A Socially Responsible Fund Joins the Kiplinger 25

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Top-performing funds tend to attract a lot of money. That's what happened to Wells Fargo Advantage Discovery ( STDIX ), which recently closed to new customers after seeing its asset base nearly doubled, to more than $3 billion, over the past five years. As is our custom, the closure prompted us to remove the mutual fund from the Kiplinger 25 and set us in search of a replacement.

The newest member of the list of our favorite no-load funds is Parnassus Mid Cap ( PARMX ). As the name indicates, Parnassus prowls among midsize companies, which for it means generally investing in stocks with market capitalizations, at the time of purchase, of $3 billion to $20 billion. What the name doesn't say is that Parnassus practices socially responsible investing, making it the first such fund to join the Kip 25. The fund favors companies that it believes behave ethically, and it won't invest in tobacco stocks, beer and booze companies or weapons makers, among others.


The limitations haven't hampered lead manager Matthew Gershuny and co-manager Lori Keith in their search for good, growing businesses. Initial screens weed out the tobacco and firearms firms, as well as others, such as companies with too much debt or stocks that trade near their 52-week highs, to create a list of about 300 firms. Then Gershuny and Keith sift through the list to build their portfolio--which now holds just 38 stocks--company by company. A good prospect needs to offer a product or service that's in demand; it needs to dominate its industry and present a high barrier to entry; and it needs a smart team at the top. Only about 100 firms meet those standards. Finally, to make it into the fund, the managers must conclude that a company's intrinsic value--what they estimate to be its true worth--can increase, on average, by at least high-single-digit or low-double-digit percentages annually over the next three years.

The result is a fund that has outpaced the competition with below-average volatility. From the time Gershuny and Keith took over management of the fund, in October 2008, through May 30, Parnassus returned an annualized 13.7%, beating the typical midsize-company fund by an average of 1.4 percentage points per year. And over that time, the fund was 13% less volatile than its peers.

But Parnassus has other things going for it. It holds just $251 million in assets, giving the managers plenty of flexibility to buy and sell stocks. The fund's annual expense ratio of 1.14% is below the average of 1.28% for mid-cap funds. Plus, we like that the portfolio tilts toward technology (13% of assets) and industrial stocks (31%), two groups that should perform well as the economy improves.

Xylem ( XYL ), a water transport, treatment and testing firm, and Ecolab ( ECL ), which offers cleaning and sanitizing products and services for many industries, have been two of the fund's best-performing industrial stocks, with gains of 34% and 30%, respectively, over the past 12 months. Among the fund's tech-stock holdings, semiconductor-equipment maker Applied Materials ( AMAT ) has climbed 35% over the past year, and software and services company Autodesk ( ADSK ) has gained 39%.



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



This article appears in: Investing , Insurance

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