"In the mutual-fund world, being socially responsible refers to funds that combine progressive 'social' mandates with their investment criteria," explains Mark Salzinger.
In The No-Load Fund Investor, he suggests, "We have no problem with an investor who wants his investments to reflect his values, provided that the funds have also provided good risk-adjusted returns." Here, he looks at two favorites.
"Funds that call themselves socially responsible usually avoid stocks that don’t meet progressive, or politically liberal, standards of environment impact, workplace environment, and diversity/tolerance and community involvement.
"They also exclude companies in certain industries, including defense, tobacco & alcohol, gaming, coal and nuclear power, and sometimes oil & gas producers and exploration companies.
"We track 13 socially responsible funds. We think at least two of them are very attractive for long-term investing -- Parnassus Equity Income (PRBLX) and Parnassus Small-Cap (PARSX).
"For all of its funds, Parnassus looks for good companies with attractive returns, above-average growth prospects and sustainable competitive advantages.
"They couple these broad investment criteria with judgments on the degrees to which specific companies respect the environment, treat their employees, encourage diversity in the workplace, support their local communities, and insist on ethical business dealings.
"Also, they will not invest in companies that manufacture alcohol or tobacco products; are involved with gambling; manufacture weapons; or generate electricity from nuclear power. Parnassus attempts to buy these types of companies when they become temporarily undervalued due to market sentiment.
"According to Jerome Dodson, who founded Parnassus Investments in 1984, Parnassus calculates a so-called intrinsic value for each of its purchase candidates based on expectations of future cash flows, and then discounts the sum of the excess future cash flows into a value today.
"A stock is considered for purchase when its price is at least 30% less than this value and its traditional value ratios (price/earnings, price/sales etc.) are in the bottom halves of their ranges of the past five years.
"Parnassus Equity Income is an excellent core choice for more risk-averse investors, while Small-Cap should be considered for some of the aggressive portion of a diversified portfolio of funds.
"Though Parnassus Equity Income has held its own in up markets, it has shined brightest in down markets. In 2008, for example, the fund lost 23%, vs. 37% for the broad U.S. market.
"As a result, its return over the past five years (+5.2% annually) is among the very best of the funds in our growth-income category over this period.
"Parnassus Equity Income's positions in consumer staples and healthcare partially reflect the more conservative nature of the fund.
"However, the large weighting in energy/utilities (nearly 19% of the fund’s assets) and small weighting (about 7%) in financials partially reflect so-called top-down views of the sectors.
"According to Dodson, Parnassus decided to avoid most financial stocks in 2008 because of the financial and credit crisis.
"As for the energy sector, chief investment officer Todd Ahlsten, who manages the Equity Income fund, convinced the rest of the firm several years ago that some energy stocks met socially responsible criteria and needed to be considered for investment.
"He and Dodson like to buy energy equities for their respective funds when they think oil and natural-gas prices are low but poised to move higher over time, as they think now.
"Parnassus Equity Income currently includes an abundance of top-quality companies with excellent brand equity, including top-10 holdings Microsoft, Johnson & Johnson and Proctor & Gamble.
"For Parnassus Small-Cap, Dodson looks especially for attractively valued growth companies in possession of unique characteristics that help shield them from competition.
"Dodson believes that not only does his focus on unique characteristics help identify stocks that can rally, but also decreases risk because operational results are less likely to disappoint.
"Like Equity Income, Small-Cap lost considerably less than the market in 2008. Small-Cap also includes substantial positions (about 21% each) in energy/utilities and industrials/materials.
"Befitting its more aggressive positioning, however, it has much less than its more conservative sibling in consumer-staples and healthcare stocks and more in the technology sector, which Dodson says is near a trough in demand and set to rally more in a global economic recovery.
"It also has significant positions in homebuilding stocks, which the manager says have rallied during past real estate slumps well in advance of actual rebounds.
"While Ahlsten stocks Equity Income mainly with large-cap equities, Dodson sticks with stocks with market capitalizations of less than $3 billion at time of purchase for Small-Cap.
"Both funds have only about 40 stocks. Their expense ratios of 1.01% for Equity Income and 1.21% for Small-Cap (after subsidy by Parnassus) are reasonable."
