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February 25, 2002
Two Equity Funds Illustrate Diverse Definitions of Success in This Unstable Market
    by William Baue

The Women's Equity Mutual Fund and the Parnassus Equity Income Fund both performed well over the past year, though each attributes success to different factors.


How one describes a glass with water at the half-way mark distinguishes an optimist ("half-full") from a pessimist ("half-empty"). Redefining this old metaphor can help us understand mutual fund performance in these tough economic times. In a bullish market, one expects a fund's return to rise; in bearish times, however, maintaining a stable return, while other funds fall, represents a kind of success.

The recent performance of two equity funds--the Women's Equity Fund and the Parnassus Equity Income Fund--illustrate these different definitions of success. All fund performance figures in this article are as of January 31, 2002, and have been provided by Weisenberger.

"The last year has been a success only in relative terms," said Bill Apfel, portfolio manager of the WEMF. "We haven't made any money for investors. Fortunately, we haven't lost any either, while the S&P 500 is down about 10 percent."

The WEMF, a large-cap blend fund that invests for growth, ranked in the tenth percentile compared to its peers over the past year. Mr. Apfel explained the fund's success at holding fast in a declining market.

"[We] have been significantly under-weighted in the technology sector, which is down about 30% over the past 12 months," Mr. Apfel said.

What distinguishes the WEMF from all other socially responsible mutual funds is evident from its ticker symbol: FEMMX. Heidi Soumerai, director of social research at Walden Asset Management, the socially responsive division of the United States Trust Company of Boston that manages the WEMF, explained how the fund is unique.

"The WEMF is the only social mutual fund that focuses on companies that advance the social and economic status of women," Ms. Soumerai said. "For example, the fund seeks companies that promote women to top executive positions and compensate them accordingly, have a high percentage of women directors on the board, and offer programs addressing work-life balance concerns, among other issues."

The WEMF's annualized return since its inception in October 1993 is 11.32 percent. The fund's top three holdings include Johnson & Johnson (JNJ), Illinois Tool Works (ITW), and the oil company BP p.l.c. (BP).

While the WEMF defined success by maintaining its return while other funds fell, the Parnassus Equity Income Fund (ticker: PRBLX) defined success in part by the ingredients filling its vessel.

"One important ingredient for the success of . . . the Parnassus Equity Income Fund last year was a high level of cash in the portfolios: . . . up to 40 percent . . . ," said Portfolio Manager Jerry Dodson. "Stock-picking also helped. We only invested in companies that we thought could weather the storm of recession in 2001 . . . Since we found very few stocks that were undervalued, a lot of cash built up in the portfolios."

The Parnassus Equity Income Fund, a mid-cap value fund that invests for equity income, returned 8.21 percent over the past year. It ranked in the fourth percentile when compared to its peers. This continued its long-term trend for exceptional performance: it ranked in the third percentile over the past three years, and in the second percentile over the past five years. Mr. Dodson explained the strategy behind this success.

"Eighty percent of the stocks [in the Equity Fund] have to pay a dividend, so we end up with a lot of larger, stable companies. However, we put 20 percent of the assets into more aggressive investments and this helps return while the 80 percent provides stability," Mr. Dodson said.

The fund's top three holdings, Redback (RBAK), Johnson & Johnson, and Fannie Mae (FNM), illustrate this mix. Redback is a smaller and newer tech company, while Johnson & Johnson and Fannie Mae have longer track records.

"We will have less cash in 2002 since the economy is coming out of a recession and recovery will come before the end of the year," Mr. Dodson forecasts. "Most stocks are still overvalued given business prospects so we'll remain somewhat cautious."

 

 
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