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Parnassus Funds Commentary

Parnassus Funds Annual Commentary: December 31, 2013

February 3, 2014

Dear Shareholder:

It was a great year for the stock market and for the Parnassus Funds! Three of our funds had returns in excess of 30% – the Parnassus Fund, the Parnassus Equity Income Fund and the Parnassus Workplace Fund. The other two domestic equity funds, the Parnassus Small-Cap and the Parnassus Mid-Cap, each gained over 28% in 2013. Although they did not beat their benchmarks, they had excellent absolute returns. Enclosed you will find the reports on all the funds, which I think you will enjoy reading.

One fund I want to highlight is the Parnassus Equity Income Fund. It had a total return of 34.01% (investor shares) compared to 32.38% for the S&P 500 Index and 27.92% for the Lipper Equity Income Fund Average, which represents the average return of the equity income funds followed by Lipper. I have joked in the past that the Equity Income Fund was for widows and orphans because of its relative conservative stance. Normally, it doesn't keep up with the market in really good years like 2013, but it doesn't go down as much as the market in really bad years like 2008. However, after its performance in 2013, I can no longer refer to the Equity Income Fund as being for widows and orphans only. After its gain of 34% in 2013, it should now be identified as an "all-weather" fund. In other words, it can still beat the market in bad years, but it can also keep up with the market in good years. While the Equity Income Fund's performance has been impressive, I should remind investors that past performance is no guarantee of future results. This "all-weather" designation is a real tribute to lead manager, Todd Ahlsten, and his co-manager, Ben Allen. They are a tremendous team and they have done a wonderful job.

New Staff Members

Downey Blount recently joined us as a Senior Compliance Officer of Parnassus Investments, and Deputy Chief Compliance Officer of Parnassus Funds Distributor. Downey has been with us on a temporary basis since June, and has done an excellent job with several compliance projects during that time. Downey brings a wealth of experience, which includes work as Chief Compliance Officer at Matthews International Capital Management and Mutual Fund Administration Manager at Montgomery Asset Management. She has a BA degree from University of California, Santa Barbara, and attended law school at the University of San Francisco. Downey is fluent in Spanish, and spent a year living in Spain.

Natasha L. Watts is an Institutional Sales & Marketing Associate. Prior to joining Parnassus Investments in 2013, Natasha was an analyst at Rockwood Real Estate Advisors. Previously, she was an analyst intern at Eastdil Secured, a real estate investment bank. Natasha graduated as a double major with bachelor's degrees in economics and French and received a minor in biological sciences from the University of Southern California. She enjoys traveling around the world and learning new languages. She also speaks Farsi and French.

Changes in Board of Trustees

Herb Houston, who has served over 20 years as a Trustee of the Parnassus Funds, has retired as of the end of 2013. He has been the Rock of Gibraltar for the Parnassus Funds, serving over 20 years, the most in our firm's history. His steadfast leadership has guided the Funds through good times and bad – mostly good. He has seen the Funds grow from less than $100 million to more than $10 billion in assets. Herb also served as the lead Trustee. I would like to thank him for his years of service.

The Trustees have elected Alecia DeCoudreaux, President of Mills College, as a new Trustee. She was selected from a list of many qualified candidates, and we're delighted to welcome her to the board. She's a woman of many talents, including a background in law, business and education. Her list of accomplishments includes executive leadership positions at Eli Lilly & Company, most recently as Vice President and Deputy General Counsel, as well as service as a Trustee of Wellesley College and work with many community organizations. I'm delighted that someone of her caliber has joined our board.

30-Year Anniversary Celebration

The Parnassus Funds were established 30 years ago in 1984 with initial assets of $330,000. We've grown a lot since then, with total assets now over $10 billion. We'd like you to help us celebrate that milestone. The celebration will be on Wednesday, March 26, 2014, at the Palace Hotel in San Francisco (corner of Market and New Montgomery). The reception will begin at 6:00 pm and the program will last from 6:30 pm until 8:30 pm. You will have an opportunity to meet the Parnassus Trustees and the Parnassus staff. There will also be presentations by the portfolio managers and an opportunity for questions and discussions. If you would like to come, please RSVP to rsvp@parnassus.com or by calling 415-778-2607 by Wednesday, March 19.

Finally, I would like to thank all of you for the confidence you've displayed in us by investing in the Parnassus Funds.

Yours truly,

dodson signature
Jerome L. Dodson
President

PARNASSUS FUND

Ticker: PARNX

As of December 31, 2013, the net asset value per share ("NAV") of the Parnassus Fund was $45.86, so after taking dividends into account, the total return for the year was 34.22%. This compares to 32.38% for the S&P 500 Index ("S&P 500") and 32.46% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper ("Lipper average"). It was a great year for the stock market and especially for the Parnassus Fund; since we beat our benchmarks by almost two percentage points. If you held your shares at the beginning of the year, the value of those holdings has increased by more than a third.

Below is a table comparing the Parnassus Fund with the S&P 500 and the Lipper average over the past one-, three-, five- and ten-year periods. As you can see, we are well ahead of both benchmarks for all periods. Most striking is the five-year number, where we have gained an average of 22.64% per year since the end of 2008. This is almost five percentage points per year ahead of the benchmarks.

Further down, you will also see a graph that shows the growth of a hypothetical $10,000 investment in the Fund over the past ten years. The graph shows that the Fund has grown more than the same amount invested in either of the benchmarks.

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The S&P 500 Composite Stock Index (also known as the S&P 500) is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. Prior to May 1, 2004, the Parnassus Fund charged a sales load (maximum of 3.5%), which is not reflected in the total return calculations.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505.

Company Analysis

EZchip Semiconductor was the only company that had a significantly negative impact on the Fund during the year, but it only cut 17¢ off the NAV, a figure that pales in comparison to the gains contributed by the eight companies that topped our winners list. The company designs semiconductors used in data centers, enterprise networks and telecommunications equipment. EZchip's stock dropped 25.6% during the year from $33.07 to $24.61. The stock plunged early in the year, when a large customer, Huawei, decided to design its own network-processing chips rather than purchasing them from EZchip. The issue sank further when its largest customer, Cisco, also announced plans for a new chip, but the stock rebounded somewhat, when Cisco clarified that its new semiconductor would not replace that of EZchip. We've had a lot of ups and downs with this stock, but we're hanging on to it, because of its best-in-class technology and its undisputed leadership in network-processors.

Eight companies each accounted for a gain of 39¢ or more on the NAV. Ciena, maker of optical equipment for telecommunications, had the biggest impact. It contributed an astounding $1.15 to each Parnassus share during the year, as its stock soared 52.4% from $15.70 to $23.93. This put it at the top of our winners list. The next time you make a phone call, take a moment of silence to reflect on Ciena and show some appreciation for the boost it has given your Parnassus shares. We bought Ciena several years ago with the idea that the big phone companies would have to purchase more equipment, because all the telecom traffic was straining their networks. Somehow, the carriers were able to postpone major purchases until this year when the dam finally broke. Ciena's order backlog hit record levels and the company gained market share.

Right up there with Ciena was Applied Materials, maker of equipment used in semiconductor-manufacturing, which added $1.10 to the NAV, as its stock rocketed up 54.6% from $11.44 to $17.69.

parnx compositionApplied had a strong start in 2013. Robust demand from chipmakers and manufacturers of flat-panel displays helped earnings and pushed the stock higher. The big event, though, was the announcement that Applied would merge with Tokyo Electron, a rival Japanese maker of semiconductor equipment. The stock moved higher on the news, since the combined company will benefit from a wider customer base, enormous cost savings and much greater pricing power.

Finisar makes optical equipment for use in telecommunications and data centers, and it contributed 90¢ to each fund share, as its stock shot up 46.8% from $16.30 to $23.92. Shares dropped at the beginning of the year, as its telecommunications customers delayed investment in additional network capacity. Later in the year, the shares moved much higher with strong sales in its data-communications division, which now accounts for almost 70% of revenue. Customers of this division have been upgrading their servers in their data-centers to handle increased Internet traffic. I had originally bought the stock because I was counting on much higher sales to telecommunications companies, but this has not yet happened. All I can say is that I was very fortunate that the data-center sales have materialized. I'm still hopeful that telecom sales will have a sharp increase, and if they do, I believe the stock should move much higher.

Charles Schwab, the San Francisco-based bank and brokerage firm, soared 81.1% from $14.36 to $26.00, adding 82¢ to the NAV. Although earnings increased modestly this year, what drove the stock was not income, but rather an expected increase in interest rates. With rates currently at extremely low levels, Schwab earns far less than normal on its banking assets, money market funds and margin loans to brokerage clients. When rates eventually return to their pre-crisis levels, I believe the company should more than double its current earnings. We sold some of our Schwab shares in response to the stock's big move, but we still hold 500,000 shares.

Parnassus Fund Portfolio of Investments as of 12/31/2013

Credit-card-issuer Capital One climbed 32.3% from $57.93 to $76.61 for a gain of 61¢ per fund share. The company got off to a slow start this year, reporting disappointing quarterly earnings related to its acquisition of online bank ING Direct and HSBC's private label credit-card portfolio, which had customer losses and higher expenses than expected. The stock dropped and we added to our position, because we believed the acquisitions were sound strategic fits and management's execution would improve. This is what actually happened late in the year, as earnings moved higher and so did the stock.

parnx growth

Homebuilder PulteGroup added 47¢ to the NAV, as its stock rose 12.2% from $18.16 to $20.37. At first glance, it may be hard to understand how Pulte could contribute 47¢, while only going up 12.2% from the beginning of the year to the end. The explanation is that we sold 350,000 shares around $21 each during the period of March through July, and then we bought back 650,000 shares around $16 each during the month of August. Pulte climbed higher early in the year, as the housing market recovered and people bought new homes, and this is the period when we sold stock. The housing market slumped during the summer, as a jump in interest rates led to a slowdown in new home sales. That's when we bought more shares. During the fourth quarter, new home sales bounced back, and so did shares of Pulte.

Autodesk makes software for architects, engineers and designers, and its stock rose 42.4% from $35.35 to $50.33 for an increase of 42¢ to the NAV. Weak demand for its software in Europe caused the company to miss earnings expectations in early 2013, causing the stock to fall. We added 100,000 shares to our position, because we expected demand to increase due to improved conditions for manufacturing and construction. The stock did move higher later in the year, as conditions improved and investors became more bullish. The company then announced plans to shift to a more predictable subscription-based pricing model. Autodesk is poised to benefit from its leading design and engineering software, as the recovery continues in construction and manufacturing.

Shares of San Francisco-based Wells Fargo rose 32.8% from $34.18 to $45.40 for a gain of 39¢ for each fund share. Unlike other large banks, Wells Fargo did not make many bad loans, so it came out of the financial crisis with a strong balance sheet. This has enabled the bank to become the biggest real estate lender in the country, and one of the largest lenders to business and consumers. Wells Fargo has been increasing its market share, and with the housing market recovering and the economy improving, the bank has now reported ten consecutive quarters of record earnings, with each quarter higher than the one before it.

Outlook and Strategy

Note: This section represents the thoughts of Jerome L. Dodson and applies to the Parnassus Fund and the Parnassus Workplace Fund.

In general, I'm an optimist, but I wasn't optimistic enough about last year's returns. It's an understatement to say that I was amazed that the stock market was up 30% last year. The market is a leading indicator, so that means that the economy should be very strong in 2014. I think that's correct. The housing market is strong, and that always drives the economy higher. Janet Yellen has been confirmed as head of the Federal Reserve, so she will provide plenty of fuel to keep the economy growing. Also, unemployment is now down to 7%, and more jobs means more spending which is good for the economy. I wish it was down to 4%, but at least it's headed in the right direction. Democrats and Republicans in Congress have stopped feuding – at least over the budget – and that's definitely a plus for the economy.

Does all this good economic news mean the stock market will move much higher in 2014? In the long-run, the stock market moves along with the economy, but in the short-run, valuations have a big impact on what the market does. Right now, the market looks fully-valued. While I expect the market to move higher in 2014, I don't think the gains will be that big – maybe something in the 5-10% range. Of course, I don't think it's possible for anyone, including me, to make accurate predictions on the market, so this is just my personal opinion.

Usually, the market cools off after a year of 30% gains, but sometimes it can keep on going much higher. For example, the Parnassus Fund was up 26% in 2012, so I expected modest gains in 2013. Instead, the Fund was up 34% last year. Because the market is so unpredictable, it's better not to make investment decisions based on market forecasts.

My expertise is in identifying good companies, putting a value on them, then investing in the ones that are undervalued. Those are the ones in our portfolios right now. Although I believe our stocks are undervalued, they aren't as undervalued as they were at the beginning of 2013. I anticipate modest gains in 2014.

Yours truly,

dodson signature
Jerome L. Dodson
Portfolio Manager

PARNASSUS EQUITY INCOME FUND

Ticker: Investor Shares - PRBLX
Ticker: Institutional Shares - PRILX

As of December 31, 2013, the NAV of the Parnassus Equity Income Fund-Investor Shares was $36.68. After taking dividends into account, the total return for the year was 34.01%. This compares to increases of 32.38% for the S&P 500 Index ("S&P 500") and 27.92% for the Lipper Equity Income Fund Average, which represents the average return of the equity income funds followed by Lipper ("Lipper average").

Below is a table that summarizes the performances of the Fund, the S&P 500 and the Lipper average. The returns are for the one-, three-, five- and ten-year periods. Further down is a graph showing the growth of a hypothetical $10,000 investment in the Fund over the last ten years.

prblx returns

The average annual total return for the Parnassus Equity Income Fund-Institutional Shares from commencement (April 28, 2006) was 10.44%. Performance shown prior to the inception of the Institutional Shares reflects the performance of the Parnassus Equity Income Fund- Investor Shares and includes expenses that are not applicable to and are higher than those of the Institutional Shares. The performance of Institutional Shares differs from that shown for the Investor Shares to the extent that the classes do not have the same expenses. Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The S&P 500 is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. On March 31, 1998, the Fund changed its investment objective from a balanced portfolio to an equity income portfolio.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505.

2013 Review

The stock market had a great year, with a 32.38% gain for the S&P 500 representing its best annual return since 1997. This historic rally occurred even though corporate earnings grew only modestly in 2013. Total earnings per share (EPS) for companies in the S&P 500 increased about 5% for the year, down from 7% in 2012 and 15% in 2011. That stock prices grew much faster than earnings means that the price-to-earnings multiple for most stocks expanded significantly in 2013. The two biggest factors that drove this improvement in market sentiment were the Federal Reserve's Quantitative Easing (QE) program and an expectation that corporate profits will accelerate in 2014. The consensus expectation for 2014 EPS growth for index constituents in aggregate is currently 10%, just about double the 2013 rate.

The Fund posted a return of 34.01% for the year, beating the index by 163 basis points (a basis point is 1/100th of one percent). Given the Fund's lower than average risk profile, we're delighted that it outpaced the index in such a robust year for stocks. In keeping with our relatively defensive posture, the sector allocation decisions had a slightly negative effect on our performance for the year. The two biggest impacts came from the portfolio's low allocation to the best-performing sector in the index, consumer discretionary, and its relatively heavy exposure to the second-worstperforming sector, utilities. These allocations, combined with a 6% average cash balance for the year, represented a headwind of three percentage points for the Fund, relative to the S&P 500.

Offsetting these negative impacts was excellent stock selection, particularly in the technology, financials and healthcare sectors. Combined, our stock selection contributed over four percentage points to our gain versus the index. For the year, five stocks boosted the NAV by at least 50¢. Just as important, the Fund had only one loser, and it had a very modest impact on the NAV.

Parnassus Equity Income Fund Portfolio of Investments as of 12/31/2013

Company Analysis

C.H. Robinson, a Minnesota-based logistics company, fell 7.7% from $63.22 to $58.34, trimming the NAV by 1¢. C.H. Robinson underperformed the market significantly this year, because its truck brokerage margin fell below expectations. This dynamic, which has been an issue for the company since 2010, intensified in 2013. This was due to a combination of tepid economic growth, which limited demand for high-margin rush prblx comp shipments, increased trucking prices caused by new regulations and certain competitors' decisions to accept lower prices in order to gain market share.

We don't know precisely when Robinson's truck brokerage margin will stabilize, but we're confident that it eventually will. If trucking capacity remains constrained, then shipping demand will eventually outstrip carrier supply. In this scenario, smaller brokers won't be able to find trucks, and shippers will have to pay up for access to Robinson's massive carrier network. While we wait for the pricing environment to improve, Robinson's large technology investments and headcount growth are strengthening the company's already dominant position in its industry. As for valuation, the stock is down almost 30% from its 2010 high of $81 per share, so we think that Robinson's current challenges are already priced into the stock.

For the second year in a row, the Fund's biggest winner was Bay Area biotech company Gilead Sciences, whose stock soared 104.6% to $75.15 from $36.73 and added 61¢ to the NAV. Our average cost for Gilead is about $20 per share, so it's now among the biggest winners in the Fund's history.

We initially bought Gilead in 2010 because of its valuable HIV/AIDS therapeutic franchise. However, the stock's amazing run over the past two years has been fueled by the company's progress in developing a cure for hepatitis C. In December, Gilead's drug Sovaldi was approved by the FDA to treat hepatitis genotype 1-4 patients. Given Sovaldi's high cure rates, excellent safety profile and the unfortunate fact that about 150 million people have hepatitis C worldwide (including over 4 million Americans), it could be among the world's biggest-selling drugs within a few years.

We think the drug offers a huge social benefit, even considering its high price tag of $1,000 per day. The drug's short duration, typically 12-24 weeks, offers a cure with much better outcomes and lower overall costs than existing therapies. The company also has a generous program to help low-income patients obtain treatment. We sold a portion of our Gilead stock during its spectacular run, but the Fund still owns some shares, as we expect 2014 to be another good year for the company.

Semiconductor-equipment-maker Applied Materials rose 54.6% to $17.69 from $11.44 and boosted the NAV by 61¢. Applied Materials' Taiwanese foundry and flash memory customers placed large tool orders in 2013, due to strong end-market demand for smartphonerelated chips. Building on this momentum, Applied Materials announced in September a merger with rival Tokyo Electron for $9 billion. This historic deal, which we expect to close in the second half of 2014, would broaden Applied Materials' exposure to important areas of chip manufacturing, and boost the company's long-term earnings potential.

prblx growth

Apple climbed 42.0% from our average cost of $395.02 to $561.11 and increased the NAV by 57¢. We bought Apple in April of 2013, after the stock fell from a 2012 all-time high of $700 to bargain levels, due to fears of increasing smartphone competition. At that time, Apple's downside risk seemed limited because of its valuable customer base, device and app ecosystem, and a balance sheet featuring $140 billion of cash. The stock rebounded sharply during the second half of 2013, as successful product launches, especially for the iPhone 5S, demonstrated the power of its brand, technology and global distribution. These assets became even more valuable in December when Apple formalized a relationship with the world's largest mobile phone operator, China Mobile.

As we mentioned last quarter, market leaders in the consumer electronics industry can shift quickly, so we're keeping a close eye on Apple's competitors, especially Samsung. For now, we think that Apple's "competitive moat," which is a competitive advantage that is difficult to emulate, is still widening, and we're still comfortable with the stock's valuation, so we didn't sell any of our Apple shares as of year-end.

Charles Schwab, the San Francisco-based bank and brokerage firm, soared 81.1% from $14.36 to $26.00 and added 52¢ to the NAV. While earnings increased only modestly throughout the year, the real driver for the stock was not net income, but rather an expected increase in interest rates. With rates currently at extremely low levels, Schwab earns far less than normal on its banking assets, money market products and margin loans to brokerage clients. When rates eventually return to their precrisis levels, the company should more than double its current rate of earnings. We sold a portion of our Schwab position during the year in response to the stock's big move, but still held some shares as of year-end.

MasterCard jumped 70.1% this year, from $491.28 to $835.46, increasing each Fund share by 50¢. Like Gilead, MasterCard has been one of the best performers in the Fund's history, as it has quadrupled from our average cost of $206 per share. The company had another fantastic year, and we believe the long-term looks outstanding. In late July, the stock shot up after management raised earnings expectations for 2013, and reaffirmed its three-year outlook for annual revenue and EPS growth of 12.5% and 20%, respectively. The stock jumped again in mid-December, after the company announced positive capital allocation actions, including an 83% increase in the dividend and a $3.5 billion stock buyback plan.

Outlook and Strategy

The most important recent event that informs our outlook for 2014 is the tapering of the Federal Reserve's Quantitative Easing (QE) program. The potential impact of the taper stems from the truly staggering scope of this program. As a result of QE, the central bank's balance sheet just surpassed the $4 trillion mark, and currently has a value equal to 24% of the nation's gross domestic product (GDP). In proportion to the overall economy, our central bank is now four times larger than it was before the 2008 credit crisis. The only other times in the Fed's 100-year history that its balance sheet has even approached this size, relative to GDP, was during the Great Depression and in the wake of World War II. Suffice it to say, from an economic standpoint, we're living through very unusual times.

It's impossible to know how much QE drove stocks in the past few years, as opposed to actual improvements in fundamentals. One thing that appears certain is that the Fed, through its highly accommodative actions, has increased the risk tolerance of many investors. It's done this since 2008 by repeatedly stepping in to stem even modest stock market declines. As the Fed slowly removes its implicit safety net, we wouldn't be surprised to see a period of increased volatility or even a temporary market correction.

We hope that the economy continues to improve, that corporate earnings accelerate in 2014, and that these positives outweigh any negative headwinds represented by the QE taper. While we wait to see the outcome of these competing macro forces, we're staying true to our process of investing in stocks with attractive, long-term risk-reward payoffs. As a reminder, since we construct the portfolio from the bottom-up, macro factors matter to us only insofar as they inform our view of an individual holding.

The Fund enters 2014 with a diverse set of companies, each with a unique investment thesis. The biggest concentrations in the portfolio are in the technology, industrials and consumer staples sectors. Relative to the index, the portfolio has very few holdings in the financials and consumer discretionary sectors. We expect this collection of stocks to do well under a wide range of economic and market scenarios.

The latest addition to the Fund is Allergan, a pharmaceutical company based in Irvine, California. Half of the company's sales comes from its eye care division, and the other half comes from cosmetic products. We're excited about the long-term prospects of this business.

Thank you for your trust and investment with us,

ahlsten signature allen signature  

Todd C. Ahlsten
Lead Portfolio Manager

Benjamin E. Allen
Portfolio Manager

 

PARNASSUS MID-CAP FUND

Ticker: PARMX

As of December 31, 2013, the NAV of the Parnassus Mid-Cap Fund was $25.10, so after taking dividends into account, the total return for 2013 was 28.27%. This compares to 34.76% for the Russell Midcap Index ("Russell") and 32.46% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper ("Lipper average").

We are pleased that the Fund had such a strong return in 2013 but are disappointed that we fell behind our benchmarks. The reason we lagged is because of our goal to take on less risk than the index, so it's hard for us to outperform when the market surges. The Fund's longer-term track record remains very good. The Fund has outperformed both the Russell and its Lipper peers over the three-year period. For the five-year period and for the period since inception, the Fund is ahead of its Lipper peers but slightly behind the Russell.

Below is a table comparing the Parnassus Mid-Cap Fund with the Russell and the Lipper average for the one-, three- and fiveyear periods and for the period since inception on April 29, 2005. Further down is a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception.

parmx returns

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The Russell Midcap Index is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. Mid-cap companies can be more sensitive to changing economic conditions and have fewer financial resources than large-cap companies.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505. As described in the Fund's current prospectus dated May 1, 2013, (as Amended and Restated September 30, 2013), Parnassus Investments has contractually agreed to limit the total operating expenses to 1.20% of net assets for the Fund. This agreement will not be terminated prior to May 1, 2014, and may be continued indefinitely by the Adviser on a year-to-year basis.

2013 Review

Mid-cap stocks soared 34.8% in 2013, well ahead of the returns predicted by most Wall Street strategists. So, what happened? As expected, corporate earnings growth was fair, but investors paid more for each dollar of company earnings. Investors believed that a material economic recovery was underway, driven by housing and manufacturing sector improvements and employment gains. The Federal Reserve also kept interest rates low through its aggressive bondbuying program, making equities an attractive investment option relative to low-yielding savings accounts.

Aside from a 5.7% market drop in May and June, when the Greek government was in turmoil and the Fed began hinting about reducing its bondbuying program, mid-cap stocks climbed higher and higher throughout the year. When all was said and done, the Russell Midcap index rose an astonishing 34.8%.

Despite the Fund's robust 28.3% return, we fell six percentage points behind the Russell and four percentage points behind our Lipper peers. From a high level, we underperformed our index because we tend to invest in high-quality stocks. This strategy served us well in down markets like 2008 and 2011, when high-quality businesses in the index outperformed the market, but it held us back in 2009, 2010 and this year, when many lowerquality stocks performed exceptionally well. Another reason for the Fund's underperformance was stock selection. Poor stock picks in the industrial and consumer discretionary sectors hurt us the most this year, while good stock picks in the utilities and financials sectors helped our return.

Company Analysis

The Fund had just three stocks that reduced the NAV this year. While together they took a meager 6¢ from the Fund, they were costly investments, because the Russell went up so much. In fact, these three stocks accounted for almost half of our underperformance relative to the market.

parmx compThe stock that hurt us the most was Teradata, a hardware and software provider of complex data analytics systems. The stock plunged 26.5% during the year, from $61.89 to $45.49, cutting 4¢ from the NAV. Early in the year, the stock was under pressure after the company missed revenue expectations, because fewer large customers bought its product suite. Deal flow improved by mid-year, but an abrupt slowdown in demand from China pushed the stock lower at year-end. We're holding onto the stock, because we expect enterprise demand to improve and the shares are trading at a depressed valuation.

C.H. Robinson, a trucking brokerage company, fell 7.7% from $63.22 to $58.34, trimming the NAV by 1¢. The company's net revenue margin – the difference between what it charges shippers and what it pays carriers – continues to be under pressure. This is due to a combination of tepid economic growth that limits demand for higher-margin rush shipments, new trucking regulations that limit supply and force trucking prices up and irrational competition that isn't allowing brokers to pass through the higher prices to shippers. We believe the company's net revenue margin will improve, when either the supply-demand dynamic shifts or aggressive competitors begin to seek profits. In the meantime, we are holding our position in this industry leader due to its high returns on capital, policy of returning excess cash to shareholders and historically low valuation multiple. We also like the company's variablecost business model that provides downside protection in the event of an economic downturn.

Coach, a handbag and accessories retailer, cut a penny off of the NAV, as its stock fell 3.3% from $55.51 to $53.68, where we sold the stock. The stock plummeted in early 2013, as competitive pressures, primarily from Michael Kors and Kate Spade, hurt Coach's profits. The stock recovered mid-year, as a new footwear line boosted sales, but weak demand for its handbags in North America caused the stock to fall again in the second half of the year. We sold the stock primarily because we believe that Coach has damaged its brand by selling too much merchandise at discount outlet stores. We think the company could face further market share losses in its core North America handbag business and worry that management's transition to a lifestyle brand, with a broader assortment of apparel and shoes, will pressure earnings.

parmx growth

Most stocks in the Fund had big gains this year, and our three largest contributors added at least 30¢ each to the NAV. The Fund's biggest winner was Pentair, an industrial products manufacturer. The stock surged 58.0%, from $49.15 to $77.67, adding 40¢ to the NAV. The stock went up steadily throughout the year, as management reaffirmed its longer-term performance targets, supported by an improving residential construction market. We're holding onto our shares of this industry leader, because we think the company can realize greater-thanexpected efficiencies from its recent merger with Tyco Flow Control, leading to management's goal of earning $5 per share by 2015, more than double what the company earned in 2012.

Charles Schwab, the San Francisco-based bank and brokerage firm, soared 81.1% from $14.36 to $26.00 and added 31¢ to the NAV. While earnings increased only modestly throughout the year, the real driver for the stock was not net income, but rather an expected increase in interest rates. With rates currently at extremely low levels, Schwab earns far less than normal on its banking assets, money market products and margin loans to brokerage clients. When rates eventually return to their pre-crisis levels, the company should more than double its current earnings. We sold some of our Schwab position during the year in response to the stock's big move, but we still held a meaningful position as of year-end.

Applied Materials, a leading maker of semiconductor manufacturing equipment, saw its stock jump 54.6% from $11.44 to $17.69, for an impressive gain of 30¢ to the NAV. Sales benefitted early in the year, as flat-panel-displaymanufacturers and chipmakers purchased Applied's equipment to expand capacity to build chips for smartphones and tablets. The stock moved higher after the company announced a deal to buy Tokyo Electron, a rival Japanese maker of semiconductor production equipment. We believe that CEO Gary Dickerson and his team's focus on R&D, cost management and market share gains will drive significant earnings growth ahead, so we're hanging on to the stock.

Parnassus Mid-Cap Fund Portfolio of Investments as of 12/31/2013

Outlook and Strategy

The consensus view is that U.S. stocks will go up again in 2014. Strategists are predicting mid-to-high single digit gains for most market segments. We agree that the domestic economic expansion, supported by population gains, low interest rates, continuing employment gains and tepid inflation are positive tailwinds for stocks. However, even as the economy improves, we don't expect the remarkable returns that we've seen over the past few years to persist.

The reason is that there's little corporate sales growth, and profit margins are at all-time highs. The Russell's earnings growth is decelerating, from 19% in 2012 and 13% in 2013, to an estimated 10% in 2014, and earnings growth, fueled by cost reductions and share buybacks, is getting harder to come by. The multiple that investors are willing to pay for earnings has crept up, and at 19 times earnings, is 10% above the ten-year average. Finally, the Fed's December announcement that it will taper its bond buying program will inevitably drive investors to less risky assets. This also opens the door to eventual rate tightening, which will temper market bulls.

Fortunately, we are still finding plenty of good opportunities. We recently added to our health care exposure, because we believe an aging global population, rising incomes in developing markets, greater domestic health care coverage and an improving domestic economy will lead more people to seek medical treatment.

In this sector, we initiated a position in Allergan, a leader in medical devices and specialty pharmaceuticals. We have followed the company for years, appreciating its increasing relevancy due to market leading anti-aging and eye care products. The stock dropped sharply over the summer as investors worried that Restasis, a dry–eye treatment, could face generic competition when it goes off patent in 2014. We felt that investors overreacted, which provided an opportunity to buy this great business at an attractive valuation.

We also added to our position in Dentsply, a leading manufacturer of dental consumables and implants. A slowdown in patient visits has depressed demand for Dentsply's consumables over the past few years. We see conditions gradually improving, as unemployment declines and patients return for treatments, such as fillings and root canals, which were put off over the past few years. We expect the company's earnings growth to accelerate over the next five years, aided by improving demand for its leading products and further margin expansion.

In the energy space, we initiated a position in MRC Global, the world's largest distributor of valves, pipes and fittings to the energy, utility and industrial sectors. We already own several distributors, including dental distributor Patterson Companies and pharmaceutical distributor Cardinal Health. We love this business model, because distributors benefit from buying power with suppliers. A pause in customer demand for MRC's products due to permitting issues gave us an opportunity to buy this difficult-to-replicate business (the company seamlessly supplies over 200,000 SKUs of specialized pipes to customers around the world) at a good price.

We also believe that increasing global demand for energy will drive significant capital spending over the next three years, pushing revenue and earnings growth for MRC, along with our holdings Spectra Energy and Cameron International. We believe that our energy services and infrastructure stocks will perform well going forward, because each is a leading operator in a growing market.

Overall, we remain committed to our investment process of investing in increasingly relevant, well-managed companies with competitive advantages and attractive valuations.

Thank you for your investment.

Yours truly,

gershuny signature keith signature  

Matthew D. Gershuny
Lead Portfolio Manager

Lori A. Keith
Portfolio Manager

 

PARNASSUS SMALL-CAP FUND

Ticker: PARSX

As of December 31, 2013, the NAV of the Parnassus Small-Cap Fund was $28.72, so after taking dividends into account, the total return for the year was 28.33%. This compares to a return of 38.82% for the Russell 2000 Index ("Russell 2000") of smaller companies and 36.74% for the Lipper Small-Cap Core Average, which represents the average return of the small-cap core funds followed by Lipper ("Lipper average").

Usually, we would be thrilled to report a 28.3% gain for the year. However, we trailed the Russell 2000 by over ten percentage points. Although we are never proud to trail our benchmark, it is not surprising to us this year. Our goal is to outperform during down years and attempt to keep up during boom years by buying high-quality, competitively-advantaged businesses. Although this approach of focusing on lower-risk companies contributed to our underperformance this year, it has served our investors well in the past.

Below is a table comparing the performance of the Parnassus Small-Cap Fund with that of the Russell 2000 and the Lipper average over the past one-, three- and five-year periods and the period since inception. Although our short-term performance has been weak, our performance for the last five years and since inception has exceeded both benchmarks. Further down is a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception. Our investment process of identifying high-quality businesses that are temporarily out-of-favor remains the same, so our goal is to return to outperformance in the near future.

parsx returns

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The Russell 2000 Index is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do. Small-cap companies can be particularly sensitive to changing economic conditions and have fewer financial resources than large-cap companies.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505. As described in the Fund's current prospectus dated May 1, 2013, (as Amended and Restated September 30, 2013), Parnassus Investments has contractually agreed to limit the total operating expenses to 1.20% of net assets for the Fund. This agreement will not be terminated prior to May 1, 2014, and may be continued indefinitely by the Adviser on a year-to-year basis.

Company Analysis

Five companies in the portfolio each accounted for a gain of 32¢ or more for the year, while only two accounted for a loss of 20¢ or more. The company that hurt us the most was fertilizer producer Intrepid Potash, which sank 26.5%, from our average cost of $19.56 to where we sold it at $14.38, slicing 23¢ off of the NAV. Potash has historically enjoyed high prices, because five companies control 80% of the world's supply, and they manage production to match demand. However, one of the companies decided to steal market share from the others, which caused the price of potash to decline 20%. We had not expected production to jump while demand was stable, and since our investment thesis was proven wrong, we exited our position.

EZchip Semiconductor, a designer of semiconductors used in data centers, enterprise networks and telecommunications equipment, dropped 25.6% during the year, from $33.07 to $24.61, cutting 20¢ from each fund share. The stock plunged early in the year, when a large customer, Huawei, decided to design its own network processing chips rather than purchasing them from EZchip. The issue sank further when its largest customer, Cisco, also announced plans for a new chip, but the stock rebounded somewhat, when Cisco clarified that its new semiconductor would not replace that of EZchip. We've had a lot of ups and downs with this stock, but we're hanging on to it, because of its best-in-class technology and its undisputed leadership in network-processors.parsx composition

Turning to the winners, the biggest contributor was Gentex, a manufacturer of auto-dimming car mirrors. Gentex soared 75.3% during the year, from $18.82 to $32.99, contributing 61¢ to each fund share. Thanks to its superior technology, Gentex supplies 90% of all auto-dimming car mirrors around the world. The company benefited from increasing new car sales, as well as adoption by additional car models. We are holding our shares because we expect this important safety feature to expand downward from luxury cars to mid- and lowerpriced cars.

The Fund's second best performer was Ciena, a manufacturer of optical equipment used in telecommunications networks. The stock climbed 52.4%, from $15.70 to $23.93, for a gain of 53¢ per fund share. During the year, telecommunications carriers increased their purchases from Ciena to accommodate rapidly increasing traffic on their networks, and Ciena's order backlog hit record levels. The company's innovative products gained market share, and we expect further share gains in 2014, so the stock should continue to do well.

Finisar also manufactures optical equipment for telecommunications networks and data-centers. Its stock rose 46.8%, from $16.30 to $23.92, adding 49¢ to the NAV. The company's data-center division, which accounts for 70% of the firm's revenue, had robust sales because customers upgraded equipment to handle increasing Internet traffic. We see further upside to the stock, as Internet traffic continues to grow, driving strong demand for Finisar's equipment.

VCA Antech, the largest veterinary laboratory and animal hospital operator in the country, jumped 49.0%, from $21.05 to $31.36, for an increase of 42¢ for each fund share. The company's laboratory segment operates in a market with only two suppliers, which allowed it to increase prices, while its hospital segment benefited from improving pet-care spending. Additionally, management announced the company's first share buyback in April.

Shares of InterMune, a biotechnology company focused on respiratory diseases, shot up 52.0%, from $9.69 to $14.73, contributing 32¢ to the NAV. The stock rose as sales of Esbriet, the company's treatment for idiopathic pulmonary fibrosis, grew more than 160%. During the year, the company won additional approval for Esbriet in the United Kingdom and Italy. Having only recently launched in these two new countries, Esbriet should have significant room to grow.

Parnassus Small-Cap Fund Portfolio of Investments as of 12/31/2013

Outlook & Strategy

The market continued to climb a wall of worry in 2013, with the Russell 2000 reaching a new, all-time high at the end of the year. The strong stock market gains were propelled by an improving economy, as well as very low interest rates, which made equities more attractive to investors than other asset classes. The economy showed clear signs of improvement throughout the year, with unemployment declining from 7.8% to 7.0%, while GDP growth increased to 4.1% – up from no growth at the end of last year. The Federal Reserve maintained ultra-low interest rates in order to stimulate the economy, forcing investors to seek greater returns from higher-risk assets, which led to more than $300 billion of global equity inflows.

Unfortunately, because of the significant equity inflows, stock prices appreciated faster than profits, and valuation multiples have increased. Since valuations are less compelling than at the beginning of the year, we sold stocks that hit our intrinsic value targets and redeployed the cash into our remaining undervalued companies. As a result, the number of stocks we own has declined from 40 at the beginning of the year to only 34, the lowest number since 2005.

parsx growth

We remain bullish on the U.S. economic recovery, but we are concerned that valuation multiples may pull back once the Federal Reserve reduces monetary stimulation and interest rates return to historically average levels. Therefore, we have reduced our exposure to interest-rate sensitive sectors such as utilities and have purchased competitively-advantaged businesses that benefit from long-term secular trends. Each of our ten new investments made in 2013 fits this profile:

Air Lease, the fastest growing airplane leasing company, is run by what we believe is the best CEO in the industry and benefits from increasing air travel in emerging markets.

Blount International, the largest manufacturer of saw chains, operates in a market with only two suppliers and benefits from increased chainsaw sales in emerging markets.

Dominion Diamond, the lowest-cost North American diamond miner, benefits from increased demand for diamond engagement rings in China and India.

Harman International offers the best car infotainment systems and benefits from increasing adoption of these systems in midand lower-priced cars.

Micros Systems, the largest provider of point-of-sale systems for restaurants, hotels and retailers, benefits from increasing adoption of its systems.

MRC Global, the largest distributor of valves to the U.S. energy sector, operates in a market with only two suppliers and benefits from increased domestic oil and gas production.

Orient-Express Hotels has 45 iconic luxury properties and benefits from improving luxury travel trends.

Regal-Beloit, the leader in energy-efficient motors, benefits from increased demand for energy saving products.

Thermon Group, the second largest manufacturer of heat-tracing equipment used to prevent freezing pipes, operates in a market with only two suppliers and benefits from increased oil production in cold-climate regions.

UTi Worldwide, a leading global logistics company, benefits from increasing global trade.

Thank you for investing in the Parnassus Small-Cap Fund.

Yours truly,

dodson signature wilsey signature  

Jerome L. Dodson
Lead Portfolio Manager

Ryan Wilsey
Portfolio Manager

 

PARNASSUS WORKPLACE FUND

Ticker: PARWX

As of December 31, 2013, the NAV of the Parnassus Workplace Fund was $26.99, so after taking dividends into account, the total return for the year was 31.15%, compared to a gain of 32.38% for the S&P 500 Index ("S&P 500") and a gain of 32.46% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper ("Lipper average"). It was a great year for the stock market, with the S&P 500 returning over 30%. The Workplace Fund also returned over 30%, but it was slightly behind the benchmarks.

Our goal for the Workplace Fund is to position it as a relatively conservative equity fund, so it tends to lag a bit in years when the market moves sharply higher, but it tends to outperform in difficult years. Given the nature of the Fund, I'm delighted that it was able to go up almost as much as the market in an outstanding year. Below is a table that compares the Parnassus Workplace Fund with the S&P 500 and the Lipper average for the one-, three- and five-year periods and the period since inception. You will notice that the Workplace Fund has outperformed both of its benchmarks for all periods with the exception of the one year period. Most striking is the five-year period, where the Workplace Fund beat both of the benchmarks by well over five percentage points per year. If you've held your shares in the Fund for this five-year period, you've done very well indeed.

Further down, you will find a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception. It shows that the growth of that hypothetical $10,000 would have been much greater in the Workplace Fund than in either benchmark.

parwx returns

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The S&P 500 Index is an unmanaged index of common stocks, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505.

Company Analysis

Six companies each accounted for a gain of 30¢ or more to the NAV of the Workplace Fund. No stock had a meaningful negative impact on the Fund. The biggest winner this year was Charles Schwab, the San Francisco-based bank and brokerage firm that soared 81.1% from $14.36 to $26.00, adding 58¢ to the NAV. Although earnings increased modestly this year, what drove the stock was not income, but rather an expected increase in interest rates. With rates currently at extremely low levels, Schwab earns far less than normal on its banking assets, money market funds and margin loans to brokerage clients. When rates eventually return to their pre-crisis levels, the company should more than double its current earnings. We sold some of our Schwab shares in response to the stock's big move, but we still hold 650,000 shares.

Parnassus Workplace Fund Portfolio of Investments as of 12/31/2013

Applied Materials, maker of equipment used in semiconductor-manufacturing, added 55¢ to each fund share, as its stock rocketed up 54.6% from $11.44 to $17.69. Applied had a strong start in 2013, as robust demand from chipmakers and manufacturers of flat-panel displays helped earnings and pushed the stock higher. The big event, though, was the announcement that Applied would merge with Tokyo Electron, a rival Japanese maker of semiconductor equipment. The stock moved higher on the news, since the combined company will benefit from a wider customer base, enormous cost savings and much more pricing power.

parnx growth

Autodesk makes software for architects, engineers and designers, and its stock rose 42.4% from $35.35 to $50.33 for an increase of 40¢ to the NAV. Weak demand for its software in Europe caused the company to miss earnings expectations in early 2013, causing the stock to fall. We added 100,000 shares to our position, because we expected demand to increase due to improved conditions for manufacturing and construction. The stock did move higher later in the year, as conditions improved and investors became more bullish. The company then announced plans to shift to a more predictable subscription-based pricing model. Autodesk is poised to benefit from its leading design and engineering software, as the recovery continues in construction and manufacturing.

Gilead Sciences, a biotech company specializing in medicine to treat HIV and liver diseases, soared an incredible 104.6% from $36.73 to $75.15 for a gain of 39¢ for each fund share. Sales of Stribild, the company's new once-a-day HIV pill that produces higher viral suppression with fewer side effects, increased sevenfold from the third quarter of 2012 to the third quarter of 2013. Gilead also continued to develop Sovaldi, its breakthrough hepatitis C (HCV) therapy, demonstrating higher cure rates, shorter durations of therapy and higher tolerability than the existing standard of care. Having received approval from the Food and Drug Administration (FDA) in December of 2013, Sovaldi is the first oral HCV therapy to market, and there are hundreds of thousands of HCV patients waiting to use the drug. Finally, Gilead successfully developed Idelaslib, a therapy being submitted to the FDA for indolent non-Hodgkin's lymphoma and chronic lymphocytic leukemia.

Credit-card-issuer Capital One climbed 32.3% from $57.93 to $76.61, adding 37¢ to each fund share. The company got off to a slow start this year, reporting disappointing quarterly earnings related to its acquisition of online bank ING Direct and HSBC's private label credit-card portfolio, which had customer losses and higher expenses than expected. The stock dropped and we added to our position, because we believed the acquisitions were sound strategic fits and that execution would improve. This is what actually happened late in the year, as earnings moved higher and so did the stock.

Shares of Corning rose 41.2% from $12.62 to $17.82, adding 31¢ to the NAV. The company makes most of its profits by selling special glass for high-definition television sets and computer screens. Increased demand for larger, higher definition television sets combined with good cost controls made earnings exceed expectations. In addition, the stock moved higher in October after Corning announced it was acquiring full ownership of its joint-venture with Samsung for $2.2 billion. Corning expects the acquisition to increase its earnings by 20%, as it gains additional scale and manufacturing flexibility in special glass.

Yours truly,

dodson signature
Jerome L. Dodson
Portfolio Manager

PARNASSUS ASIA FUND

Ticker: PAFSX

As of December 31, 2013, the NAV of the Parnassus Asia Fund was $15.67, so the Fund was up 4.47%. This compares to a gain of 1.48% for the MSCI AC Asia Pacific Index ("MSCI Index") and a loss of 2.57% for the Lipper Asia Pacific Region Average, which represents the average return of the Asia Pacific Region funds followed by Lipper ("Lipper average"). Below you will find a table comparing the Parnassus Asia Fund with the MSCI Index and the Lipper average for the period since inception on April 30, 2013.

You will notice that we are substantially ahead of both benchmarks — by about three percentage points ahead of the MSCI Index and by almost seven percentage points ahead of the Lipper average.

Even though we were way ahead of the indices, I really can't brag too much about our performance. Much of the relative performance was due to the high cash position in the portfolio for most of the year. While some of the Asian markets had big moves down this year, we were safely in cash with much of our assets. Since it took us a while to become invested in stocks, we had the good fortune of being in cash during much of the time when many Asian markets moved sharply lower. In other words, I was lucky.

pafsx returns

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original principal cost. Returns shown in the table do not reflect the deduction of taxes a shareholder may pay on fund distributions or redemption of shares. The MSCI AC Asia Pacific Index is an unmanaged index of Asian stock markets, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do.
This fund invests primarily in non-U.S. Securities. Foreign markets can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market or economic developments and can perform differently from the U.S. Market.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505. As described in the Fund's current prospectus dated May 1, 2013, (as Amended and Restated September 30, 2013), Parnassus Investments has contractually agreed to limit the total operating expenses to 1.45% of net assets for the Fund. This agreement will not be terminated prior to May 1, 2014, and may be continued indefinitely by the Adviser on a year-to-year basis.

Company Analysis

Four stocks each had a negative impact of 10¢ or more on the NAV, while seven had a positive impact of 10¢ or more on the NAV. Three of the four with the biggest negative impact are based in Thailand, the scene of massive flooding and political instability during the year. These calamities pulled down most of the companies traded on the Thai stock exchange. For the winners, there was no general theme, as each company had different reasons for its success. Below you will find a discussion of each company that either helped or hurt the Fund to a substantial degree. All stock prices have been converted into U.S. dollars for this discussion. Since the Asia Fund has been operating for less than a year, and most of our stocks were only purchased late in 2013, the beginning stock prices we quote will be from the time we purchased the issue, and the last quote will be as of the end of the year.

The two stocks that dropped the most were Amata Corporation and TICON Industrial Connection. Amata sliced 16¢ off the NAV, dropping 26.3% in dollar terms from $0.57 to $0.42, while TICON sank 22.6% from $0.62 to $0.48 for a loss of 10¢ per fund share. Both companies provide land and buildings in Thailand to foreign corporations for use in manufacturing automobiles, auto parts, electronics and other products. Floods hurt the operations of both companies, and political instability also contributed to the slide. Although things look difficult right now, we're holding onto these stocks, since both companies should benefit from Thailand's position as a low-cost manufacturing center.pafsx ocmp

Bank Rakyat Indonesia declined 14.3% from $0.70 to $0.60, cutting 11¢ off the value of each fund share. The bank is Indonesia's second largest by assets, with one-third of its lending coming from microloans to small, rural businesses. In 2013, concerns about Indonesia's current account deficit and the U.S. Federal Reserve's reduction in its stimulus program weakened the Indonesian rupiah and depressed the company's stock. Most of the stock decline was due to currency translation (weakening of the rupiah against the dollar). Bank Rakyat continues to gain share among small- and medium-sized businesses, which should increase earnings next year.

Thanachart Capital, the fifth largest bank in Thailand, sliced 10¢ off the NAV, as its stock dropped 16.8% from $1.19 to $0.99. Growth in automobile loans, which accounts for just over half of Thanachart's volume, slowed in 2013 as a weaker Thai baht reduced consumers' ability to purchase new cars. The bank also adopted stricter loan policies to reduce credit losses in the future, which also had the effect of reducing earnings this year. Since acquiring Siam City Bank in 2010, Thanachart has been reducing its dependence on the competitive auto loan market. Continued growth in corporate, small-business and mortgage-loans should diversify the bank's income, providing support for this undervalued stock.

Fortunately, we had more winners than losers. Biostime International Holdings, a Chinese distributor of foreign-made infant formula, saw its stock soar an amazing 81.5% from $4.92 to $8.93 for a gain of 27¢ for each fund share. In August, a competitor of the company was forced to recall supplies of possibly contaminated milk, which burnished Biostime's image as a purveyor of safe, high-quality products. Also, late in the year, the Chinese government relaxed its one-child policy, and Biostime acquired a factory to produce formula domestically. Both developments helped the stock, since they significantly expand the company's already fast-growing customer base.

21Vianet added 19¢ to the NAV, as its stock climbed 36.2% from $17.27 to $23.52. Aside from telecommunications carriers, the company is the largest provider of Internet data-centers in China, with 80 centers located in more than 40 cities across the country. 21Vianet has entered into a strategic partnership with Microsoft to provide Office 365 and Windows Azure service through the cloud to over 2,000 customers, who are willing to pay a premium for secure, reliable and scalable data services. Strong demand for cloud services in China caused a surge in profits this year and should continue to benefit the company going forward.pafsx composition

KDDI Corporation, the second largest telecommunications company in Japan, saw its stock jump 26.1% from $48.87 to $61.62, boosting the value of each fund share by 19¢. Part of the reason for the stock's move higher was the strong performance of the Japanese stock market, aided by the easy-money policies of the Bank of Japan, but the company achieved record net profit, because of strong sales of smartphones and the resulting higher usage fees. KDDI has pioneered some innovative strategies, such as selling older models of Apple iPhones at a steep discount and encouraging trade-ins of Wi-Fi only iPads for new cellularenabled iPad minis. In both cases, KDDI is winning over users with its high-speed LTE network, and they're willing to pay hefty monthly fees for large volumes of data.

Samsung Electronics contributed 12¢ to the value of each fund share, as its stock price rose 15.3% from $1,129.35 to $1,302.62. Worldwide, the South Korean consumer-electronics giant ranks first in sales of mobile phones and second behind Intel in semiconductors. Although Samsung lost a couple of patent battles with Apple, its Galaxy 4 smartphone is outselling the iPhone, and the company continues its strategy of rapid product innovation with different-sized tablets, wearable smartphones and bendable screen displays. With strong distribution in both developed and developing markets, Samsung is poised for higher earnings, when it creates the next "must-have" gadget.

pafsx growth

The stock price of Rakuten climbed 20.7% from $12.37 to $14.93, lifting the value of each fund share by 12¢. Based in Japan, Rakuten is an international online shopping mall with tens of thousands of merchants and also a major player in online financial services including securities brokerage and credit-cards. In Japan, e-commerce reaped the benefits of improved customer demand this year, while the effects of the government's stimulus program (known as Abenomics) gave the company a boost. Operations in Taiwan, Thailand, Malaysia, and especially Indonesia, performed well, strengthening Rakuten's presence in Southeast Asia's fast-growing markets.

Lenovo increased the Fund's NAV by 11¢, as its stock price climbed 25.8% from $0.97 to $1.22. (Because they are more liquid, we own the Hong Kong-listed shares, as opposed to the US-listed ADR's; one ADR is equal to 20 shares with a value of $24.40 at year-end.) This maker of personal computers (PCs) and other technology products is the number one brand in China, and this year it surpassed Hewlett-Packard as the largest PC manufacturer in the world. Although investors are concerned that the PC market may be contracting, Lenovo was able to gain market share and keep its PC sales growing, while protecting profitability with low-cost manufacturing. The company has also expanded its product line to include smartphones and tablets, and now sells more mobile devices than PCs. Lenovo plans to sell its phones and tablets in more developed markets such as the U.S. in the near future, a strategy that should extend the company's track record of profitable growth.

Applied Materials, the big maker of equipment used in semiconductor-manufacturing, added 10¢ to each fund share, as its stock gained 12.2% from $15.77 to $17.69. Although based in Silicon Valley, Applied has announced a merger with Tokyo Electron and will have more than half its sales in Asia. The company had a strong start in 2013, as robust demand from chipmakers and manufacturers of flat-panel displays helped earnings and pushed the stock higher. The big event, though, was the announcement that Applied would merge with Tokyo Electron, a rival Japanese maker of semiconductor equipment. The stock moved higher on the news, since the combined company will benefit from a wider customer base, enormous cost savings and much more pricing power.

Outlook and Strategy

Those of you who read the results of the other Parnassus Funds discussed earlier in this report may have noticed that three of the Parnassus Funds each earned more than 30% this year, including the Parnassus Fund, the Parnassus Equity Income Fund and the Parnassus Workplace Fund. Other shareholders may have noticed that the Japanese stock market was up 49% this year, so why wasn't the Parnassus Asia Fund up more?

The short answer is that except for Japan and Taiwan, all the Asian countries where we have holdings were down. Also, for an American investor, Japan's stock market gain is not what it seems. While Japan's Nikkei Index was up 49%, that is measured in yen terms. Since the yen fell about 19% against the dollar, that meant the gain for Americans in our currency was only about 25% – not bad, but not 49%. (All results in the Parnassus Asia Fund are translated into dollars.) Although we have some Japanese stocks in our portfolio, and these did well for us, only about 12% of our assets were in Japan.

The most important factor, though, is that, on balance, the Asian economies are not doing as well as the American economy and the stock markets reflect that. Although the U.S. economy has been slow to recover, it is recovering and things are improving here more than in Asia. Last year, the Hong Kong stock market dropped 2.8%, Indonesia was down 4.7%, Singapore was down 0.2%, South Korea was down 2.9%, Thailand was down 13.1% and China was down 10.2%. Although Taiwan was up 12.1%, its currency was down 3.4% in relation to the U.S. dollar, so the return expressed in American currency was only 8.3%.

I expect most Asian markets to do much better in 2014 than they did in 2013. The real wild card is Thailand. It has a welldeveloped economy, and its costs are among the lowest in Asia, so I believe it should thrive in 2014. The difficulty is that there is a lot of political instability in the country, with the opposition party known as "yellow shirts" conducting strong, and sometimes violent, protests against the government party known as "red shirts." Right now, it looks as if this instability might affect the tourism industry, which accounts for 12% of the economy. If the political situation improves, the economy could be strong and the stock market could soar, since valuations are very low right now.

I think all the other Asian stock markets where we have holdings should do better in 2014 than they did in 2013. (Japan is the exception since it ran up so much in 2013. I expect it to do reasonably well in 2014, but nothing like the 49% it gained in 2013). Asian economies tend to follow the U.S., since the U.S. buys so many products from Asia. Most of the companies in the Fund's portfolio have strong links to the American economy, so if the United States does well, I believe Asia should do well, too.

Billy Hwan, our senior research analyst, and I visited Asia twice last year, as did Maria Kamin and Rachel Tan from our ESG team. Billy and I visited over 50 companies in Asia, and we also attended two investment conferences in that part of the world. This has given us a much better view of various Asian economies than we had a year ago, and we've found some good companies to invest in.

Billy is a graduate of Stanford University and the Haas School of Business at the University of California, Berkeley, and he has also had some terrific Asia experience. He worked at the Government of Singapore Investment Corporation, studied and worked in Japan, as well as studied for a year in Taiwan. He has been invaluable to me in terms of finding good investments for the Fund.

We cannot predict the future of the stock markets in Asia or chart the direction of the Asian economies next year, but we do have the ability to find good companies and invest in them. We are optimistic about the prospects for that part of the world, and if we're right, the Fund should do very well in 2014.

Yours truly,

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Jerome L. Dodson
Portfolio Manager

PARNASSUS FIXED-INCOME FUND

Ticker: PRFIX

As of December 31, 2013, the NAV of the Parnassus Fixed-Income Fund was $16.43, producing a loss for the year of 2.71% (including dividends). This compares to a loss of 2.02% for the Barclays U.S. Aggregate Bond Index ("Barclays Aggregate Index") and a loss of 1.69% for the Lipper A-Rated Bond Fund Average, which represents the average return of all A-rated bond funds followed by Lipper ("Lipper average").

Below is a table comparing the performance of the Fund with that of the Barclays Aggregate Index and the Lipper average. Average annual total returns are for the one-, three-, five- and ten-year periods. For December 2013, the 30-day subsidized SEC yield was 1.32%, and the unsubsidized SEC yield was 1.24%.

prfix returns

Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted. Current performance information to the most recent month-end is available on the Parnassus website (www.parnassus.com). Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay in fund distributions or redemption of shares. The Barclays U.S. Aggregate Bond Index is an unmanaged index of bonds, and it is not possible to invest directly in an index. Index figures do not take any expenses, fees or taxes into account, but mutual fund returns do.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Fund and should carefully read the prospectus or summary prospectus, which contain this and other information. The prospectus or summary prospectus can be obtained on the Parnassus website, or by calling (800) 999-3505. As described in the Fund's current prospectus dated May 1, 2013, (as Amended and Restated September 30, 2013), Parnassus Investments has contractually agreed to limit total operating expenses to 0.68% of net assets for the Fund. This agreement will not be terminated prior to May 1, 2014, and may be continued indefinitely by the Adviser on a year-to-year basis.

2013 Review

The past year was a tumultuous period for bond markets, as the Federal Reserve instituted a policy change and dominated headlines. In late 2012, the Federal Reserve removed the deadline from its Quantitative Easing (QE) program. Because of the open-ended nature of the program, it was quickly dubbed "QE-infinity" and the markets rejoiced at the continued flow of cheap money. This led to higher asset prices and lower yields, with the yield on the 10-year Treasury initially dropping to 1.63% by May 2nd from 1.83% on January 1st.

In May, the Federal Reserve first communicated its desire to gradually remove the monthly bond purchases, as the exceptionally low yields were not reflective of the country's growth rate. Bond investors spent the summer trying to decipher the timing of the first reduction in purchases and carefully watched each economic data release for clues. Investors widely expected that the Federal Reserve would begin tapering in September, and so the 10-Year Treasury rose to 3.00% in anticipation of the policy change.

However, the economy slowed over the summer, due to concerns about both higher interest rates and political infighting in Washington. As a result, the market received a "September Surprise" when the Federal Reserve made no changes to its QE program. This sent the 10-year Treasury from 3.00% back to 2.50% by the end of October.

prfix growth

By the third quarter of the year, Gross Domestic Product (GDP) accelerated to an annualized rate of 4.1%. The economy added approximately 200,000 jobs per month and consumer spending increased. Since 2010, the economy added 7.4 million jobs, a substantial percentage of the 8.7 million jobs lost during 2008 and 2009. Finally, Congress departed from its now-typical brinksmanship by announcing a longer-term budget deal, giving both businesses and individuals better clarity on future policies.

As a result of these positive developments, the Federal Reserve opted to reduce its monthly stimulus in December. Beginning in January 2014, monthly purchases will be reduced from $85 billion per month to $75 billion. Investors reacted to this announcement by sending the 10-year Treasury yield back to 3.00%.prfix composition

When interest rates rise, bond prices fall. However, these events had different impacts on asset classes within the bond market. The Barclays Aggregate Index, the Fund's benchmark, has three major categories: Treasuries, Corporate Credits and Securitizations.

Treasury bond prices felt the greatest impact from the year's rising interest rates, declining by 3.35%. During the latter half of the year, the percentage of Treasury bonds in the Fund decreased substantially. Treasury bonds represented 62% of the Fund as of January 1st, but declined to 45% by the end of the year. I decreased the allocation of Treasuries to invest more heavily in asset classes that would directly benefit from the improving economy and generate a higher return for investors. However, the allocation to Treasury bonds is still above the 36% weighting in the benchmark. The Fund's heavy weighting in Treasuries meant that its performance very closely reflects this return.

Corporate Credits lost less value during the year than Treasury bonds because credit spreads tightened. Credit spreads represent the premium an investor receives to hold riskier corporate debt instead of Treasury bonds, and is therefore referred to as a "spread over Treasuries". In times of rising interest rates, or when the base Treasury rate increases, this credit spread can act as a buffer and shrink, protecting some of the value of the bonds. Because corporations continued to perform well and have robust balance sheets, investors accepted a smaller premium over Treasuries during 2013. Within the benchmark, corporate credits lost 1.53% over the year. The Fund benefitted from its relatively high allocation to corporate credits for the year of 37% versus 22% for the index.

The final major component of the Barclays Aggregate Index is asset-backed, or securitized, bonds. Securitized bonds are typically composed of multiple loans that have physical collateral, usually real estate. Most securitized bonds are built from mortgages, so they have different characteristics than corporate credits or Treasury bonds, and are an important component of a diversified portfolio. Securitized debt represents 32% of the benchmark and, due to a prospectus modification made on September 30th, the Fund is now able to invest in this asset class. Because Quantitative Easing (QE) involves purchasing both Treasury bonds and mortgage-backed securities, it's my belief that the gradual reduction of QE will push prices down since the Federal Reserve, currently the largest buyer, will no longer artificially elevate demand. I believe there will be opportunities throughout 2014 to increase the Fund's allocation to this asset class from its year-end weight of 10%.

Parnassus Fixed-Income Fund Portfolio of Investments as of 12/31/2013

Outlook and Strategy

In the upcoming year, it's likely that the Federal Reserve will continue to take center stage. Navigating through the end of QE, while keeping the market informed and the economy on track, will be a gargantuan task.

During most of the past four years, companies were rewarded by their shareholders for holding exceptionally high levels of cash. While this gave investors in both their stocks and bonds increased confidence in corporate credit profiles, cash stockpiling was a major drag on economic growth. This sentiment began to evaporate last year as investors became aggravated by extremely high corporate cash levels, since cash provides a much lower return, especially when compared to the return on producing a new product line or entering a new market. This, to me, signals the beginning of higher growth: as companies are pressured to deploy their cash and reinvest in their businesses, the economy grows.

Because of this outlook, I have positioned the Fund for a growing economy. First, this means that the Fund's duration is shorter than the Barclays Aggregate Index's, so it will have comparatively lower interest rate sensitivity. Second, the Fund still has a relatively high allocation to corporate credits. It's my expectation that increasing consumer demand, and productivity gains due to advances in software, will drive revenues and cash flows higher. This should continue to benefit corporations, particularly those sensitive to capital expenditures, such as high-tech industrial firms.

Next, convertible bonds will likely play a more important role in the upcoming year. The Parnassus Fixed-Income Fund can invest up to 20% of its assets in convertible bonds. This asset class typically does well during periods of growth, since it benefits from equity price appreciation, so it can be a way to supplement fixed-income returns. Finally, mortgage pools will be opportunistically added throughout 2014, so that the Fund reaps the benefits of this asset class as the housing market continues to recover.

Thank you for your investment in the Parnassus Fixed-Income Fund.

Yours truly,

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Samantha D. Palm
Portfolio Manager

Responsible Investing Notes

By Milton Moskowitz

The outpouring of respect, admiration and love touched off by the death of Nelson Mandela brought 2013 to a close with a crescendo of applause. It was a spontaneous and worldwide celebration of his life. Mandela's life had special meaning for Parnassus and other members of the social investment community because it legitimized the use of non-financial measures in the appraisal of companies as investments.

Little by little, the anti-apartheid campaign gained strength, coming to a head during the 1980s. General Motors and IBM pulled out of South Africa. Between 1985 and 1988, 114 American companies, including Eastman Kodak, Dow Chemical, Exxon and Ford, withdrew their investments. Parnassus Investments was born in this maelstrom at the end of 1984 and aligned itself with the protestors.

2014 got under way with the elevation of Mary Barra to president and CEO of General Motors. She is the first female to head up a major auto maker. Her appointment came two years after Virginia Rometty was named CEO of IBM, a holding in two Parnassus Funds. Of the Fortune 500 companies, 22 are now led by a female CEO, including two Parnassus Funds holdings, Mondelez International and PepsiCo.

Fast Retailing, one of the first holdings in Parnassus's newly launched Asia Fund, is the parent of Uniqlo, fastest growing apparel chain in the world. Noted for selling stylish clothes at reasonable prices, Uniqlo has stores in 15 countries and is just beginning its U.S. push with 17 stores, mainly in the New York metropolitan area and the Bay Area. The company is nothing if not ambitious. It has a simple goal of becoming the world's largest clothing retailer. Uniqlo has 793 stores in its home country, Japan, 99 of them in Tokyo. The company has established a partnership with the Grameen Healthcare Trust to attack poverty, illiteracy and poor sanitation. They are opening stores to sell clothes to the poor, investing the profits in community businesses. Their mission statement is simple: "Changing clothes. Changing conventional wisdom. Changing the world."

Another Asian holding is Hong Kong-based Lenovo, the company that bought IBM's personal computer business, retaining the ThinkPad brand name. This business has done so well that Lenovo has jumped into first place in worldwide PC sales – and the company now plans to enter the mobile phone market. Lenovo has a well-developed social responsibility platform. It is one of the constituents of the Hang Seng corporate sustainability index, and it is a signatory and member of the United Nations Global Compact. Piracy has been a problem for many companies entering the Chinese market, and Lenovo has been a leader in fighting for the protection of intellectual property rights. The company has an Employee Code of Conduct that requires employees to report any evidence of fraud or danger to health and safety.

Riverbed Technology joined Whole Foods Market and TV station KPIX in sponsoring a program to feed hungry families in the San Francisco Bay Area. The drive concentrated on getting people to make food donations to bins located in Whole Foods stores…One of latest benefits at perk-happy Google is a special death benefit. In event of an employee's death, Google will pay one-half of his/her salary to spouse or domestic partner for the next 10 years. In addition, it will send $1,000 a month for children still in school until they reach age 19…Roche Holdings, Switzerland's pharmaceutical giant and a recent addition to the Parnassus Funds portfolio, specializes in exemplary workplaces. Roche owns 11 different companies in the United States – and the two largest, Genentech in South San Francisco and Roche Diagnostics in Indianapolis, both make Fortune's list of the 100 Best Companies to Work For.

Milton Moskowitz is the co-author of the Fortune magazine survey, "The 100 Best Companies to Work For," and the co-originator of the annual Working Mother magazine survey, "The 100 Best Companies for Working Mothers." Mr. Moskowitz serves as a consultant to Parnassus Investments in evaluating companies for workplace issues and responsible investing. Neither Fortune magazine nor Working Mother magazine has any role in the management of the Parnassus Funds, and there is no affiliation between Parnassus Investments and either publication.

The information above represents the Letter from Parnassus Investments, management's discussion and analysis of fund performance, and Responsible Investing Notes as excerpted from the Report. Please click on the "Full Report" link above to view the Report in its entirety.