Analysis of Parnassus Core Equity Fund
active management, analysis, mutual fund, value investing

A recent story in The New York Times focused on Parnassus Investments and its Core Equity Fund (PRBLX; Investor Class shares). This $15.7 billion large-cap no-load fund has a reasonable 0.87% net expense ratio and 23% turnover. According to the article

Value-oriented investors who screen out companies that don’t meet strict social standards, [the fund managers], over the last year, generated a respectable 14 percent return in their core equity fund where they have large stakes in Apple and Google. But the positions are not nearly enough to keep pace with the 18 percent return of the Standard & Poor’s 500-stock index, within which six of the 10 top components are now technology stocks.

Over the longer term, however, the Parnassus results are better. For 10 years, the core equity fund handily beats its benchmark — 9 percent compared with 7 percent, a record that outpaces 98 percent of the competition.

This post is a follow-up to our previous coverage of this fund.

Let’s start with rolling returns. The fund’s primary prospectus benchmark is the S&P 500® Index. One of the long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). From January 2000 through June 2017, the fund returned more than the ETF in approximately 62% of all rolling 36-month periods, 56% of 24-month periods and 54% of 12-month periods. However, the dispersion of outcomes was quite wide, as shown in the following chart and statistics:

Rolling Returns of Parnassus Core Equity Fund (PRBLX) and SPDR S&P 500 ETF (SPY) since 2000

While a rolling returns analysis provides useful information about relative performance over typical holding periods, it does not take the fund’s exposures or risk into account. To more accurately adjust for the latter, let’s employ the simplest variant of Alpholio™ patented methodology. In this approach, a custom reference ETF portfolio is built for each analyzed fund to most closely track the fund’s returns. The portfolio has a fixed ETF membership (with a configurable limit) and weights, thus facilitating an easy implementation.

The following chart with associated statistics shows the cumulative RealAlpha™ for Parnassus Core Equity over the ten years through June 2017 (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 10 Years

Compared to the reference portfolio of up to six ETFs, the fund added a fair amount of value over this analysis period and did so with a RealBeta™ well below one.

The following chart with statistics depicts the constant composition of the reference ETF portfolio over the same evaluation period:

Reference Weights for Parnassus Core Equity Fund (PRBLX) over 10 Years

The fund had equivalent positions in the iShares MSCI KLD 400 Social ETF (DSI), Vanguard Consumer Staples ETF (VDC), PowerShares BuyBack Achievers™ Portfolio (PKW), iShares Morningstar Large-Cap Growth ETF (JKE), First Trust Water ETF (FIW), and iShares U.S. Energy ETF (IYE).

Now let’s take a look at the fund’s performance over the last five years. Here is the resulting cumulative RealAlpha™ chart with related statistics:

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 5 Years

Since mid-2015, the fund lost all of the cumulative RealAlpha™ it previously generated in this analysis period. Also, despite lower volatility (measured by the standard deviation) the RealBeta™ of the fund was higher than that over the broader evaluation period.

The following chart with statistics illustrates the static composition of the reference ETF portfolio over five years:

Reference Weights for Parnassus Core Equity Fund (PRBLX) Over 5 Years

The fund had equivalent positions in the PowerShares S&P 500® Quality Portfolio (SPHQ), iShares MSCI USA ESG Select ETF (SUSA; formerly KLD), SPDR® S&P® Dividend ETF (SDY), iShares U.S. Industrials ETF (IYJ), Technology Select Sector SPDR® Fund (XLK), and Consumer Staples Select Sector SPDR® Fund (XLP).

The final chart with conventional statistics shows the total return of the fund and two of the reference ETFs:

Total Return of Parnassus Core Equity Fund (PRBLX), iShares MSCI KLD 400 Social ETF (DSI) and iShares MSCI USA ESG Select ETF (KLD) over 5 Years

Over the five-year period, the performance of the two ETFs, and especially DSI, converged with that of the fund.

In sum, while the Parnassus Core Equity Fund has a decent long-term record, its recent performance has been similar to that of index-based environmental, social and governance (ESG) products with lower expense ratios. With approximately 40 positions, the fund’s portfolio is fairly concentrated – top ten holdings currently constitute almost 39% of the total. In three of the last four calendar years, the fund had significant distributions, which made it 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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Analysis of Parnassus Core Equity Fund
analysis, mutual fund

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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