The Best Companies to Work For 2013: Mutual Fund Investing

We had previously written an article highlighting Glassdoor’s Best Companies to Work for 2013 list. As a review, the organization has been conducting this survey for five years and publishes a list of the top 50 places to work each year. Several studies on the performance of socially responsible investments indicate that while SRI is not guaranteed to beat the market, firms which specialize in the “S” of ESG as a whole outperform the market.

In the article, we focused on Facebook (“FB”) which was the Survey’s number 1 rated company two years counting with an overall company rating of 4.7 out of 5.0. We highlighted the company’s share performance and questioned whether one could consider Facebook socially responsible.

However, given the need to individually invest (and constantly monitor) in at least two to three dozen companies, investors have requested information on ETFs and mutual funds that invest in these listed companies.

So how can the average investor take advantage of the strong share performance of The Best Companies to Work for?  Well, you’re in luck because there is a mutual fund company that does just that. The Parnassus Workplace Fund (“PARWX”), which was started in 2005, invests in companies that have “outstanding workplaces.” Parnassus’ founder states that the fund invests in companies that…

“are undervalued equity securities of large-capitalization companies with outstanding workplaces. Companies with good workplaces usually are able to recruit and retain better employees, and perform at a higher level than competitors in terms of innovation, productivity, customer loyalty and profitability. The Fund also takes environmental, social and governance factors into account in making investment decisions.”

The Parnassus Workplace Fund (“PARWX”) as well as the Parnassus family of funds are some of the best performing funds within the SRI arena over the long term.  The Workplace Fund, in particular has high ratings not just for performance but other key criteria. We have provided our own independent analysis of the fund based on information that is publicly provided.

What we like:

  • Long-term performance has beat its benchmark (S&P 500).
  • Since inception (2005) the fund has risen 13.4% versus 7% for the S&P500. This is outstanding performance.
  •  The Fund is properly Benchmarked to the S&P 500. It could also be benchmarked against an SRI index or similar funds.
  • Yearly performance has been consistent (in other words the fund’s strong long-term performance wasn’t just dependent on one fluke year.)
  • Management fees are reasonable (1.1% expense ratio) considering the extra research requirements.
  • Top 10 investments are diversified.  The fund has about three dozen holdings.
  • While risk is higher (see below) risk adjusted returns are good.  For example, the Sharpe ratio is 0.61 versus 0.37 for the S&P 500.  (This ratio measures excess return per unit of risk.)
  • Tracking Error of +7.46% is not equal to 0, indicating the portfolio is not managed like an Index-Fund. Since the tracking error is greater than 0, one can assume the portfolio has outperformed its benchmark due to its manager’s stock-picking skills.

Our critiques include:

  • Fund has a higher P/E ratio, and Beta compared to its benchmark (5YR data) 
  • Risk ratios are higher compared to its benchmark (Standard Deviation is higher than the benchmark)
  • The portfolio is heavily leaning towards Technology (about 38% for the fund versus 18% for the S&P 500.) Largest tech holdings include (largest to smallest): Applied Materials, Riverbed Technology, Intuit and Intel.

Conclusion:
Parnassus Workplace Fund is one of the best funds in the area of SRI. It has had a tried-and-true portfolio manager/founder, performance has significantly beaten its benchmark and risk adjusted returns are superior. Two other funds with similar investment objectives are Pax World Women’s Fund and Neuberger Berman Socially Responsible Investment Fund. Both funds have had dismal historical investment performance over the last 5YR period.


Disclosure: The author does not receive compensation of any kind from Parnassus Investments Company or any fund company.


Parnassus Workplace Fund

The Best Companies to Work for 2013

There is an organization named Glassdoor that offers information on jobs and career in a unique way. As they describe themselves, Glassdoor “offers the world an inside look at jobs and companies. What sets us apart is our “employee generated content” – anonymous salaries, company reviews, interview questions, and more – all posted by employees, job seekers, and sometimes the companies themselves.”

Think about it…Who knows the companies better than the employees who actually work there? While other surveys rely on companies to self-nominate themselves, Glassdoor’s results probably can be trusted given that most of the data is from employees. The organization has been conducting this survey for five years and publishes a list of the top 50 places to work each year.

So what does a job information site have to do with Investing, especially SRI ? Well, a lot. Several studies on the performance of socially responsible investments indicate that while SRI is not guaranteed to beat the market, firms which specialize in the “S” of ESG as a whole outperform the market. Further, like the saying “Charity begins at home”, we believe if a company can’t take care of its own people, it certainly won’t be able to help others!

The ranking of the top companies list is quantified by taking an average of all surveyed respondents’ ratings after they answered an 18-question survey.  The survey asks employees if they trust their CEO, work-life balance, company culture, job mobility and compensation.  The table below is from another of Glassdoor’s surveys, this particular one is on Employee Confidence. It is shown here to demonstrate factors that are behind the rankings.

Facebook (“FB”) was the Number 1 rated company two years counting with an overall company rating of 4.7 out of 5.0. In an interesting twist, employees got to “like” Facebook’s CEO in the survey.  In fact, a huge 99% of employees said they trust Mr. Zuckerberg, up 14% from the previous year. In receiving the award, Lori Goler, Facebook’s vice president of people and recruiting stated, “We strive to make Facebook a place where everyone is able to have an impact doing what they love.  Receiving this award is a testament to the culture of builders we’ve worked hard to create.”

What’s even more fascinating is that the survey occurred during the time of Facebook’s failed initial public offering (many employees receive stock-based compensation so you would think they were disappointed). The chart below is FB’s share price during the survey period (Nov’11 to Nov’12) when its shares hit their all-time low of $17.55.  They are now trading well over twice that price!


Is Facebook really a socially responsible company?
Using the common definition of ESG, the flat answer is “No.” However, we expect the company will be on a strong uptrend in its ESG efforts given that other top-rated surveyed companies (i.e, Bain & Co., Boston Consulting Group, Gartner, REI, Trader Joe’s, etc) usually rank highly in ESG.  Remember, Facebook is a young company. Only recently, has it begun to aggressively monetizing its 1.1Bn customer base. Despite this $-focus, its fearless leader has already jumped to number 2 ranking on the Philanthropy 50, behind only Warren Buffet. CSRHub, which aggregates ESG ratings from several sources, rates Facebook “53” (higher the better) which is equal to the average rating of its universe. Facebook rated particularly weak in Governance, probably due to Zuckerberg’s control of the company via “supershares” and multiple-hat role (CEO, Chairman) at the company.

Conclusion:
Overall, we believe using the Best Companies to Work For list is a good investment criteria.  This list should be used along with other investment criteria such as stock screening and fundamental analysis. While Facebook is certainly no Starbuck’s it appears to be a company that will increasingly focus its efforts on increasing value to all stakeholders including socially responsible investors.

Disclosure: The author has held investment positions in Facebook and Starbuck’s and may purchase and/or increase these investment positions.

CR Magazine releases its 100 Best Corporate Citizens: 2013


Corporate Responsibility Magazine recently released its 100 Best Corporate Citizens list.  This year marks the 14th time this list has been published.  We, at the Socially Responsible Investing website consider CR’s list, itself, amongst the best of SRI/CRI lists.

CR documents 298 data points of disclosure and performance along broad categories including the environment, climate change, employees, human rights, governance, finance and philanthropy. CR itself has made its measurement process and methodology more transparent over the years.

Some interesting notes about the list:

  • The list is drawn from the Russell 1000 Index so the companies are not all large multinationals.  However, and unfortunately, many of the top rated companies are still larger than what would be represented in the Russell 2000 index.  We believe that smaller companies tend to be more authentically supportive of CSR programs rather than larger firms that are increasingly setting-up CSR departments as just another cost-center .
  • Movement of companies in/out of the list is quite large with 26 companies joining the list in 2013 (that’s a 25% turnover rate). Do companies really change that much (people don’t !) ?
  • Nearly one dozen companies have appeared on the list every year since 2007.
  • 70% of the Top 10 are consumer-oriented companies. 
  • Two of the Top 10 are toy companies, with Mattel Inc. coming in at 2nd and Hasbro, 7th. 

Methodology:
There are 7 main categories as mentioned above. Within these 7, there are 14 subcategories (usually about 2/category). For example, for Employee Relations, there are the subcategories of Diversity disclosure, and Employee Benefits disclosure as well Diversity performance. The big theme throughout the list methodology is disclosure. We would like to see more focus on performance, though this admittedly requires a great deal more work.

So what’s so special about toy companies?
Both Mattel and Hasbro were on the Top 10.  Further, both companies are featured on other CSR lists.  For example, Mattel (#96) and Hasbro (#92) are on Fortune’s 100 Best Companies to Work for 2013. Well, not only are toy companies consumer facing organizations, but toy-users (i.e., children) are our most precious ones. So, it follows that the toy firms would be more socially responsible (e.g., safety first) than say, an oil pipe manufacturer.

Industry Structure of the U.S. Toy Industry:

  • Mature Industry
  • Demographics (i.e, the birth rate) highly influential on revenue growth
  • Growth is in the very low-single digits
  • Industry Revenue (U.S. market) ~ $21Bn (Refer to blue section of chart).
  • High competition from lots of smaller differentiated players (and low entry barriers).
  • The top players are not large enough to influence the market and raise profit margins.
  • Price competition given that the main distributors are discount chains such as Wal-Mart (High bargaining power of customers).
  • The improving U.S. economy should improve birth rates somewhat, in turn increasing industry revenues.
  • Significant imports (80%+) from China, and dependence on plastics as a raw material.

Source: NPD Group


Investing in Hasbro (HAS) and Mattel (MAT):
Both companies have had decent, but not spectacular financial and stock market performance, with the larger company Mattel besting Hasbro on both counts. Over the last year, Hasbro’s shares have risen 23%, while Mattel’s have risen nearly 37% (12mos period ended 6/23/13). Both companies dominate a slow-growing industry sector whose markets, in turn, are dominated by three larger retailers, Wal-Mart, Toys-R-US and Target which distributed nearly 40% of the industry’s product revenues.

Source: Hasbro

Hasbro (HAS) is known for its Monopoly games as well as the Transformers, Nerfs, and PlaySchool.  After a weak 4Q’12, financial performance improved during 1Q’13, which was highlighted by strong (+26%) games growth with overall sales growing 2% (so little market share gains as industry sales growth is in the low-single-digits). However, shares appear fairly valued given low earnings growth. Analysts expect HAS shares’ 2013 P/E to be about 13x which is somewhat high in our view considering the company’s sub-P/E earnings growth (i.e, PEG is over 1x) and 2013 operating margins are 1%-plus below its 2010 peak of nearly 15%.  Note that Hasbro is also undergoing another restructuring which is likely to increase earnings volatility. However, Hasbro’s long-term (one year +) prospects should improve as the company is expected to see higher margins related to its ongoing product rationalization, brand building and focus on licensing.  Some of the more interesting CSR actions the company does are giving its first year employees 3 weeks vacation, a subsidized gym, compressed workweek, telecommuting and a job sharing program. Hasbro was also ranked #1 on Climate Counts’ scorecard for the toy industry. And as of this writing, HAS received an Environmental Award from the U.S. EPA.

Source: Mattel

Mattel (MAT) appears to be the better of the two companies – at least for now.  Other than the financial crisis period of 2008, MAT shares have risen steadily and more so compared to HAS.  The company is well liked by employees with many staying at the company over 15 years. An outstanding 63% of employees are women (Source: Fortune). Before we discuss financials, it is worth noting that the company provides sabbaticals to its employees as well as:

  • an onsite gym, including a subsidized membership fee
  • compressed workweek
  • and offers domestic benefits for same-sex couples.

Mattel’s financials are good. In fact, Mattel is currently at its highest operating profit margins in years. Mattel’s P/E is approximately 19x and 13-14x on a forward basis. Like Hasbro, this forward P/E is also above its growth rate implying a PEG that is above parity.  However, note that Mattel’s operating profit margins (see below) and earnings growth are higher than Hasbro’s (see comparison table on bottom of page).

Source: Morningstar


Comparison between HAS and MAT
Source: Morningstar

Conclusion:
Odds are higher that consumer-facing companies will make it to the CR 100 Best Corporate Citizens list.  Above were highlighted two toy companies that ranked highly on CR’s list as well as others such as Fortune’s Best Companies to Work For.

Disclosure: The author has no shares in HAS or MAT.

SRI warms to Climate Counts’ Scorecard 2012-13

Climate Counts (Climatecounts.org) recently released its Scorecard for 2012-2013.  This independent, non-profit organization congratulated Unilever for having topped its list of companies with a score of 91 (highest ever) for the second year in a row.

Climate Counts produces a scorecard, or list of companies’ impact on climate/sustainability. Companies are rated on their practices to reduce global warming.  Scoring is from 0 to 100 (best).  Climate uses 22 criteria to evaluate companies, which are broken-down into four categories. Please refer to its website for additional information. Note that the SRI website does not consider the Scorecard a comprehensive list for socially responsible investing screens as it‘s mostly limited to consumer brands and focuses on the “E” of ESG (Environmental, Social, Governance).

Unilever is a huge consumer products company (€46.5Bn as of FY’11) of which typically focus on the “bottom line.”  However, knowing that Unilever was the holding (parent) company of Ben & Jerry’s made me realize its high ranking wasn’t a fluke

Background:
I was recently at a Socially Responsible conference at the Mohegan Sun and decided to sleep at a (haunted) B&B in Mystic, Connecticut in lieu of a soulless hotelcasino.  After a late breakfast I arrived at the conference’s topic table session.  These are tables led by individuals that aren’t giving presentations.  I decided to join folks at a table called Common Good headed by a fellow named Terry Mollner.

After Mr. Mollner speculated my late arrival on a “late-night with a girlfriend” I thought he was a little flaky (though I was equally touched that he thought I was a young lad). When he started evangelizing what he called a “Common Good Movement” I felt like I just walked into a cult.  However, I soon learned Mollner was not only the founder of Common Good, but a founder of Calvert Social Investment Funds, the Calvert Foundation and a board member of Ben & Jerry’s.

In the same manner that large asset managers are rapidly signing on to the United Nation’s Principle for Responsible Investment, Mollner is calling on large enterprises to “publicly declare that their highest priority is the common good of us all and profit or anything else is second in priority.”  This would be a proactive initiative coming from enterprises themselves rather than defensive moves as is utilized today (e.g., socially responsible shareholder proxy fights, responses to government regulations).

This would move enterprises away from their short-term self interest to longer term common good.  Ex-Fed chairman Alan Greenspan was a strong believer in the capitalistic self interest motive.  However, even he later revealed in Congressional testimony that self interest was no longer a valid assumption and that it did not prevent Banks from bringing the U.S. to the brink of Depression.

Ben & Jerry’s vs Unilever
If you want to learn the source of Unilever’s sustainability success, then you must hark back to its acquisition of Ben & Jerry’s.  Back in 2000, there was a bidding war for the nostalgic ice-cream maker, with Mollner organizing his own bid (with a group of investors including founder Ben Cohen).  As Mollner says, we lost the battle but not the war.”  In other words, while Unilever out-bid them, Mollner’s group was able to instill legal provisions allowing Ben & Jerry’s to:

  • retain their own Board of Director’s
  • choose their own Board on an ongoing basis, and
  • maintain their “double-dip” mission of profits + social responsibility*

Ben & Jerry’s continues to operate independently to this day.  In fact, during 10/2012, Ben & Jerry’s announced that it became the first wholly-owned subsidiary to become a Certified B Corp.  Essentially, Ben & Jerry’s sole purpose is now not just to make money but to benefit society.  The move was supported by Unilever, as consistent with Ben & Jerry’s mission and is also aligned with Unilever’s sustainability agenda. In 2010, Unilever committed to reducing the environmental impact of its products by 50% while doubling sales by 2020.  In a BBC interview, ESG consultant Paula Widdowson said, “I think Ben & Jerry’s was a tipping point for Unilever – they learned a lot from the culture and learned that it made business sense.”

Conclusion:   
In a case of David vs Goliath, Ben & Jerry’s social mission has become embedded into Unilever, so much so that it’s now the #1 ranked company in Climate Counts’ Scorecard.

*Note: In all fairness, the Unilever presence hasn’t been all creamy for Ben & Jerry’s.  All of their ice-cream flavors are no longer universally wholesome as some contain corn syrup and the company stopped saying their products are all natural.




Appendix: Climate Counts’ Scorecard Industry Leaders 2012-13:

       Company Name: (Rating)

  • Airlines: Lufthansa  (77)
  • Apparel/Accessories: Nike  (89)
  • Beer: Heineken  (79) 
  • Banks: Bank of America (86)
  • Consumer Shipping: UPS  (89)
  • Food Products: Unilever  (91)
  • Food Services: Starbucks  (69)
  • Home and Office: Herman Miller  (66)
  • Hotels: Marriott  (70)
  • Household Products: L’Oreal  (87)
  • Internet/Software: Google  (64)
  • Large Appliances: AB Electrolux  (87)
  • Media: News Corporation  (67)
  • Pharmaceuticals: Johnson & Johnson  (82)
  • Technology (formerly Electronics): IBM  (86)
  • Toys & Children’s Equipment: Hasbro  (73)