A good place to work makes for a good investment – that’s the basic premise of the Parnassus Workplace Fund. In other words, a company that treats its employees well should be successful as a business. Since its inception over eight years ago (on April 29, 2005), the Parnassus Workplace Fund has demonstrated the truth of this premise.
The idea for the Parnassus Workplace Fund was first presented to me by Milton Moskowitz, co-author of the annual Fortune magazine survey of The 100 Best Companies to Work For in America. Russell Associates, the analytics group and creator of the Russell 2000 Index and other benchmarks, had contacted Moskowitz and told him that they had done a study of the publicly-traded companies in the annual Fortune list, and found that the stock-market performance of those companies had been excellent, handily beating the S&P 500 over long periods of time.
Moskowitz called me with the news and urged me to start a mutual fund that invested in companies with good workplaces. I was hesitant at first, because studies are not the same as investing with real money, and the results can be very different. However, the idea struck a chord in me because I’d always felt that a company with a happy workforce made for a good investment, but until then I had no way of proving it. Despite my initial hesitation, I decided to go ahead and start the Parnassus Workplace Fund with Milton Moskowitz as a consultant to the Fund. The Fund has been successful, and as of June 30, 2013, it has over $350 million in assets.
We use two sets of criteria in making investment decisions: financial and workplace. Assessing the financial criteria involves doing fundamental analysis to find companies with high returns, good products and services, sustainable competitive advantages and solid balance sheets. Once we have done the financial analysis, we make an estimate of the value of the company. Usually, we will only buy a stock if it is selling for no more than two-thirds of its intrinsic value. This gives us an important margin of safety.
While the financial analysis is quantitative, the workplace assessment is qualitative. We think it is important to visit companies and talk with management to find out if a company has a good workplace. While almost all companies will say they have a good workplace, the ones that impress us the most are ones that can give specific examples and articulate policies that make them good places to work. Important characteristics include: some meaningful form of profit-sharing or stock-ownership; good health-care and retirement benefits; support for working mothers; an emphasis on training and personal development; job flexibility; and recognition for accomplishments. We like companies that respect their employees, genuinely care about them and don’t just treat them as hired hands.
I think that picking companies with good workplaces is one of the keys to the Fund’s success. Some of the extra return we get is because of our financial analysis and using a value approach to investing, but a lot of our edge comes from choosing companies that are great places to work. If people are happy at work, they will be more productive, and this means better results from the same number of people. It also means that that there will be lower turnover, and this results in less money spent on recruiting and training new people. More importantly, workers at this kind of firm will help to save money for their employer and also find ways to develop more business for the company. It’s impressive what can happen when happy workers are allowed to be creative and come up with ways to build a better business.
The Fund is careful about taking risks, making sure that there is the potential for more upside gain than downside risk. The market has really taken off so far in 2013, so we have to be careful to avoid stocks that may be over-valued. Right now, the economy is improving, so there should be more upside, but there’s no doubt that some valuations have gotten ahead of themselves, so it’s important to look at both potential risk and potential return.
Parnassus Asia Fund
On April 30, 2013, Parnassus started its first new fund in eight years: the Parnassus Asia Fund. This is our first venture into international investing. Asia is a very dynamic and creative place. It contains the world’s fastest-growing middle class, and it is the scene of much technological innovation. Asia is also a region with a lot of entrepreneurship, and it is developing deep financial markets. Given that the region is growing at a fast pace, and we expect that growth to continue, it makes sense to invest in Asia ahead of future positive developments and despite all of the complications in doing so.
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