In a research report on the Parnassus Mid Cap Fund written last February, Morningstar analyst Connor Young described the product as a “reliable offering.” That sounds reassuring, but it also lacks sex appeal. Then again, this fund has offered steady risk-adjusted returns against its benchmark since its current portfolio managers—Matthew Gershuny and Lori Keith—took the helm in October 2008, and that is evidently sexy enough for its investor base.
The fund, which had $5 million in assets when the duo began calling the shots more than 12 years ago, recently hit the $7 billion mark. Investors seem to like that it offers a good balance of market upside participation and market downside protection. In short, being labeled as reliable is a good thing for an actively managed mutual fund.
“In a lot of ways, [reliable] is a great description of what we do,” says Matthew Gershuny, deputy chief investment officer at Parnassus Investments and co-manager of the Parnassus Mid Cap Fund. “I don’t think it is the complete picture, but I think we’re very much in tune with our institutional investors and financial advisors who use us as part of their overall strategy for their clients.”
Gershuny says the fund is a true mid-cap core product consisting of roughly 40 companies. He touts the fund’s differentiation from its bogey, the Russell Midcap Index, and notes that the product has been very consistent in its style, fund characteristics and low cash position. He also highlights his fund’s low turnover rate, which tends to be at around 30% or less.
And as Morningstar points out, the fund has a lower standard deviation, downside capture and maximum drawdowns than the Russell index. “That has helped us do very well on a risk-adjusted basis during a full market cycle,” Gershuny says.
ESG Focus
Gershuny says Parnassus looks for quality companies with competitive advantages, including their defensive moat against other companies and their ESG principles. The fund also looks at “relevancy”—a company’s ability to stay important to a growing base of customers.
Lori Keith, the fund’s co-manager and Parnassus’s research director, notes that the fund integrates ESG into its investment process. “We take a holistic view of companies. We have a dedicated team with expertise in ESG that works with our fundamentals team to discern the quality of the companies around these dimensions,” she explains.
The fund’s prospectus touts that it’s fossil-fuel free. And the firm applies exclusionary screens, so that the nuclear, tobacco, alcohol, gambling and weapons sectors can’t make up any more than 10% of a portfolio company’s revenue. In actuality, Keith says, those revenues are often lower than 10% because the fund doesn’t want to hit that limit and be forced to sell a particular company.
One example of how the fund accommodates companies within that 10% threshold is a former fund holding, Whole Foods (now owned by Amazon.com), whose in-store alcohol sales contributed 3% to 4% of its revenue during the time it was a fund portfolio holding. “It’s in the spirit of not screening out companies that overall are doing things the right way,” Keith says.
She adds that Parnassus engages with companies to help improve their operations over the long run to move them toward environmental, social and governance investing objectives, particularly with their sustainability disclosures and transparency within company reports. She notes this area is sometimes more lacking in mid-cap companies than in large-cap companies, which put out comprehensive sustainability reporting.
She mentions one current portfolio holding, tech company Cadence Design Systems Inc., as an example of Parnassus’s active engagement helping bolster a company’s ESG chops. “They had no sustainability reporting, so we had a dialogue with them and they subsequently developed a fairly comprehensive report and continue to make progress in sharing their narrative,” Keith says.
“Putting out sustainability reports won’t move the needle today,” she continues, “but over time, as a company reorients its priorities in areas like reducing emissions or workplace engagement, it will create a positive impact to help attract more capital and other long-term investors.”
Risk-Adjusted Returns
In a video on the Mid Cap Fund’s website, Gershuny states that he and Keith are making a bet that the 40 or so companies in the fund will outperform the Russell Midcap benchmark over time. Based strictly on price performance, the fund has come up a tad short. But again, they stress, the fund’s performance should be viewed from the lens of risk-adjusted returns.