Are you looking for a shelter amid this year's market storm? Consider the $30.1 billion Parnassus Core Equity Fund (PRBLX), one of the best mutual funds.
Like 73% of actively managed, diversified mutual funds that invest mainly in U.S. stocks, Core Equity is trailing the S&P 500 so far this year, according to Morningstar Direct. But in Core Equity's case, it's behind just barely, -6.32% vs. -6.04%, going into Wednesday.
And Core Equity is in a virtual dead heat with the broad market benchmark despite hefty exposure to popular, megatech technology-related stocks — such as Microsoft, Google-parent Alphabet and Apple — that are trailing the market.
So how has Core Equity kept pace with the big-cap bogey?
Best Mutual Funds: Holdings That Outperform
Credit for that goes to holdings that have topped the S&P 500 so far this year. Tractor maker Deere & Co. was up 14.73%. Online travel info provider Booking Holdings was up 9.83%. Brokerage Charles Schwab was up 6.83%. Chipmaker Micron Technology was up 3.06%. Canadian Pacific Railway was up 2.43%.
Core Equity's exposure to stocks that are thriving amid broad market carnage stems from diversification, says said lead manager Todd Ahlsten. Forty-seven percent of fund holdings now are growth stocks, says Morningstar.com. Another 11% are value stocks, with 42% in the blend category. "This fund is designed to be an all-weather way to invest through the full (market cycle)," said Ahlsten. He runs the fund with managers Benjamin Allen and Andrew Choi.
Top holdings include growth stocks like Schwab. Schwab is part of the IBD 50.
The IBD 50 is IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
Exposure To Value Stocks
In addition, the fund holds value-oriented names like chipmaker Micron Technology and tractor-maker Deere. Both have best-possible IBD SMR Ratings of A.
IBD's SMR Rating (Sales + Profit margin + Return on equity) is on an A-to-E scale, an A Rating shows that a stock is in the top 20% of all publicly traded stocks when it comes to the composite profitability measurement.
Both are also intended to help Core Equity earn a spot among the best mutual funds by outperforming. "We look for 40 companies that have wide business moats," Ahlsten said. "In the long term, that gives them competitive advantages and pricing power."
Focus On ESG Investing
A second reason the managers have avoided the pullback that plagues most U.S. diversified stock funds? They only buy stocks that meet their ESG investing standards.
The fund avoids tobacco producers, gambling stocks, nuclear power companies and fossil-fuel producers. "We want companies that are decarbonizing, have good corporate ethics and good policies for how they treat people," Ahlsten said.
Ahlsten and his colleagues feel that companies with solid ESG investing values also tend to have strong financial fundamentals. "We want companies with long-term potential for double-digit IRR," Ahlsten said, referring to the internal-rate-of-return measure of annual profitability.
How Deere Helps One Of The Best Mutual Funds
How can Deere help plow a path for Core Equity back to the best mutual funds? "We're investing in long-term megatrends such as Deere's bet on precision agriculture. Deere is looking to tie tractors to the internet."
Using high technology to steer farm equipment can help farmers use less fertilizer, water and pesticides. So it helps clean the environment while cutting farm costs.
In addition, Ahlsten expects the economy to slow later this year due to interest rate increases. Still, Ahlsten does not expect rates to rise too much. "That'll be good for high-quality, longer duration companies with wide moats like Microsoft, Deere, Google and Mastercard. When overall growth slows, those long-duration compounding growers are scarce. They can really outperform," he said.
Can Schwab Help Core Equity Be Among Best Mutual Funds?
What else helps make Core Equity one of the best mutual funds? Booking is the parent of travel sites including Booking.com and Priceline. "We added Booking in the pandemic of 2020 when (the) share price pulled back," Ahlsten said. "Now they're in a great position to participate (in a market rally) as the economy reopens."
Schwab is a play on rising interest rates, Ahlsten says. Schwab holds lots of cash for customers. When rates are low, Schwab pays almost as much in interest to customers as it earns on idle cash. But once rates rise, Schwab will be able to earn much more than it pays out.
Ahlsten said, "So they're in a fantastic position to grow earnings as rates go up. They've also been a strong market share gainer in the asset management space. They've grown faster than the industry. And they've been consolidators."
Core Equity 'Quite Bullish' On Micron
And why does Ahlsten like Micron Technology? "Micron had a fantastic couple of years, but not in the first quarter," he said.
Micron makes dynamic random access memory (DRAM) computer chips and NAND flash memory chips. DRAM chips are used in computers and smartphones. NAND chips enable devices like cellphones to store photos, videos and music even without power on.
"We think they can grow earnings for years to come," Ahlsten said. "Micron is cheap. It trades at under 10 times earnings. That would clearly be in the value (stock) box. We're quite bullish on it."
EPS grew 118%, 129%, 124% and 177% the past four quarters.
By The Numbers: One Of The Best Mutual Funds
Parnassus Core Equity Fund became an IBD Best Mutual Funds Award winner by topping the S&P 500 in 2020 and in the three, five and 10 years that ended that Dec. 31.
It fell short of repeating in the next Awards compilation by lagging the benchmark in 2021, 27.55% vs. 28.71%.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
