What could be more “old school” socially responsible investing than the premise that companies that foster good workplaces would be successful businesses? It just seems to make sense.
That’s what Jerome Dodson, president of Parnassus Investments, thought in 2005 when he started the Parnassus Workplace Fund. He had a feeling that a good workplace would be a good business and show excellent investment returns. But he had no evidence to demonstrate that.
Then Milton Moskowitz, the author of Fortune Magazine’s annual “100 Best Companies to Work For” told him that the Russell Group, which publishes numerous stock indexes, tested many of the “100 Best” for several years and found out that the returns were higher than the S&P 500. Later, Dodson says a professor at the University of Pennsylvania’s Wharton School conducted a similar study and concluded the same.
“That gave me some hard evidence that a good workplace would give good investment returns,” says Dodson.
In fact almost four years later the Parnassus Workplace Fund is becoming a top performing fund, based upon its rankings with Morningstar. For the three months ending June 30, Parnassus Workplace was up 26.6 percent placing it in the first percentile for large-cap growth funds. Total return for the 12 month-period was down 5.44 percent, but still in the first percentile for its class.
The stellar performance has helped the fund grow from just $9 million at the end of March to more than $34 million at the end of June, with Dodson expecting it will top $50 million within a few months.
“Money chases performance,” he says.
The Parnassus Workplace Funds picks its 35 to 40 stocks from a pool of companies that are listed on Fortune magazine’s 100 Best Companies to Work For or have otherwise been identified as good workplaces. It also applies an investing style that Dodson considers Graham & Dodd-style value investing, even though Morningstar categorizes the fund as growth.
Dodson thinks there are three possibilities why good workplaces make good investments. The first is that having a good workplace is an indicator of enlightened management.
“People who are smart enough to have a good workplace and have those progressive values, would be progressive in other areas such as marketing and finance and operations,” he says. “So it’s an indicator of good management.”
A second possibility is that the companies that treat their employees well will have employees who work harder and smarter.
“If I’m working for a company that’s a sweat shop, that has labor problems, I’m probably not going to be motivated to do as good a job as I would if I were working at a company that has a good workplace,” he says.
The third possibility is that companies that do well for non-workplace reasons, such as strong marketing or finance capabilities can afford the extra costs that are associated with a good workplace. Those include higher salaries, profit sharing and other benefits.
While Dodson includes the Fortune list as part of its core companies to consider, it doesn’t follow it blindly. Data storage firm NetAppwas ranked number one on the last Fortune 100 list. But it isn’t in the Parnassus Workplace Fund because it was fined $128 million by the federal government last spring for overcharging government agency customers.
After selecting companies using a best workplace screen, Dodson looks to see if they are undervalued. If a firm’s current price/earnings ratio (P/E) is below its five-year average it becomes an investment possibility. The same is true if other current ratios fall below their five-year average.
Skeptics might argue that the companies included in the Workplace Fund are simply well-run companies with good operations and finances, and that the workplace angle is irrelevant. Dodson doesn’t think so.
“Look at our Parnassus Fund,” he says. “It has done well over the last three or four years, but not as well as the Workplace Fund. That fund is not as strict about the workplace, but it takes in all the other social aspects. Yet the Workplace Fund still does better. It’s the best of all our funds.”