Parnassus Digest - October 2012
Research Insight: Responsible Investment Update
At Parnassus Investments, we aim to provide shareholders with long-term risk-adjusted returns in a responsible manner. We do this by carefully considering a company’s financial as well as environmental, social and governance (ESG) factors to understand the complete investment merits and risk profile of a company. This approach has been in place since the firm’s founding in 1984. This Digest is a snapshot of our responsible investment initiatives from the past year and our outlook for the coming year.
The emphasis of our responsible investment approach is company-specific research. The ESG process begins by screening out companies from the investable universe that derive significant revenue from the manufacture of alcohol, tobacco or weapons, and have significant involvement with nuclear power, gambling and Sudan. Next, we assess a company’s qualitative ESG factors, focusing on core ESG areas, such as: environmental impact, employee relations, issues affecting local communities, customers and the supply chain, and governance and ethics. We identify the positive and negative attributes within these groupings, and generate an overall assessment of the ESG risk profile of a company. Our investment team then incorporates our ESG findings into their fundamental investment process, with the goal of identifying risks and opportunities that the market may have ignored.
In addition to company-specific work, we also consider ESG factors at the portfolio level. For example, at the end of the first quarter of 2012, we analyzed the Parnassus Equity Income Fund, incorporating all of the ESG work that we had conducted on each portfolio company in the Fund. We used a proprietary scoring system to rate qualitative ESG factors, and came up with a composite score for each company. We then compared the scores across the group of companies. Approximately 80% of the companies had significant positive attributes in at least two key areas. Examples of significant positives include: business strategy incorporating ESG, initiatives to reduce greenhouse gas emissions or toxicity, product safety improvements, wellness programs, philanthropy, supply chain enhancements, and improvements in diversity and employee safety.
A defining characteristic of the firm’s responsible investment approach is active ownership. The firm uses proxy voting as a way to engage with management and impact a company’s policies. We have voted approximately 100 times so far in 2012. We voted against management’s recommendations approximately 10% of the time, which is similar to our 2011 results. The majority of votes against management this year have concerned governance. We have voted for changes to governance structure, such as separating the Chief Executive Officer position from the Chair of the Board of Directors. We have also voted to declassify boards, so that all board members stand for election annually. With a declassified board, shareholders can give feedback to individual directors annually with their votes, rather than having that opportunity only once every three years. Another important area where we have voted against management relates to compensation, in so-called “Say on Pay” votes. While these votes do not require a company to change their executive pay, they communicate shareholder disagreement with the level or structure of pay. We encourage you to review our voting guidelines and history online at www.parnassus.com/proxyvoting.
Another form of active ownership at Parnassus Investments is direct engagement with our portfolio companies. Our engagement style has always been collaborative. We believe that we can be most effective by giving management the flexibility they need to make corporate decisions, while also engaging them on key issues of importance to us and our Funds’ shareholders. A major engagement initiative this year was a request to the companies in the Parnassus Small-Cap Fund for increased disclosure on sustainability issues. This was part of a larger investor group’s effort to reach out to companies to foster transparency on ESG topics. We are happy to report that several of our portfolio companies have responded to our request, and are now reporting on ESG issues. Parnassus Investments has also supported larger initiatives, where responsible investors have publicly spoken out on corporate water management, combating air pollution and supporting anti-bribery laws.
In the 28 years that Parnassus Investments has been in business, we have seen a significant increase in reporting from companies on ESG issues as a result of shareholder engagement. We believe there is opportunity for even greater participation from companies in the future. Attention brought by responsible shareholders on issues like executive compensation is having an impact. The Parnassus Funds typically own 40-60 portfolio companies and have a growing asset base, which means that we now hold major positions in some small- and mid-sized businesses. These ownership stakes enable us to engage with management teams to develop strong lines of communication and affect positive change.
An additional characteristic of our responsible investment approach is community investing. This year, the investment team has selected new placements in community investment strategies. Our funds hold high social impact investments in Community Development Financial Institutions (CDFIs). CDFIs are financial institutions that provide credit and financial services to underserved markets and populations primarily in the United States. Over the coming year, we plan to conduct further due diligence and add more CDFI investments to our Funds. Our individual CDFI investments are listed in the Semiannual Report located on our website, www.parnassus.com.
In 2012, Parnassus Investments’ ESG initiatives are making a lasting impact through proxy voting, engagement and community investing. Over the next year, we will continue to collaborate with other responsible investment peers, engage with management teams, participate in community investing and communicate these efforts with our shareholders.
We thank you for your investment with Parnassus.
Maria Kamin is a working mother with eight years of experience in responsible investing. This is her third year at Parnassus Investments, where she manages the ESG function of the investment team.
The ESG team is comprised of two full-time analysts, Maria Kamin & Iyassu Essayas. In 2012, the ESG team benefitted from the assistance of two ESG interns, Grace Chang and Rachel Tan.
The views expressed in this Parnassus Digest are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds. Any specific securities discussed may or may not be current or future holdings of the Funds.
Investment Team Expands. Since 2008, Parnassus Investments has seen assets increase steadily, and this growth has provided the firm with the opportunity to bring on more talented investment professionals. Over the past four years, the investment team has doubled in size from seven to fourteen members.
Parnassus Investments is pleased to announce that as of September 2012, Billy Hwan and Robby Klaber have joined the firm as Senior Research Analysts. Billy and Robby interned with Parnassus during the summer of 2011 while they were completing their master’s degree in business administration at the University of California, Berkeley and Harvard Business School, respectively.
“I am thrilled that Billy and Robby have joined our firm. We got to know them well last summer, and I’m confident that they have the skills, judgment and temperament to be great investors,” expressed Director of Research, Ben Allen. “In addition, they are team-oriented, committed to excellence and have intellectual and personal integrity, so I’m sure they will be a great fit within the unique Parnassus Investments culture.”
All returns greater than one year are annualized.
a The inception date for the Parnassus Fund is December 31, 1984. The inception date for the Parnassus Equity Income Fund and Parnassus Fixed-Income Fund is August 31, 1992. The inception date for the Parnassus Mid-Cap Fund, Parnassus Small-Cap Fund and Parnassus Workplace Fund is April 29, 2005. The inception date for the Institutional Shares of the Parnassus Equity Income Fund is April 28, 2006.
b As described in the Funds’ current prospectus dated May 1, 2012, Parnassus Investments has contractually agreed to limit the total operating expenses (exclusive of acquired fund fees and expenses) to 0.99%, 0.99%, 0.78%, 1.20%, 1.20%, 1.20% and 0.75% of the net assets of the Parnassus Fund, the Parnassus Equity Income Fund-Investor Shares, the Parnassus Equity Income Fund-Institutional Shares, the Parnassus Mid-Cap Fund, the Parnassus Small-Cap Fund, the Parnassus Workplace Fund, and the Parnassus Fixed-Income Fund, respectively. These limitations continue until May 1, 2013, and may be continued indefinitely by the Adviser on a year-to-year basis. Without these fee waivers and/or expense reimbursements, the Funds’ returns would have been lower.
Performance shown for the Parnassus Equity Income Fund – Institutional Shares prior to the inception date of April 28, 2006 reflects the performance of the Parnassus Equity Income Fund-Investor Shares and includes expenses that are not applicable to and are higher than those of the Institutional Shares.
Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and the most recent month-end performance is available on the Parnassus website (www.parnassus.com). Investment return and principal will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original principal cost. The S&P 500 Index, the Russell Midcap Index, and the Russell 2000 Index are widely recognized indexes of common stock prices. The Barclays Capital U.S. Government/Credit Bond Index is a widely recognized index of fixed-income security prices. An individual cannot invest directly in an index. An index reflects no deductions for fees, expenses or taxes. Returns shown for the Funds do not reflect the declaration of taxes a shareholder would pay on the fund distributions or the redemption of fund shares. Prior to March 31, 1998, the Parnassus Equity Income Fund was a balanced fund. Prior to May 1, 2004, the Parnassus Fund charged a sales load of a maximum of 3.5%, which is not reflected in the total return figures.
Common stock prices fluctuate based on changes to a company’s financial condition and on overall market and economic conditions. Small- and mid-cap companies can be particularly sensitive to changing economic conditions and have fewer financial resources than large-cap companies. Investments in fixed-income securities are subject to interest rate risk, credit risk and market risk, each of which could have a negative impact on the value of the Fund’s holdings.
The Parnassus Funds are underwritten and distributed by Parnassus Funds Distributor, a subsidiary of Parnassus Investments and a FINRA member.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the fund and should carefully read the prospectus or summary prospectus, which contains this information. A prospectus or summary prospectus can be obtained on the website, www.parnassus.com, or by calling (800) 999-3505.