Bronze-rated Parnassus Fund’s record of excellent stock-picking and a strong environmental, social, and governance focus outweigh succession questions.
The following is our latest Fund Analyst Report for Parnassus Fund PARNX.
An experienced lead; a proven process; a strong environmental, social, and governance focus; and a record of excellent stock-picking give this fund an edge. It has generated a strong long-term record, but succession questions remain. The fund earns a Morningstar Analyst Rating of Bronze.
Firm founder Jerome Dodson has guided the fund since 1984, and his importance can't be understated. He has built a robust team at Parnassus and has a good track record launching funds and developing managers to run each portfolio. Silver-rated funds Parnassus Core Equity PRBLX and Parnassus Mid-Cap PARMX exemplify this. But Dodson's retirement is a possibility, and the additional managers on this fund, Ian Sexsmith and Robert Klaber, are light on tenure. That said, the duo owns day-to-day management of the fund, including the sell decisions. Dodson still serves as sounding board and mentor on new stock ideas, which is sensible given his experience. Sexsmith and Klaber have done a fine job over a short period, demonstrating increased responsibility for the investment process and increasing personal ownership in the fund--both positives.
The team narrows its investable universe using a rigorous ESG research process. Then it invests based on company fundamentals, valuation, and perceived long-term competitive advantages. The resulting portfolio has about 40 stocks, so a few names can have a significant impact on performance. The fund also carries sector-specific risk, being traditionally overweight in technology stocks. But strong stock-picking and a robust process have offset both risks.
Parnassus has carved out an attractive niche in the ESG space. In a peer group of socially conscious large-growth and large-blend funds, the firm's large-cap offerings have top-tier long-term performance and fair fees. There aren't competitors with similar conviction and portfolio concentration that compete with the funds on every front. The fees on the institutional shares of Parnassus are competitive even with some socially conscious index funds.
Process Pillar: Positive | Wiley Green 07/24/2017
This fund doesn't hug a benchmark. It resides in the large-growth Morningstar Category, but 32% of its holdings are mid- or small-cap stocks. Its average market cap of $30 billion is less than half the benchmark Russell 1000 Growth's. The fund owns stocks in all nine sections of the Morningstar Style Box and has roamed between growth and blend over time. Sector weightings are limited to 3 times the S&P 500's, but there is no minimum. The managers have given perpetual underweightings to utilities and energy and an overweighting to technology.
The team narrows the investable universe with proprietary ESG criteria that have made the firm a leader in the growing ESG space. The managers check firms in five areas: environment, governance, workplace, community, and customers. This process uncovers consciously managed companies instead of just identifying known rotten eggs. As a result, this fund has an above-average Morningstar Sustainability Rating. The fund has avoided fossil fuel stocks since February 2015.
Next, the team seeks companies with strong competitive advantages, exemplary management teams, and attractive valuations. The latter shines through in the value measures, all of which are well below the Russell 1000 Growth's. Further, the fund's P/E and price/book ratios are lower than the S&P 500's. Most of its stocks' Morningstar Stewardship Ratings are Standard or Exemplary.