Socially Responsible Investing vs. Traditional Investing: A Comparison 

Oct 30, 2023 | ESG, Financial

Some people worry that socially responsible investing (SRI) might compromise return potential. Detractors posit that tailoring investments based on ESG (Environmental, Social, Governance) criteria might come at the expense of profitability. To address this perspective, we turn to the performance of PRILX (Parnassus Core Equity Fund), a stalwart in socially responsible investing, juxtaposed against the traditional benchmark, the S&P 500, which is investable via the SPY exchange traded fund. It’s relevant to note that PRILX operates under a sustainability mandate and that it does not own fossil fuel companies. (However, it does have one investment in a bank that loans to fossil fuel enterprises.) 

Methodology: 

Our exploration encompasses: 

1. Historical Returns: A glance at annualized returns over 1, 5, 10, and since inception periods. 

2. Risk-adjusted Performance: A deep dive into returns, accounting for the associated risks. 

3. Volatility: Evaluating return stability via beta metrics. 

Historical Returns: 

1-Year: As of 9/30/23, PRILX yielded 22.74%, beating the S&P 500 at 21.62%. 

5-Year: In this phase, PRILX reported 10.92%, outstripping the S&P 500’s 9.92%. 

10-Year: PRILX secured 11.66% during this decade, narrowly lagging behind the S&P 500’s 11.91%. 

Since Inception (2006): From its genesis in 2006 through to September 2023, PRILX consistently impressed, with an annualized return of 10.70%, besting the S&P 500’s 9.2%. 

Risk-adjusted Performance: 

The Sharpe ratio serves as a key tool to appraise return per risk unit. Since its inception, PRILX has consistently boasted a superior Sharpe ratio compared to SPY, not just over its entire lifespan, but also through the preceding one, five, and ten-year periods. This denotes that PRILX’s managers have excelled in managing risk, delivering competitive returns while astutely navigating uncertainties.   

Volatility: 

Beta, a measure of relative volatility, placed PRILX at 0.91 over the past 5 years, suggesting its returns varied less than the market. Over a decade, the beta for PRILX was 0.9047. Since its inception, PRILX’s beta is more conservative at 0.7999, indicating its historical trend of less volatility than the S&P 500, benchmarked at a beta of 1.00. 

Conclusion: 

Comparing PRILX to the S&P 500 makes it clear that responsible investing can be just as profitable as regular investing, if not more so. Over different time scales, PRILX has usually earned the same or better returns than its traditional peer, with less risk. 

Nonetheless, one should be mindful that past performance isn’t a crystal ball for future outcomes. Aligning investments requires individual risk appetites, horizon considerations, and financial objectives. Beyond sheer numbers, responsible investing melds financial aspirations with ethical and sustainable values. As showcased by PRILX, these values can coexist fruitfully with excellent financial performance.