This fund, which avoids tobacco and similar companies, outpaces the market. By Amy Bickers, Associate Editor May 16, 2008 Parnassus Equity Income shows that you can make money and do good at the same time.The socially screened fund outpaced the market handily over the past decade. Its annualized return of 9% through April 30 beat that of Standard & Poor's 500-stock index by an average of 5.5 percentage points per year. Over the past five years through May 15 -- perhaps a more-relevant timeframe because the fund's current manager, Todd Ahlsten, has been solely in charge only since May 2002 -- Equity Income's 10% annualized return lags the S&P index, but only by a half percentage point per year, on average. Year to date, Equity Income (symbol PRBLX) is up 1%, three percentage points ahead of the S&P 500. All six Parnassus funds, including Equity Income, avoid companies that make tobacco products, alcohol and weapons. They also steer clear of companies involved with gambling and nuclear power, an increasingly controversial stance because some observers consider atomic energy part of the solution for global warming. "Nuclear power is nonpolluting from the standpoint of greenhouse gases," says research director Ben Allen. "But we believe there is currently no safe way to store the spent fuel." Beyond the social screens, the fund focuses on dividend-paying stocks of large and midsize companies. Ahlsten likes companies with higher-than-average returns on capital and growth rates and lower-than-average value ratios. Advertisement More specifically, Ahlsten wants to see revenue growth of at least 6% a year, which is about the nominal growth rate of the overall economy. "We figure that if a company can't grow by 6% a year, it's shrinking in real terms," says Allen. Moreover, Parnassus looks for companies with "moats," or defenses, around their business. As for share price, a stock doesn't necessarily have to be dirt cheap. "We look for reasonable valuations," says Allen. Equity Income, which had only $42 million in assets when Ahlsten became manager, is now a $1-billion fund. As the fund grew, Ahlsten added five stock analysts, as well as one researcher who works on the social screens. Since taking the helm, he has also cut the number of holdings in half, to about 60. Allen says the social screens eliminate about 20% of stocks in the S&P 500 and Russell 1000 index. With the list of eligible stocks in hand, Ahlsten and his team meet quarterly to examine economic and other trends and draw conclusions to help identify winning sectors and stocks. Ahlsten's observation, for example, that lenders were taking on too much credit risk enabled Equity Income to sidestep much of the subprime-mortgage-related minefield. Advertisement With socially screened funds, it can often be as interesting to see what stocks are included for consideration as what are excluded. For example, Parnassus scored big with Apache Corp. (APA), an energy exploration and production company that is one of the fund's ten biggest holdings. Its shares have nearly doubled over the past year. Another unexpected holding is Waste Management (WMI). Years ago, garbage haulers didn't pass muster with social investors. Allen says Waste is now eligible for Parnassus funds because it has made huge strides in the way it handles garbage to minimize its environmental impact. Moreover, he says, the company's leadership is committed to returning capital to shareholders in the form of share buybacks and dividends. Equity Income requires a $2,000 investment to start. Its annual expense ratio is a below-average 1.0%.