A recent fund profile in Barron’s features the Parnassus Core Equity Fund (PRBLX, investor shares). This $9.7 billion large-cap core fund has a modest expense ratio of 0.87% and a low turnover ratio of 17%. According to the article

Core Equity is among a new wave of investment funds that leave behind passive index-hugging for what they call an ESG approach — one focusing on environmental, social, and governance issues… The result is a fund with 40 midsize to large-company stocks that has average annualized returns of 10% over the past 10 years, beating 97% of its large-blend peers, and two percentage points ahead of the Standard & Poor’s 500.

The fund’s primary performance benchmark is the S&P 500® index. Despite a fairly concentrated portfolio and the price-to-earnings ratio (P/E) of an average holding exceeding that of the index by about 28%, the fund exhibited a smaller volatility than the index. This is also reflected in the fund’s RealBeta™ of 0.86 calculated by Alpholio™.

One of practical implementations of the fund’s benchmark is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that the fund returned more than the ETF in approximately 60% of all 12-month rolling periods over the past 10 years. A median outperformance per period was about 1%, while the mean was about 2.2%. This indicates that the fund significantly beat the ETF in a relatively small number of rolling periods (more on that below).

In a simplest Alpholio™ methodology, both the membership and weights of ETFs in the reference portfolio are kept constant throughout the entire analysis period. This analysis shows that over the past 10 years, the fund had top equivalent positions in the Vanguard Consumer Staples ETF (VDC; weight of 22.9%), iShares North American Tech ETF (IGM; 12.1%), Vanguard Health Care ETF (VHT; 10.9%), and iShares U.S. Industrials ETF (IYJ; 8.5%).

In a more elaborate Alpholio™ approach, weights of fixed ETFs in the reference portfolio are allowed to fluctuate over the analysis period. This supports a more accurate tracking and, consequently, adjustment for risk of the fund. Here is a resulting chart of cumulative RealAlpha™ for Parnassus Core Equity:

Cumulative RealAlpha™ for PRBLX

From late 2004 through mid-2008, the fund’s cumulative RealAlpha™ was largely flat. The fund generated a substantial amount of RealAlpha™ in the second half of 2008, at the onset of the financial crisis. In fact, in that entire year the fund lost about 23% compared to 37% for its benchmark index. However, by mid-2012 all of that cumulative RealAlpha™ was gone. Finally, the fund’s RealAlpha™ rebounded in the last two years. The lag cumulative RealAlpha™ curve was generally above the regular one, which indicates that new investment ideas added value.

Overall, the annualized discounted cumulative RealAlpha™ for the fund was about 0.95% on a regular and 1.8% on a lag basis (to learn about the differences between the regular and lag RealAlpha™, please visit our FAQ). At 13.25%, the fund’s standard deviation over the entire analysis period was about 0.2% lower than that of its reference ETF portfolio.

The following chart demonstrates changes of ETF weights in the reference portfolio in the same analysis period:

Reference Weights for PRBLX

The fund had top equivalent positions in the iShares Select Dividend ETF (DVY; average weight of 13.2%), iShares Morningstar Large-Cap Growth ETF (JKE; 12.6%), Vanguard Consumer Staples ETF (VDC; 12.3%), iShares North American Tech ETF (IGM; 11.1%), Vanguard Health Care ETF (VHT; 10.5%), and iShares S&P Mid-Cap 400 Value ETF (IJJ; 9.6%).

The Other component of the chart collectively represents six additional ETFs with smaller average weights. These include the iShares 1-3 Year Treasury Bond ETF (SHY; 7.7%), which represents the considerable short-term investments of the fund, currently at 5.1% of the portfolio.

In sum, over the past 10 years Parnassus Core Equity generated a modest amount of RealAlpha™. The fund’s outperformance can be attributed to just two sub-periods: the second half of 2008 and the last two years. While the fund had no short-term capital gain distributions since 2004, and recently shifted its focus away from income, its long-term capital gain distributions could be quite large, such as the one of over 5% of the net asset value (NAV) in 2013. This makes the fund somewhat less suitable for taxable accounts.

To learn more about the Parnassus Core Equity and other mutual funds, please register on our website.

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