Working It Out

By Peter Staas,

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This fund's unique approach to socially responsible investing focuses on companies that provide a comfortable work environment, betting that happy employees work harder and lay a foundation for success. Say what you will about this logic, management's strategy of buying names that offer superior growth prospects at a discount continues to pay off.

In his most recent quarterly commentary, manager Jerome Dodson notes that Parnassus Workplace ( PARWX ) "began as an experiment over four years ago to see if companies with good workplaces could have superior stock-market returns." The logic underpinning this test is elegant in its simplicity: A company that treats its employees with respect and fosters a supportive work environment should outperform average businesses because its team members will work harder and more conscientiously.

What makes for a good workplace? Dodson and his team make this judgment based on factors such as respect for and fair treatment of employees, equitable pay and benefits, family-friendly policies, and support for volunteerism and charitable contributions to the community. Management also consults outside sources when necessary, including the Great Place to Work Institute and annual surveys conducted by Fortune and Working Mother . Milton Moskowitz, coauthor of Fortune's "100 Best Companies to Work For," advises the fund on these matters.

To date, Dodson's experiment has paid off handsomely for shareholders. The fund weathered the financial crisis and market selloff better than most, losing just 29.9 percent in 2008, and chalked up an extraordinary 62.2 percent gain in last year's extended rally. This substantial outperformance places the fund in the top 1 percent of Morningstar's Large Growth category and has landed it in The Rukeyser 100 for the past seven months. Unlike many funds, Parnassus Workplace has erased all of the losses incurred since the bear market took hold in 2007.

That being said, we wouldn't necessarily describe the fund's track record as proof of concept; the fund's romantic conceit about "exceptional workplaces," no matter how appealing, wouldn't stand up without Dodson's stock-picking acumen and the rigorous research that undergirds all of Parnassus Investments' offerings. Remember, plenty of Internet startups that were great places to work failed in the wake of the tech boom.

Social responsibility aside, Parnassus Workplace's solid performance in both up and down markets validates Dodson's strategy of buying undervalued companies that are growing at a faster rate than the rest of the economy. These names are typically industry leaders with secular growth opportunities, competitive advantages, solid returns, healthy balance sheets and quality management. Although the fund can invest in companies of any size, the majority of its holdings are large-cap or blue-chip stocks.

Top-down analysis enables management to identify key growth trends that are sometimes lost in the shuffle, while close scrutiny of individual companies ferrets out the names that are best positioned to benefit.

This approach yields cyclical names such as chipmaker Intel ( INTC ), which should reap the rewards of an anticipated wave of computer upgrades now that Microsoft's ( MSFT ) Windows 7 operating system has launched.

At the same time, Dodson is also bullish on Qualcomm ( QCOM ), an attractive play on the rising popularity of smart phones across the globe. Not only does Qualcomm provide integrated circuits and software solutions--the guts of some of the most popular smart phones--to top wireless handset manufacturers but its patents on key technologies mean that the firm receives royalties from the sale of 3G-enabled phones.

Outside the technology space, the fund holds a sizeable position in Deere & Company ( DE ), the agricultural equipment company that boasts an almost 50 percent share of the North American market and should benefit over the long term from rising demand in China and India. Tennessee-based regional bank First Horizon National Corp ( FHN ) enjoys an enviable capital position and continues to reduce problem credits aggressively. The bank is further along in its turnaround than many of its peers in the South and stands to increase its share in its local market.

Although Dodson's value approach should limit losses in pullbacks and position the fund for future success, return-chasing investors shouldn't expect the eye-popping gains the fund generated last year. The violent selloff of 2008 and subsequent rally in 2009 were anomalous occurrences set in motion by extreme circumstances; selectivity will be the key to success going forward.

At the same time, prospective investors shouldn't be scared away by the fund's relatively short track record. The founder, president and CEO of Parnassus Investments, Dodson has achieved similarly impressive results at firm's marquee fund, Parnassus ( PARNX ), which he's piloted since 1984.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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