Affiliated Managers Stock Jumps After Acquiring ESG Specialist Parnassus

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Affiliated Managers Group

stock jumped after the firm announced it is buying sustainable investing specialist Parnassus Funds in a move demonstrating the popularity of environmental, social and governance, or ESG, investing.

In early afternoon trading on Tuesday, AMG’s shares (ticker: AMG) were up 7.2% to $167.25 Meanwhile, the S&P 500 was down 0.8%.  

Sustainable investing is “a sign of the future,” AMG CEO
Jay Horgen
told Barron’s. “We see ESG investing as one of the fastest growing segments in industry and one of the fastest growing segments of AMG.”

“Parnassus is really ahead of that trend given its authenticity and length of history in that space,” Horgen added.

As reported, AMG is purchasing the majority of Parnassus Funds, a premier socially responsible investing firm founded in 1984, for $600 million. In recent years, Parnassus, based in San Francisco, has grown swiftly as the vogue for sustainable investing strengthened and as the firm developed a reputation for reliably good performance. It has five mutual funds, all fossil fuel free.

AMG makes equity investments in boutique active management firms. The addition of Parnassus will bring AMG’s ESG-dedicated assets under management to approximately $80 billion, and assets incorporating ESG factors into the investment process to approximately $600 million, AMG said. AMG has about $738 billion in assets under management through its affiliates. Parnassus has about $47 billion under management.

As part of the transaction, Parnassus CEO Ben Allen and chief investment officer
Todd Ahlsten,
both longtime employees, are signing contracts to remain with the firm. Ahlsten is also a member of the Barron’s Roundtable. Other key fund managers will also have contracts, Horgen and Allen said.

The Parnassus acquisition is expected to contribute approximately $70 million to AMG’s 2022 earnings before interest, taxes, depreciation and amortization, and $1.30 to economic earnings per share. For 2021, analysts on average expect EPS of $16.64 a share and EBITDA of $938 million, according to Bloomberg. The transaction is expected to close in the second half of 2021.

Sustainable investing, also known as ESG investing, has been a huge and steady trend in recent years. In 2020, nearly a quarter of all fund flows went into sustainable funds. That could gain strength as U.S. retirement plans open up to sustainable investing.

About a third of the $51.4 trillion of U.S. assets under management is sustainably managed, according to US SIF, the trade group for the sustainable-investment industry. Indeed, a survey by investment manager Schroders found that 69% of retirement-plan participants said they would or might increase their overall contribution rate if their plan offered ESG options.

The firms have been talking casually for the past 10 years but talks gathered strength since Parnassus founder
Jerome Dodson
 stepped back from the firm and Allen was named CEO in 2018. “It’s a super-long dating process,” Horgen said. 

AMG’s other investments in responsible investing include stakes in Boston Common Partners and in Inclusive Capital Partners, which is led by
Jeff Ubben,
a well known sustainable investor who is currently sitting on

Exxon’s

board of directors. Allen said Parnassus is likely to tap Boston Common’s expertise as it deepens engagement with companies in its portfolios.

“This is one of the fastest-growing segments of AMG because of the role of active management,” Horgen said. “Clients have a greater desire to drive outcomes and when you see that capital being deployed through parnassus, it requires an active approach. You really need engagement and you need to continue to have an approach that’s forward looking.”

In addition, AMG will help Parnassus with distribution, particularly with international investors and with U.S. wirehouses.

Parnassus is approximately 35% owned by its employees and 65% by founder Dodson and his family.

In recent years, some of the most venerable names in U.S. sustainable investing have been purchased by larger entities. Calvert Research & Management was bought by Eaton Vance in 2016, which in turn was bought by

Morgan Stanley

(MS) this year.  In 2018, Pax World Management was acquired by

Impax Asset Management

(IPX.United Kingdom). Trillium Asset Management was purchased last year by Australian financial services company Perpetual. This year, AMG bought 15% of Boston Common Partners, while Boston Common’s management team and principals retained 85%.

Write to Leslie P. Norton at leslie.norton@barrons.com