Parnassus' Ahlsten Finds Value and 'Values'

Hunting for value companies is always tricky. Hunting for companies with values makes the job nearly impossible.

That's what makes the (PRBLX)Parnassus Equity Income fund's record doubly impressive. The fund follows socially responsible investing guidelines, which rules out Big Tobacco, nuclear power and a host of other "sin" industries. Meantime, the fund also maintains a strict discipline: It only buys stocks that are trading at a discount to their intrinsic value.

The results have been outstanding. Parnassus Equity Income's one-, three- and five-year average annual returns rank in the top 1% of all large-cap blend funds, according to Morningstar. The fund has returned 10.86% a year over 10 years -- good for the top 8% and good for a top billing in TheStreet.com's Five Winning Funds column on socially responsible investing funds.

We spoke with Todd Ahlsten, skipper of the fund, about how he has managed to blend value investing and values investing with such ease in these turbulent markets. Ahlsten took sole stewardship over the fund from Parnassus founder Jerome Dobson in 2002, but he has spent his career at Parnassus and shares the same approach as his predecessor. Read on to hear his thoughts on socially responsible investing, and how his bargain-hunting style leads him to big health care companies such as Merck (MRK) and Pfizer (PFE) and away from most of tech.

What does socially responsible investing mean to you and how does it get applied to your fund?

The companies we invest in have to meet two criteria. First, they have to be socially responsible. For us, that means no alcohol or tobacco, no gambling, no weapons, no nuclear power. But we also have positive screens: We look for companies that treat their employees well, give back to the community, respect the environment and are ethical in their business dealings.

Second, we look for companies that make financial sense. A company's fundamentals have to look good, and the stock's valuation has to be attractive. These are extremely important; some socially responsible fund firms will buy companies that are ethically strong but don't have good return on capital. We will not invest in one without the other.