Why Are We Seeing Red Flags for the Parnassus Asia Fund?



Parnassus Asia Fund overview

In this article, we’ll outline the performance of the Parnassus Asia Fund Investor Shares (PAFSX), which is the class available for retail investors. As of February 2016, the fund was managing assets worth ~$10 million, making it the smallest fund in this review by asset size. As of December 2015, the fund was invested in 34 holdings including stocks of companies like Air Lease Corporation (AL), Qualcomm (QCOM), Expeditors International of Washington (EXPD), and Taiwan Semiconductor Manufacturing (TSM).

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Parnassus Asia Fund’s returns

From a purely net asset value return standpoint, PAFSX was firmly at the bottom of its peer group both for the one-year period ending March 31, 2016, and for 1Q16. When we refer to the peer group, we mean the group of nine funds chosen for this review.

As a benchmark for all funds in this review, we’ll look at the metrics of the MSCI AC Asia Pacific Index. Although not all funds use this index as their benchmark, we’ll use this index across this series for parity. For comparison, we’ll use two combinations of ETFs that provide exposure to stocks from the region. The first group consists of the Vanguard FTSE Pacific ETF (VPL) and the Vanguard FTSE Emerging Markets ETF (VWO), and the second group consists of the iShares Core MSCI Pacific ETF (IPAC) and the iShares MSCI Emerging Markets ETF (EEM).

Quantitative metrics of the Parnassus Asia Fund

For the one-year period ending in March 2016, the standard deviation for PAFSX stood at 15%. This was much lower than both the MSCI AC Asia Pacific Index’s standard deviation of 17.8% and the arithmetic average (16.8%) of the standard deviation of all funds in this review. Its returns were the least volatile among its peer group.

The Sharpe ratio for PAFSX was negative both in the one-year period ending in March 2016 and in 1Q16.

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The information ratio shows the consistency of fund managers and measures their ability to generate excess returns over a benchmark. Considering the MSCI AC Asia Pacific Index as the benchmark, the information ratio of PAFSX was negative for the one-year period ending in March 2016, making it one of only two funds to have a negative ratio. Evaluating a negative information ratio may be erroneous, so we won’t do so here.

Investor takeaway

All quantitative metrics of PAFSX across various periods are red flags. The fund failed to generate alpha during 2015 when every other fund did so, and it is one of three funds whose alpha was negative for 1Q16. The only thing in favor of the fund is its low volatility in terms of returns. Despite having the lowest volatility among its peers, the fund has failed to impress us.

In the next part of this series, we’ll look at the Invesco Pacific Growth Fund Class A (TGRAX).


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