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:
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):
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:
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:
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:
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:
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.