Inside the employer of choice investment fund that outperforms the S&P 500

Leading change employer of choice investment leadership

Investing in companies which are demonstrated employers of choice delivers shareholder returns which consistently outperform S&P 500 Index benchmarks, according to US-based investment firm Parnassus.

The firm manages a number of funds which invest specifically in US large cap companies with long-term competitive advantages such as quality management teams and “outstanding workplaces” and also avoids investments in fossil fuels as part of its environmental, social and governance (ESG) criteria.

The firm has a strong and long-term track record in generating wealth for investors, according to Parnassus’ CMO Joe Sinha, who said its Endeavour mutual fund is a prime example of the importance of the workplace in accurately valuing companies.

With assets of US$3.17 billion ($4.52 billion), the fund has delivered consistently better returns than the S&P 500 index, with annualised returns of 18.33 per cent over the past 10 years (against an S&P 500 return of 15 per cent).

“The very first thing we look at is the quality of the workplace and then we evaluate other qualities and statistics,” said Sinha, who explained that the firm tested the Fortune’s 100 Best Companies to Work For, and this simulation found that publicly traded companies on the list delivered consistently better shareholder returns.

“We tested that group of companies as if we owned that basket against the general benchmark of the S&P 500, and over a number of time periods the best companies to work for beat the broader index in almost every instance,” said Sinha.

Investment criteria
More generally, there are three key factors the firm looks for when investing: (1) companies with durable competitive advantages over market cycles, (2) genuine and sustainable relevancy and value, and (3) quality management teams.

“We are looking for management teams that have proper incentives, so they are not constantly changing the way they paid, but rather that they pick a method of compensating themselves in a way that is aligned to delivering shareholder value,” said Sinha.

“So, if you are a financial company, this means you have proper internal controls to make sure that you are safeguarding money.

“The world is changing, and we think that diversity is good for business”

“If you are a management team in manufacturing, this means ensuring that you have great safety records for your workers.

“We find that those can be very important measures of the culture of the business and lead to positive stock price outcomes.”

Most of Parnassus’ investments range in the US$400-500 million range, and the selection process can often take 4 to 6 months.

Sinha said the firm looks at factors including employee engagement, benefits such as parental leave, safety records, gender and ethnic diversity (especially in executive positions).

“The world is changing, and we think that diversity is good for business,” said Sinha, who observed that in the US, for example, most babies born today are not white.

“We think that the top management positions of corporations need to be filled with people from diverse backgrounds, so we have checklists which evaluate every one of our companies on those dimensions.”

Sinha observed that there are a number of other important factors from an HR perspective, such as talent acquisition and retention, good working conditions as well as benefits and compensation.

Parnassus also has a checklist which examines the quality of leadership and governance of companies.

“So, we look at leadership structure, how people are incentivised, and whether a company demonstrates ethical behaviour in their own workplace as well as with customers, suppliers and government agencies,” said Sinha.

“These factors are positively correlated to business results, because we find that being a force for good is good for business more than it ever was”

Short vs long-term returns
Sinha also commented on the tension between demands for short-term results from investors, versus the long-term outlook executive teams require to genuinely change and improve a business’ culture and workplace performance and productivity.

“If investors want quarterly profits, that is not going to go away,” he said.

“We are looking for companies and leaders who are incentivised to deliver results for the company, in a way that matches our own investment horizon.

“So, if we were buying and selling these companies on a quarterly basis then we ourselves are perpetuating this, so if we are investing for 3-5 years, we do quarterly modelling to revalue companies,” said Sinha, who added that if companies don’t meet Parnassus’ investment time horizons and expectations then it withdraws its holdings in these companies.

As a result, the firm has a turnover of up to 25 percent per year in such companies, to ensure that its long-term investment view is consistently matched within the companies it takes a position in.

More generally, Sinha observed that investors are also looking at the softer components of running a business, in addition to hard numbers such as financial results.

“It can be very difficult, but I think there are some data providers out there who are trying,” said Sinha, who predicted this investment approach would become more mainstream – especially as the quality and reporting of data around people management and leadership improves over the coming five years.

By Craig Donaldson with Khaled Al Khawaldeh