As megainvestor Warren Buffet is said to have remarked, "it's only when the tide goes out that you learn who's been swimming naked."
When the stock market fell and the tide went out on mutual-fund managers, not many were found to be appropriately attired.
That included most managers of socially responsible funds.
In general, the search for funds with unusually hardy, all-weather strategies was difficult in the late 1990s, because virtually all funds then showed consistently profitable returns. In the current down market, the search has been easier. Consistent profitability over the past five years is rare; a fund that accomplishes it stands out.
In fact, a list of 48 socially responsible domestic-equity funds on www.socialfunds.com shows only one, the Parnassus Equity Income Fund, as having been profitable for each of the past one-, three-, and five-year periods.
The fund, which eked out a 0.44 percent gain over the 12 months ending April 30, has beaten the underwater Standard and Poor's 500 index by a whopping 13.75 percent.
Morningstar, the mutual-fund research firm, gives the fund its highest rating: five stars. Lipper, another fund-evaluation company, gives the fund its highest grade for total return, consistent return, and capital preservation.
Over the past three years, investors in the Parnassus Equity Income Fund have enjoyed a modest annualized return of 2.56 percent, versus minus 12.97 percent for the S&P 500.
Dollars give a clearer picture: $10,000 invested in the fund three years ago now would be worth approximately $10,787, whereas $10,000 invested then in the S&P 500 would be worth $6,592 today. During the past five years, the fund would have grown $10,000 to $15,259.
Like many socially responsible funds, the Parnassus Equity Income Fund screens out certain companies from its portfolio. The fund excludes companies involved with gambling and nuclear power as well as companies that produce weapons, alcohol, and tobacco.
In addition, the fund seeks firms that, as the fund's website says, "respect the environment, treat their employees well, and have effective equal-employment opportunities, good community relations, and ethical business dealings."
Those are fairly standard SRI criteria. So how has this fund beaten its peers in the midst of a turbulent and declining market?
Part of the answer is that it invests in stocks that pay above-average dividends. Also, unlike many similar funds that have stability and income as high priorities, the fund targets stocks with the potential for above-average gains.
The portfolio's dividend yield of 1.73 percent helps the fund's return and stability, but it does not sufficiently account for the fund's ability to clobber the S&P.
A bigger reason for the fund's success is its flexible cash position.
"We can be 100 percent invested in stocks when we believe stocks are bargains, and we can hold large levels of cash when we believe stocks are overvalued or vulnerable," says Todd Ahlston, the fund's manager.
Recently, for example, he raised the fund's cash percentage from about 19 percent to 43 percent because he does not feel there are a sufficient number of truly undervalued stocks for him to buy.
"It's unusual for a fund to have such a high cash position," says Martin Oliver of Lipper Analytical. "At present, the equity-income group as a whole holds 4.2 percent in cash and cash equivalents. Currently on the equity side, cash positions are usually no more than 6 percent or 7 percent."
Mr. Oliver adds that many fund managers do not have much freedom to adjust their cash balances significantly. The prospectus under which a fund is managed may mandate that the fund's money be invested 80 percent or more in certain types of equities.
Since 1994, aggregate stock-fund cash positions have ranged between 4 percent and 9 percent, according to Marketgauge.com.
"I'm not required to have the portfolio resemble the S&P 500 or any other benchmark," Mr. Ahlston says. "So I'm free to hold larger positions in the companies I like the most and to underweight sectors, such as technology, which I think are vulnerable."
Investors focusing on performance should be aware that during the hot stock market of the mid- to late-'90s, the Parnassus Equity Income Fund profited consistently - but lagged the market. In a sharply rising market, more aggressive funds are likely to outperform funds with large cash holdings.
Still, some experts endorse the degree of managerial autonomy that the Parnassus fund exhibits.
"I thought it was a bad thing during the stock-market bubble that mutual-fund managers had to be fully invested because that was what they did for a living," says Jim Grant, the publisher of Grant's Interest Rate Observer. "It tended to marginalize or negate individual judgments.
"It seems to me there ought to be a market for individual judgment in the mutual-fund business," adds Mr. Grant.