“We seek to invest in good businesses with increasingly relevant products or services, sustainable competitive advantages, quality management teams and ethical business practices.” –Â Jerome Dodson (Trades, Portfolio) at the Parnassus web site.
On the GuruFocus scoreboard, Jerome Dodson of Parnassus Investments ranks seventh when the gurus are sorted by 10-year returns.
In general, he has the same goals as the other gurus on the scoreboard, but an important part of his firm’s screening and selection involves a broader view of the corporate purpose. He believes companies that consider other stakeholders, and not just those who own the shares, will ultimately outperform those that only worry about their shareholders.
Lest we push that idea too far, read what Dodson told Bloomberg:
“I am not a zealot,” Dodson said in a recent interview at his midtown Manhattan apartment overlooking the city. “My politics are modestly left of center. I am a normal American guy who believes in capitalism.”
He goes on to say that he gets an "edge" over other investors by "favoring" companies with good employee relations and environmental records.
A note about terminology: as an article at Wikipedia explains, “There has been wide uncertainty and debate as to what to call the inclusion of intangible factors relating to the sustainability and ethical impact of investments.”
"Social responsibility" and "sustainable" are commonly used terms, but "ESG"Â –Â environmental, social and (corporate) governance – is gaining wider acceptance and is commonly used at the Parnassus web site.
This article is one of several that look at the investing gurus: David Tepper, Prem Watsa, Bill Ackman, Seth Klarman, Chuck Akre, Vanguard Health Care Fund and Yacktman Focused Fund.
Who is Jerome Dodson?
Dodson founded and is chairman/CEO of Parnassus Investments of San Francisco. The firm and funds are named after Mount Parnassus in Greece, a source of Greek mythology and the home of the Oracle of Delphi.
Dodson earned a Bachelor of Arts in political science at California-Berkeley and an MBA from the Harvard Business School in 1971. Following graduate school, he joined a nonprofit, the San Francisco Local Development Corp., which assisted minority-owned firms.
He helped establish Continental Savings and Loan in 1976 and became its first president. This firm created an innovative security that allowed depositors to finance solar energy projects while receiving competitive yields and risk management. Dodson followed that with establishment of Working Assets Money Fund in 1983, a socially responsible investment money market fund.
Dodson is lead portfolio manager of the Parnassus Fund and the Parnassus Asia Fund, as well as sole portfolio manager of the Parnassus Endeavor Fund. A Bloomberg article reports that the Endeavor Fund began in 2005 as the Workplace Fund, based on the premise that the best places to work would also be the best places to invest.
The same article notes that Dodson needed time to find his footing; he was over age 40 before the firm took off. Now 73, he plans to retire next year and will be replaced by Portfolio Manager Ben Allen.
Biographical information is from the Parnassus web site and Bloomberg article.
Given his background, it is not surprising that Dodson started a socially responsible fund nor that he’s become well known for it. What may surprise is the Endeavor Fund’s performance.
What are the Parnassus Funds?
Dodson started Parnassus with $300,000 in seed capital from family and friends in 1984. The firm’s assets under management first reached $1 billion in 2003; at the end of calendar 2016, the assets had reached $21.6 billion.
While Parnassus Investments nominally operates six funds, each one is split into Investor Shares and Institutional Shares, producing a total of 12 different funds.
Dodson’s investing philosophy
The company sums up its investing philosophy this way at its web site:
“The investment style of the Parnassus equity funds is fundamental, U.S., core equity. Our investment philosophy is to own good businesses at attractive valuations. We seek to invest in businesses that have increasingly relevant products or services, sustainable competitive advantages, quality management teams and ethical business practices. Once a company clears these gates, we perform a detailed valuation analysis to confirm that the investment will yield an attractive risk-adjusted return.”
Breaking out that statement:
- Core equity: The firm says there is a core component to all positions, and this relates to the risk of permanent loss of capital. Put another way, the starting point is equity investments that are relatively unlikely to suffer significant losses. On some of those positions, it adds opportunistic capital, which the company says allows it to profit from short-term volatility within a long-term position.
- Good businesses at attractive valuations: Increasingly relevant seems to suggest positions that take advantage of secular trends; sustainable competitive advantages suggests moats (including patents, switching costs, regulation and brand names); quality management teams (includes effective capital allocation, ownership stakes and integrity); ethical business practices suggests investments in socially responsible corporations (this is particularly stringent for the Endeavor Fund, for which it says “portfolio companies must offer outstanding workplaces and must not be engaged in the extraction, exploration, production, manufacturing or refining of fossil fuels.”
- Detailed valuation analysis: reviewing the underlying fundamentals and economics of a candidate company. This initial process produces a three-year range of outcomes and assesses the potential of a permanent loss of capital. Parnassus then monitors the stock price until it drops to a level where risk-adjusted, expected internal rate of return is acceptable.
The Bloomberg article noted, “Dodson, 73, says he gets an edge on the investing crowd by favoring companies that treat their employees and the environment well, yet he mostly credits buying low and selling high. His formula – one part idealism, two parts Graham and Dodd – has produced 13% annualized returns over the past decade versus 8% for the S&P 500 Index.”
In response to an interview with The Motley Fool, Dodson said he began his career by looking for bargain stocks but learned along the way that opportunities for growth also matter so he now uses an approach that combines value and growth. And he said his preferred measure for business returns is return on equity (ROE).
While Dodson clearly follows Benjamin Graham in a broad sense, he’s added two elements of his own: a growth factor (increasingly relevant products and services) and ESG factors. The latter, in particular, adds an somewhat unique screening step for identifying and selecting stocks.
Dodson’s performance
According to the GuruFocus Scoreboard, Dodson's funds have posted average annual returns of:
- Five years: 17.2%.
- 10 years: 9.7%.
- Since inception: 10.1%.
Looking at the funds individually, Parnassus reports the following results for 10-year average annual returns (with total net assets) as of March 31:
- Parnassus Fund: 10.10% ($961 million).
- Core Equity Fund: 9.57% ($15.21 billion).
- Endeavor Fund: 12.73% ($3.7 billion).
- Mid Cap Fund: 9.32% ($2.21 billion).
- Asia Fund: N/A ($14 million).
- Fixed Income Fund: 3.69% ($224 million).
Perhaps the most striking piece of data in the performance results is the average annual return from the Parnassus Endeavor Fund, the fund most heavily weighted in favor of ESG companies. Many investment managers with an ESG bent have trouble making good on the claim that socially conscious companies outperform the rest; Dodson, though, seems to have made the case.
Current holdings
This list shows the top holdings in the Core Equity Fund (by far the largest Parnassus fund) as of Feb. 28 and how much of the portfolio they represent:
- Wells Fargo & Co. (WFC, Financial) 4.9%.
- Gilead Sciences Inc. (GILD, Financial) 4.5%.
- Apple Inc. (AAPL, Financial) 4.5%.
- Danaher Corp. (DHR, Financial) 4.5%.
- Intel Corp. (INTC, Financial) 4.0%.
- Praxair Inc. (PX, Financial) 3.9%.
- Charles Schwab Corp. (SCHW, Financial) 3.9%.
- The Walt Disney Co. (DIS, Financial) 3.9%.
- Allergan PLC (AGN, Financial) 3.6%.
- National Oilwell Varco (NOV, Financial) 3.2%.
Top holdings in the Endeavor Fund (ESG-favored stocks) were, as of Feb. 28:
- Gilead Sciences  7.1%.
- Novartis AG (ADR) (NVS, Financial) 4.9%.
- Qualcomm Inc. (QCOM) 4.8%.
- McKesson Corp. (MCK) 4.7%.
- Allergan 4.5%.
- VF Corp. (VFC) 4.4%.
- IBM Corp. (IBM) 4.4%.
- Micron Technology (MU) 4.4%.
- Whole Foods Market (WFM) 4.2%.
- American Express Co. (AXP) 4.2%.
These 10 stocks make up 47.6% of the fund’s total holdings.
No surprises in the Core Equity Fund, but in the Endeavor Fund, there is a heavy emphasis on the pharma/health care sector as well as a strong tendency to technology stocks.
Conclusion
Dodson has earned his place on the GuruFocus top 10 over 10 years with solid double-digit returns. And he’s done it with more than funds while the other funds in the Parnassus stable have come close to double digits.
What sets Dodson apart from some of his peers is his interest in ESG –Â environmental, social and governance –Â factors. He says it gives him an edge.
But it might also be argued that sector selection matters as much or more than ESG compliance. The health and technology sectors generally have opportunities to build wide moats (and the pricing/margins power that implies), which in turns means they are better able to afford compliance with ESG aspirations. Of course, health and technology also introduce greater volatility, and this year’s winners may be next year’s losers, diminishing the ESG allure.
Is there any reason for individual investors to study Dodson’s investing philosophy and processes? Yes, but perhaps more for the discipline and research than for the ESG, or social responsibility, factor.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
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