Best Mutual Funds: Parnassus (PARNX) Returns and Alpha

Bloomberg News reported mutual fund Parnassus managed to beat 95% of its peers in 2010 by purchasing stocks in the face of growing public pessimism about the economy:

When everybody’s depressed is absolutely the best time to buy stock,” said Dodson, who oversees $4.5 billion as president of Parnassus in San Francisco. “Everyone was moaning and groaning this summer. At that time, had you been able to divorce yourself from your emotions and buy stocks, it would have been great. You just have to buy, and that’s what we did.”

Insider Monkey, your source for free real-time insider trading data, uses Carhart’s four factor model to calculate each fund’s alpha (See How to calculate alpha and beta). This methodology adjusts for style biases each fund has and is more accurate in determining whether a fund manager has any stock picking skill. We believe managers with high alpha deserve a generous compensation structure such as the 2-and-20 charged by most hedge funds. Insider Monkey also closely follows managers who’ve demonstrated skill in picking stocks.

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We downloaded Parnassus’ returns from Yahoo! Finance and calculated their alpha for the past 5 and 10 years. Since the beginning of 2000, Parnassus has had an average alpha of 5 basis points per month. The fund has a market beta of 0.9 and size beta of 0.2 (the fund is tilted towards smaller companies). The momentum tilt is -0.2, implying that the fund doesn’t chase high momentum stocks.

Since 2006, Parnassus has had an average alpha of 5.7 basis points per month. So, their minuscule alpha is pretty consistent. The market beta during the past 5 years is 0.95. The size beta is 0.57 (the fund shifted more into the small cap space to goose up returns). The fund doesn’t invest in value stocks, or follow a momentum strategy.

These results indicate that Parnassus is really a small-mid cap index hugging mutual fund. Its performance is slightly better than are similar mutual funds, but it doesn’t really deserve to be showcased on the homepage of Bloomberg’s website. There are several other mutual/hedge funds that deliver better style adjusted returns after fees and expenses:

Warren Buffett’s Alpha (see Warren Buffett‘s portfolio)

Does Joel Greenblatt’s Magic Formula Investing Have Any Alpha

Guggenheim Insider Sentiment ETF (NFO) and Sabrient’s Index

Daniel Loeb and Third Point’s Returns and Alpha

Best Mutual Funds: Dimensional Fund Advisors US Small Cap Value (DFSVX)

Best Mutual Funds: LSV Value Equity Fund Returns and Alpha

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