work harder to make a company more profitable,” he says.
Critics of ESG investing, also called sustainable investing, believe that people shouldn’t have to select stocks with their hands tied by constraints. They also argue that it’s difficult to weed out good corporate citizens from bad ones, since in many cases things don’t get put down on paper. This investment style also involves making judgment calls, since there isn’t a precise definition of what constitutes a strong environmental, social or governance practice.
Nonetheless sustainable investing, which was once mainly pursued by institutional investors and public pension funds, has been gaining traction among individuals. According to a survey done in 2015 by Morgan Stanley’s Institute for Sustainable Investing, 84% of millennials (those born between 1980 and 2002) indicated an interest in it. A 2016 survey by U.S. Trust reveals that interest in ESG investing is increasing, especially among high-net-worth women, millennials, Gen Xers and those with at least $10 million in investable assets.
Morningstar’s introduction of fund sustainability ratings provided another signal of growing its popularity.
While some ESG funds have middling performance records, that doesn’t apply to Parnassus offerings. Over the 10 years ending December 31, 2016, the Parnassus Fund delivered annualized returns of 9.68%, while Parnassus Endeavor returned 12.27% and Parnassus Core Equity returned 9.69%. The S&P 500 returned 6.93% for the same period.
The firm’s record of public investment performance traces back to 1984 when Dodson started the Parnassus Fund, one of the first mutual funds to engage in sustainable investing. In the fund’s early years, he occasionally moved large amounts into cash when he felt stocks were overvalued, and jumped back into the market after a correction. That practice ended about 15 years ago after some ill-timed moves took the fund out of the markets as they kept climbing. “I learned expensive markets can get even more expensive,” he says.
ESG Pioneer Sees Challenges Ahead
April 3, 2017
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