'Socially responsible' fund uses head as well as heart

April 22, 1994|By Andrew Lecky | Andrew Lecky,Tribune Media Services

As a group, stocks of "socially responsible" companies perform no better -- but no worse, either -- than those of less high-minded companies.

That revelation, proven again during the market correction of 1994, took a while to sink in for Jerome Dodson, portfolio manager of the successful $125 million Parnassus Fund.

His crusading San Francisco-based stock fund, started in 1985, has never invested in companies involved in tobacco, alcohol, nuclear power, weapons or gambling. Furthermore, the portfolio takes into account social factors such as treatment of employees, environmental consciousness, equal opportunity programs, charitable contributions and ethical stands.

"I once expected that companies which were good corporate citizens would outperform those that weren't, but I've changed my thinking because there's no evidence that is the case," said ** Dodson, as he relaxed in his office on prestigious California Street in the heart of the city's financial district.

"Now I basically look at the fund as a vehicle for people who want to invest in good corporate citizens and want good returns as well."

The returns have definitely been there, based on Dodson's ability to find investment gems among small, out-of-favor companies with commendable ethics. His results shoot down arguments of critics who said do-gooder companies are likely to underperform.

Parnassus Fund has handily beaten the overall market in recent years. Up 5.5 percent in the first quarter of this year, it rose 17 percent in total return last year, 37 percent in 1992 and 52 percent in 1991.

At the same time, Dodson has successfully phased out much of the volatility that characterized the fund's earliest days. He's now less likely to hold a stock indefinitely simply because he's particularly fond of its ideals. He takes a hard-nosed approach without compromising basic philosophy.

"I learned my lesson in 1989 when I bought depressed shares of Digital Equipment primarily because it was good in all phases of social issues, and then promptly saw those shares fall another 50 percent in value," smiled Dodson, who believes it has not been uncommon for some ethical funds to stress ideals over performance.

"In addition, I'm quite willing these days to sell off a stock when I feel it has run its course."

Parnassus Fund, which requires a 3.5 percent "load" (initial sales charge) and $2,000 initial purchase, constructs its portfolio from a database of 200 stocks chosen through social and financial criteria.

Two examples of unusually good corporate citizens are Sun Co., an oil company with a strong code of conduct, excellent employee atmosphere and a program (financed through government credits) that buys up "clunker" cars to get them off the road; and Sunrise Medical, a maker of wheelchairs that sponsors wheelchair athletes and makes significant financial contributions to the disabled.

In the first quarter, the fund was helped by investments in technology and cyclical firms, as it has been the past two years. Resurgence of the economy helped. Advanced Micro Devices jumped 72 percent in value, while Genus Inc. rose 41 percent. On the other hand, the fund's holdings in ASK Group tumbled 42 percent, and United Stationers fell 20 percent.

"I'm still positive about the stock market because the economy is strong and inflation is down, and I don't believe we're in a bear market," explained Dodson, a Harvard MBA and former president of San Francisco-based Continental Savings and the socially conscious Working Assets Money Fund. "Recent problems were caused by speculators in the bond market, so I see this as a time to be buying selectively."

He's gradually selling holdings in technology and cyclicals while moving into health care, environmental and apparel companies that offer more potential.

Health care selections include Merck & Co., the pharmaceutical giant that has acquired Medco Containment Services; SpaceLabs Medical, maker of computers that accurately gauge patients' vital signs; and Advanced Technology Labs, manufacturer of ultrasound machines.

Environmental choices are Groundwater Technology, which does remediation procedures for underground storage tank leaks of oil companies; and Zurn Industries, in water pollution control devices and valves. Apparel selections are Liz Claiborne, expected to improve along with the economy; and Limited Inc., which should benefit from a nationwide move away from the "grunge" look.

Dodson's investment firm also offers the 2-year-old Parnassus Income Fund, which permits investors to choose a balanced, fixed-income or California tax-exempt portfolio.

"Ethical investing is now much more accepted," concluded Dodson, who had a lot to do with that trend.

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