Investing in Workplace Excellence

Proponents of progressive HR policies are firm in their beliefs that such practices benefit an organization's bottom line. Now, one mutual fund company is backing up that belief with impressive returns. Some other similarly selected funds, however, are not faring as well.

Is it wise to invest in companies that invest in their people?

At least one mutual fund company believes the answer is a resounding "yes" -- and is backing up that assertion with some impressive returns for its shareholders.

Launched in April 2005, the Parnassus Workplace Fund is thought to be the only public mutual fund that invests in companies based on their commitment to employees and the quality of their workplaces.

"I always felt that companies that treat their employees well do better than those that don't," says Jerome L. Dodson, president of Parnassus Investments in San Francisco and the investment manager for its Workplace Fund.

He decided to move forward with a fund that invested in companies with strong workplace practices after he was approached with the idea by Milton Moskowitz, co-author of the Fortune 100 Best Companies to Work For.

In addition to the workplace screening, Dodson looks for companies that are undervalued and demonstrate financial strength. "We try to examine each company closely and calculate their intrinsic value" and determine "what their earnings will be in the future."

Dodson believes the fund's ability to perform well even during an economic downturn rests partly on its practice of investing in companies with "financial strength" and avoiding "high flyers" that tend to get hammered during recessions.

So far, Dodson's approach is paying off for investors. As of May 14, the fund was up 22.1 percent, compared to 1.5 percent for the S&P 500. In 2008, the fund was down 29.94 percent, compared to a 37-percent decline for the S&P and a 38.8 decline for the Lipper average.

Morningstar, the Chicago-based investment research firm, gives the Workplace Fund its highest rating: five stars.

Since its inception, the multi-cap fund -- which is small in size, with just $22 million in assets -- beat the S&P and Lipper by roughly 3 percent and 4.2 percent, respectively.

"Managers get paid for picking stocks, and Jerry is known for doing a very good job picking them," says Eric Packer, an investment adviser with Progressive Asset Management, a Wellesley, Mass., subsidiary of Financial West Group, which focuses on socially responsible investments.

Admitting that it's a loose correlation, Packer believes that "good solid companies that are respectful and supportive of their employees through their employee practices are going to have more engaged employees and, in turn, outperform those that don't."

One of things that sets this fund apart from others, he says, is that it's not just doing the avoidance screens, but positive screens as well.

"They're looking for companies that come up on the Best Companies to Work For lists and saying, 'Let's invest here.' "

Dodson is quick to point out that, while he uses lists such as Fortune's Best Companies to Work For and Working Mother's Best Companies for Working Mothers as a starting point, he doesn't limit his research to them. Some companies, such as Southwest Airlines, are well known as great places to work, but opt not to participate in these competitions.

Conversely, Dodson says, he screens out companies that fail to meet the fund's ethical standards, such as NetApp, which recently agreed to pay the federal government $128 million to settle a contractor fraud controversy.

At present, the Workplace Fund's top 10 investments are Goldman Sachs, Google, Alcan, Whole Foods Market, Target, Texas Instruments, Citrix Systems, Corning, Baldor Electric and American Express.

Dodson, who founded Parnassus in 1984, says he sometimes will meet with HR executives at those companies he's considering for the fund to gain a better understanding of the HR practices of those enterprises. In addition to the Workplace Fund, Parnassus manages five other socially responsible funds.

Richard Beatty, a professor in the School of Management and Labor Relations at Rutgers University, doesn't dismiss the importance of workplace practices, but says the "real question from an investor's standpoint is how, where and who creates wealth and how well those positions are really managed."

"You can't necessarily make the assumption that because firms are doing well and engage in these practices, that these practices were responsible for creating an inordinate level of customer [satisfaction] and economic wealth," he says.

Beatty says the role of HR leaders should be to build organizations that score well on the scorecard of the business, not internal scorecards such as the Best Companies to Work For.

Dodson isn't the first person to focus an investment vehicle on the workplace. In December 2001, former American Society for Training and Development Vice President Laurie J. Bassi launched a private fund -- Smart Companies Portfolio -- that invests in companies that are committed to employee learning.

Managed by Bassi Investments in Bethesda, Md., that fund hasn't fared nearly as well as Parnassus. Between December 2001 and 2007, the portfolio trailed the S&P by 3.3 percent, according to the most recent data posted on the firm's Web site.

Two other Bassi portfolios, meanwhile, have had mixed results. Since its inception in January 2003 until December 2007, the Human Capital Portfolio beat the S&P by 7.3 percent, while the Human Capital -- Social Responsibility Portfolio lagged the index by 13.9 percent since its inception in March 2004 through the end of 2007.

Bassi Investments could not be reached for more current data.