Forms & Documents

Parnassus Funds Report

Parnassus Funds Quarterly Report: March 31, 2010

Letter from Parnassus Investments

April 30, 2010

Dear Shareholder:

Enclosed you will find quarterly reports for all six Parnassus Funds. I think you will be happy with our performance. We came out of the recession last year, the economy is growing again and the stock market is moving higher.

The big news at Parnassus Investments® is that we won two Thomson Reuters U.S. Lipper Fund Awards for 2010. Each year, Thomson Reuters, the parent of Lipper, hosts a dinner to present awards to top-performing mutual fund groups. The Parnassus Workplace Fund won the award for the best fund in the Multi-Cap Core category based on the last three years, 2007– 2009. More importantly, Parnassus Investments won the #1 U.S. Equity Fund Family award in the small group category. (A small firm is one with less than $34.5 billion in assets.) This award took into account the performance of all five of our equity mutual funds. We’re very proud of these awards. Below is a picture of the Parnassus Investments group receiving the awards in the Grand Ballroom of the Plaza Hotel in New York. From left to right are Grant Cleghorn, Director of Institutional Sales & Marketing, Marc Mahon, Chief Financial Officer, Vidya Nathu, Marketing & Sales Associate, Thao Dodson, board member of Parnassus Investments, Jerome Dodson, President of Parnassus Investments, and Andre Lavoie, Global Managing Director, Investment Management, at Thomson Reuters.

award

In calculating the awards, Lipper considered all open-end funds registered for sale in the United States in ten qualifying classifications. Awards were given to stock and bond funds for three-, five- and ten-year performance history. Both group and fund awards were based on Lipper’s consistent return scores, which reflects the funds’ historic returns, adjusted for volatility, relative to their peers.

This is Parnassus Investments’ first time receiving the Lipper award for Best U.S. Equity Fund Group; the firm ranked 1st out of 162 companies, based on its three-year history. The Parnassus Workplace Fund is also a first-time winner, and its three-year performance ranked 1st out of 658 U.S. Multi-Cap Core funds.*

Our strong performance has translated into very impressive growth over the past several years. At the end of 2007, we had $1.3 billion under management; at the end of 2008, $1.9 billion; by the end of 2009, it had reached $3.3 billion and as of mid-April of this year, we had $4.1billion under management. We appreciate the confidence you have shown in the Parnassus Funds, and we will work hard to continue to deserve this confidence.

New Team Member

Iyassu Essayas has joined us as a research analyst, working on integrating environmental, social and governance issues into our investment process. Iyassu attended San Jose State University, where he was president of the Ethiopian Student Association, then graduated from the University of San Francisco in 2008 with a bachelor’s degree in biology. He served as a Parnassus intern in 2009, before joining our staff this year.

Thank you again for investing with Parnassus.

Yours truly,

dodson signature
Jerome L. Dodson, President
Parnassus Investments

* Further information regarding the methodology behind the rankings used to determine the Lipper Fund Awards can be found here: http://www.lipperweb.com/docs/research/methodology/lipperfundawards_2010.pdf

PARNASSUS FUND

As of March 31, 2010, the net asset value per share (“NAV”) of the Parnassus Fund was $37.30, so the total return for the quarter was 7.12%. This compares to 5.39% for the S&P 500 Index (“S&P 500”), 5.39% for the Lipper Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper, a Thomson Reuters company (“Lipper average”) and 5.91% for the Nasdaq Composite Index (“Nasdaq”). For the quarter, we beat all three of our benchmarks by well over one percent.

Below is a table comparing the Parnassus Fund with the S&P 500, the Lipper average and the Nasdaq over the past one-, three-, five- and ten-year periods. You’ll notice that with only one exception, we’re substantially ahead of all the indices for all time periods, so both our long-term and our short-term performance have been good. (The exception is the ten-year number, where we beat the S&P 500 and the Nasdaq, but trailed the Lipper average.)

parnx 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 Investments 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), and the Nasdaq Composite Index are unmanaged indices 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, which contains this and other information. The prospectus is available on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 0.99% of net assets, exclusive of acquired fund fees, until May 1, 2010. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.

Company Analysis

Eight companies contributed the most to our strong performance during the quarter, with each one adding 16¢ or more to the NAV. Only one company had a significantly negative impact on the Fund, and that was W&T Offshore, an independent oil and gas exploration and production company. Its stock dropped 28.2% from $11.70 to $8.40, reducing the value of each Parnassus share by 23¢. While the company reported improved profitability, management lowered expectations for revenue growth in 2010, because of weak natural gas prices and ramp-up delays with one of its deep-water projects. W&T has strong liquidity, so it should be able to make acquisitions at bargain prices and increase revenue and production when natural gas prices rebound. For these reasons, we’ll continue to hold the stock.

Of the eight companies that helped us the most, three are homebuilders, one provides telecommunications equipment, one is a for-profit college, one makes medical products, one is a bank and the other provides design software for architects and engineers. There was a lot of diversity among our best-performing stocks.

The stock that helped us the most during the quarter was Ciena, a manufacturer of equipment to speed transmissions along fiber-optic telephone lines. The stock soared 40.6% from $10.84 to $15.24, adding 44¢ to each fund share. Ciena recently acquired the optical equipment assets of Nortel Networks, the Canadian telecommunications company that went bankrupt last year. This will give Ciena increased market share, economies of scale and a dominant position in the market for telecommunications equipment and Ethernet networks. The company also said that sales trends were improving for optical equipment.

parnx portfolio

Bridgepoint Education, a for-profit college offering on-line courses, added 26¢ to the NAV, climbing from $15.02 to $24.58 for a gain of 63.7%. For 2009, the company had revenue growth of 108%, and management indicated that revenue growth would continue to be strong in 2010.

Teleflex makes a broad array of components for medical equipment, and its stock rose 18.9% during the quarter, going from $53.89 to $64.07 and contributing 23¢ to each Parnassus share. Early in the year, management announced strong earnings and revenue growth. The company also increased operating margins through factory consolidation and other cost-cutting measures.

Homebuilder DR Horton rose 15.9% from $10.87 to $12.60 for an increase of 21¢ on the NAV. After almost two years of losses, the company turned profitable in the fourth quarter of 2009, as a result of higher sales and better cost controls. DR Horton specializes in entry-level homes, so it was able to take advantage of government-sponsored housing programs and appeal to buyers who could use the first-time home buyer tax credit.

San Francisco-based Wells Fargo bank saw its stock increase 15.3% from $26.99 to $31.12 for a gain of 19¢ for each Parnassus share. Wells Fargo came through the financial crisis in fine shape, enabling it to post strong earnings.

Autodesk, the leading provider of design software for architects and engineers, added 17¢ to each fund share, as its stock price rose 15.8% from $25.41 to $29.42. Sales are improving as professionals start to buy design software in anticipation of increased construction activity. The company has also done a good job controlling costs.

Pulte Homes added 16¢ to the NAV of the Parnassus Fund, as its shares climbed 12.5% from $10.00 to $11.25. Investors have been fairly positive about Pulte’s upcoming purchase of Centex Homes, since it could improve cost control and develop other economies of scale, as well as gain access to the entry-level housing market where Centex is strong.

KB Home also contributed 16¢ to the NAV, as its stock rose 22.4% from $13.68 to $16.75. KB Home moved higher with all the homebuilders during the quarter, as investors seemed to like the company’s strategy of acquiring land at bargain prices for future homebuilding.

Parnassus Fund Portfolio of Investments as of 3/31/10

Outlook And Strategy

This section represents my thoughts and applies to the three funds that I manage: the Parnassus Fund, the Parnassus Small-Cap Fund and the Parnassus Workplace Fund. The other portfolio managers will discuss their thoughts in their respective reports.

The economy came out of the recession last year, and U.S. growth was 5.6% in the fourth quarter of 2009. Growth in the first quarter of 2010 will probably be between 2.5% and 3.0%, so the economy is expanding again. In March,162,000 new jobs were created after almost two years of consistent job losses. Of course, 48,000 of those jobs were created for temporary census workers, but they still provided gainful employment and it’s great to be creating new jobs instead of losing them. The unemployment rate held steady at 9.7%, even with the new jobs. The reason unemployment didn’t fall is that as new jobs developed, new opportunities drew more people into the workforce. (The unemployment rate is calculated by dividing the number of people looking for work by the sum of people working plus people looking for jobs.) With the economy growing again, businesses are becoming confident enough to hire new workers, and eventually this will bring down the unemployment rate.

I’m confident that the American economy will continue to create jobs this year. We’re fortunate enough to have a very productive economic system, and we don’t have many of the restrictive labor laws that one finds in countries like France, Germany and Brazil. In those countries, it’s very difficult to lay off an employee without paying an enormous amount of money. For that reason, entrepreneurs are reluctant to hire new employees for fear that business will turn down, and they will be stuck paying salaries for employees they don’t need. In Brazil, for example, an enormous percentage of the workforce works “off the books” in the underground economy. It’s the only way that many small businesses can hire workers. This means that many economic transactions go untaxed and employees working in the underground economy don’t have any real protection.

As the economy improves and new jobs are created, corporate earnings will increase and the stock market should follow. So far this year, the market has moved steadily higher. This upward movement won’t continue in a straight line. At some point, the market will move lower for a while, and that’s when we’ll have an opportunity to add to our holdings at bargain prices. By the end of the year, however, I expect that the stock market will be higher than it is now in mid-April. For that reason, we remain close to fully invested with just a small amount of cash on the side in case some opportunities present themselves.

Historically, the stock market has done well in the early phase of an expansion, as the economy comes out of a recession. Small-cap stocks and technology issues tend to do very well during this phase of the recovery, so we are paying attention to these sectors.

In addition to an improving economy, another factor that will lead to rising stock prices is the fact that there’s a lot of money on the sidelines. During 2008, an enormous amount of money flowed out of equity mutual funds. The outflow continued in 2009, but a lot of new money went into bond funds because they were perceived as being more conservative. Unfortunately, that was the wrong move to make, because stocks moved much higher in 2009. There still hasn’t been much money flowing into stock mutual funds. (The Parnassus Funds are an exception, with relatively heavy inflows into our five equity funds.) As the stock market continues to move higher, I expect that a lot of money will move back into stock mutual funds, and this will provide new buying power to move the stock market even higher.

A third factor pushing stocks higher is low interest rates. This will help power the economic expansion. Right now, I think the policy of low interest rates is the correct one, since unemployment remains so high. At some point, though, the risk of inflation will appear and the Federal Reserve will need to raise interest rates to prevent the economy from overheating. When the Fed does raise interest rates, I expect a sharp move down for stocks. There’s no way to avoid this, so we’ll just have to ride out these moves to the downside and use the opportunity to buy some stocks at bargain prices. Even after a big increase in interest rates, the economy will eventually adjust, and as long as earnings are strong, the market should bounce back and continue moving higher.

Right now, my main challenge is finding good businesses that are undervalued. The market’s upward move has made it more difficult to find undervalued stock. We have had a lot of money coming into the Parnassus Funds, especially the Parnassus Small-Cap Fund and the Parnassus Equity Income Fund, so we’ve had to work overtime trying to find good companies to buy. We’re finding some, but it’s nothing like the easy pickings we had a year ago. Our strategy is to stay as fully invested as possible in good businesses with strong environmental, social and governance factors that are selling at attractive prices. I would like to thank all of you for investing in the Parnassus Funds and assure you that we’ll do our best to take good care of your money.

Yours truly,

dodson signature
Jerome L. Dodson, President
Parnassus Investments

PARNASSUS EQUITY INCOME FUND

As of March 31, 2010, the NAV of the Parnassus Equity Income Fund– Investor Shares was $25.33, so after taking dividends into account, the total return for the first quarter was 3.87%. This compares to a gain of 5.39% for the S&P 500 Index (“S&P 500”) and a return of 4.69% for the Lipper Equity Income Fund Average, which represents the average equity income fund followed by Lipper, a Thomson Reuters company (“Lipper average”).

While the Fund underperformed the S&P 500 for the quarter, we achieved the important milestone of “getting above water” after the recent bear market. I am extremely pleased to report that shareholders who owned the Fund on October 9, 2007 (the day the S&P 500 hit a record closing high) are up 3.07% from that date to March 31, 2010. In contrast, the S&P 500 is still down 20.86% from its all-time high.

The Fund’s one-, three-, five-, and ten-year returns beat both the S&P 500 and Lipper average for all periods. The past ten years included the dotcom bust, a financial crisis and the “Great Recession.” In spite of all this, the Fund generated an average annual return of 6.09% over the last decade. Conversely, the S&P 500 lost 0.65% per year during this time.

Below is a table that compares the performance of the Fund with that of the S&P 500 and the Lipper average. Average annual total returns are for the one-, three-, five- and ten-year periods.

prblx returns

The total return for the Parnassus Equity Income Fund-Institutional Shares from commencement (April 28, 2006) was 6.33%. 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 on the Parnassus Investments 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, risk, charges and expenses of the Fund and should carefully read the prospectus, which contains this and other information. The prospectus is on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 0.99% and 0.78% of net assets, exclusive of acquired fund fees, through May 1, 2010 for the Investor Shares and Institutional Shares, respectively. These limitations may be continued indefinitely by the Adviser on a year-to-year basis.

First Quarter Review

We started 2010 with a 3.87% gain for the quarter, but still lagged the S&P 500 by 1.52%. The biggest factor reducing performance was our technology stocks, which lowered the Fund’s return by 0.9% versus the index. This is surprising, because the Fund owns a collection of great technology businesses, such as QUALCOMM, Microsoft and Applied Materials, which reported improved prospects during the first quarter. Unfortunately, they still ended up underperforming their peers. We’re still hanging on to them because they’re great companies, and we think they’ll move higher this year.

Our industrial stocks reduced the Fund’s performance by about 0.5% relative to the S&P 500. While the average industrial stock in the index rose 13.5%, our industrial investments were only up 7%. Waste Management, a top fund holding and about a third of our industrial exposure, rose only 1.8% during the quarter. Waste Management’s collection and landfill businesses should do well as the economy improves, and the company continues to invest meaningfully into its waste-to-energy and recycling operations. So, even though this stock had a pedestrian quarter, I’m still comfortable with our large investment in the company.

prblx portfolio

The final sector that created a headwind for the Fund was financials. Our underweight position cost us 0.3% against the S&P 500. We remain underweighted in this sector relative to the index because I am concerned about the long-term earnings prospects of the large U.S. banks. I understand that profits can move significantly higher in the short-term, as loan losses decline and interest rate spreads remain favorable for banks. However, I think this attractive environment will end sooner than many expect. Interest rates are unsustainably low and several assets classes, such as residential real estate, continue to be supported by numerous Federal programs that are in the process of being eliminated.

I’m also amazed how quickly investor trust has returned to the banking sector, as evidenced by the rapid increase in share prices of many large banks. The financial services sector now represents 15% of the S&P 500, up dramatically from the recent low of 10% in March of 2009. Because of my sector-wide valuation concern and a scarcity of individual stocks that I think offer attractive risk-reward opportunities, the Fund’s exposure to financials is currently 10%.

During the first quarter, our healthcare stocks performed well, adding about 0.8% to our return versus the S&P 500. Our focus is to own companies that offer unique science applications or products that improve quality or lower costs.

Parnassus Equity Income Fund Portfolio of Investments as of 3/31/10

Company Analysis

The Fund was fortunate to have only one stock that meaningfully declined during the first quarter. Houston-based oil and gas producer W&T Offshore fell 28.2% during the quarter to $8.40 from $11.70, trimming the Fund’s NAV by 10¢. W&T’s stock dropped because it announced that 2010 oil and gas production could fall 20-30% from last year. One reason for this is that the company didn’t drill many wells during 2009. Quite simply, drilling costs were too high in relation to energy prices. The company also experienced technical issues at their Daniel Boone platform, where production is 3,000 barrels per day less than expected.

Despite these setbacks, I remain bullish on W&T for the long-term. The company has sufficient cash for acquisitions or drilling opportunities. In addition, I think CEO Tracy Krohn does a good job of drilling wells in an environmentally responsible way. Based on his experience working on offshore rigs in the 1970s, Tracy makes sure that his workplace is as safe as possible. He states proudly that “we won’t send employees to a location where I won’t work myself.” I was also impressed with how Mr. Krohn helped his New Orleans-based employees in the aftermath of Hurricane Katrina.

Moving to positive investments, we had five stocks that each added at least 8¢ to the Fund’s NAV for the first quarter. The Fund’s biggest contributor was Teleflex, a Pennsylvania-based company that sells healthcare and industrial products. Teleflex rose 18.9% during the first quarter to $64.07 from $53.89, boosting the Fund’s NAV by 17¢. The company’s largest division, which sells catheters for applications such as vascular access, respiratory and anesthesia, is growing sales and expanding profit margins. I want to thank my Director of Research, Ben Allen, for helping me manage our Teleflex investment.

Financial services firm Bank of New York Mellon had a strong quarter, adding 10¢ to the NAV, as the stock increased 10.4% to $30.88 per share from $27.97. Bank of New York Mellon’s trust, asset servicing and wealth management businesses are valuable segments with growing profits. In addition, Bank of New York Mellon has an enviable capital position, which the company is using to make acquisitions, including a $2.3 billion deal announced during the quarter to buy PNC Financial’s back office operations.

San Diego-based Gen-Probe, a maker of lab diagnostic testing technology, also boosted the Fund’s NAV by 10¢ as its stock jumped 16.6% from $42.90 to $50.00 per share. The company owns important technology that helps labs test the blood supply and screen for various diseases. After a temporary slowdown last year, the company’s sales have strengthened. In addition, Gen-Probe has some exciting new products in R&D that could increase the number of diseases and infections eligible for detection. I’ve enjoyed working closely with my colleague, Matt Gershuny, on this investment.

Athletic footwear and apparel company Nike had a strong quarter as our investment added 9¢ to the Fund’s NAV. Nike’s stock jumped 11.3% from $66.07 to $73.50 per share, driven by a recovering U.S. market and strong international sales. Nike’s brand and operational excellence are unparalleled in its industry, which should help the company grow for years to come.

Cooper Industries, a diversified industrial company with a specialty in electrical products, added 8¢ to the Fund’s NAV. The stock had a good start in 2010 as it rose 12.4% to $47.94 from $42.64 per share. While an improving economy and cost cutting bode well for Cooper’s earnings in 2010, this is a minor part of our investment thesis. The company’s products for lighting, power grid transmission and efficiency have tremendous long-term growth opportunities. Cooper’s dividend increased 8% during the first quarter, so the Fund will collect an attractive yield while management continues to increase the company’s intrinsic value.

Outlook and Strategy

The portfolio’s positioning and my outlook are little changed from the beginning of 2010. I continue to think the sustainability of this economic recovery will be weaker than expected primarily due to unsustainable budget deficits. However, as long as the Federal Reserve keeps interest rates low and the U.S. government continues to inject massive stimulus, stock prices could move higher. In addition, many corporations are exiting the recession with lean cost structures, so corporate earnings will likely show major growth in 2010. This should also drive stocks higher. We hope to participate in any further gains by investing in quality businesses with competitive advantages and sustainable growth opportunities.

The last 12 months have seen the S&P 500 surge an amazing 75%. Based on this powerful rally, I assume that many investors must think that the economy is heading back to “business as usual.” I’m not ready to embrace this thesis. Given the substantial government stimulus across the globe, I’m focused on ensuring that the success of our investments depends upon sustainable demand, not temporary government spending. I’m also concerned about the potential downside associated with the unwinding of the Federal Reserve’s extraordinary actions, which helped cushion the economy from the financial crisis.

The Fund remains underweighted in the financial and the consumer discretionary sectors relative to the index. We have found good investments in those sectors, such as Bank of New York Mellon and Nike, but both are unique companies relative to their peer groups. The Fund remains overweighted relative to the index in healthcare, industrials, technology, energy-utilities and consumer staples. My team and I think these sectors contain companies with predictable long-term demand, sustainable competitive advantages, quality management teams and attractive valuations.

Thank you for your trust and investment in the Parnassus Equity Income Fund.

Yours truly,

ahlsten signature
Todd C. Ahlsten
Chief Investment Officer
Parnassus Investments

PARNASSUS MID-CAP FUND

As of March 31, 2010, the NAV of the Parnassus Mid-Cap Fund was $17.26, so the total return for the first quarter of 2010 was a gain of 6.02%. This compares to a gain of 8.67% for the Russell Midcap Index (the “Russell”) and a gain of 5.39% for the Lipper Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper, a Thomson Reuters company (“Lipper average”). We’re pleased that we beat the Lipper average, but disappointed that we trailed the Russell.

It has been difficult for us to keep pace with the Russell over the past year. An important reason is that the Fund held up much better than the Russell during the bear market of 2008 and early 2009, and therefore had less ground to recover. This is a trade-off we’re willing to make because limiting losses on the downside is crucial for strong long-term performance. The benefit of this trade-off is evident in our three-year return, which averages more than four percentage points better than both the Russell and Lipper averages.

Below is a table comparing the Parnassus Mid-Cap Fund with the Russell and the Lipper average for the one- and three-year periods, for the period since September 30, 2005 when we first had most of the Fund’s assets invested in stock and for the period since inception on April 29, 2005.

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 on the Parnassus Investments 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, which contains this and other information. The prospectus is available on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 1.20% of net assets, exclusive of acquired fund fees, until May 1, 2010. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.

First Quarter Review

After last year’s tremendous market rally, mid-cap stocks took a breather in early 2010, falling almost 5% by early February. However, optimism took hold shortly thereafter, and the market roared back to close the quarter with strong gains for most issues. Mid-cap stocks, as measured by the Russell, continued to outperform the broader market averages during the first quarter.

Two factors contributed to our quarterly underperformance versus the Russell: market capitalization and return on equity. During the first quarter, the smallest quintile of companies in the Russell, as measured by market capitalization, outperformed the largest by almost 6% points, and the lowest return on equity quintile outperformed the highest by more than 4% points. Since the Fund is disproportionately invested in companies at the high end of the mid-cap range and with better than average returns on equity, we faced a stiff headwind this quarter. While this investment style hurt us, we think it’s the right recipe for long-term performance.

Regarding sector allocation, we lost ground during the quarter due to our being underweighted relative to the index in the consumer discretionary sector, which performed very well, and being overweighted relative to the index in the technology sector, which performed relatively poorly. The Fund was overweighted relative to the index in the healthcare sector, which was the most positive contributor during the quarter.

Company Analysis

As usual, our performance was mostly impacted by stock selection, as opposed to sector allocation. There were five stocks that added at least 7¢ to the Fund’s NAV for the first quarter. Conversely, only one stock hurt the Fund materially in the period.

Cooper Industries, a diversified industrial company with a specialty in electrical products, was the Fund’s most positive contributor. The stock rose 12.4% to $47.94 from $42.64, adding 9¢ to the Fund’s NAV. The company has a compelling long-term growth story, and the improving economy has accelerated near-term demand for Cooper products. On top of this, management has cut costs aggressively, further boosting earnings beyond investors’ expectations.

parmx portfolio

Molecular diagnostics company Gen-Probe was the second largest contributor during the quarter, increasing the Fund’s NAV by 8¢, as its stock jumped 16.6% from $42.90 to $50.00 per share. The company owns technology that helps labs test the nation’s blood supply and detect numerous diseases. Investors are excited that its core blood screening business has stabilized, and that the company has many promising R&D initiatives underway. Furthermore, as a testament to its excellent cash flow generation, Gen-Probe announced a $100 million stock buyback early in 2010.

Teleflex, a healthcare and industrial products company, soared 18.9% during the first quarter to $64.07 from $53.89, growing the Fund’s NAV by 8¢. Investors drove shares higher after the company offered a rosy forecast for 2010 earnings. Management has done an excellent job of divesting lower margin, cyclical businesses and expanding the company’s more profitable healthcare segments.

C.R. Bard, a provider of medical instruments and supplies, added 7¢ to the NAV as its stock rose 11.2% from $77.90 to $86.62. The stock went up when the company reported strong revenue results due to increased demand for its surgical and oncology products. Earnings were also aided by aggressive cost-cutting programs.

The stock of AFLAC, the insurance company, rose 17.4% in the quarter to close at $54.29, contributing 7¢ to the Fund’s NAV. After a tremendous 2009, the stock continued to move higher in the first part of 2010 as concerns abated regarding credit losses on AFLAC ’s investment assets. This has been a great stock for the Fund, as our average cost for AFLAC is just under $25 per share.

Only one company hurt the Fund’s NAV by more than 2¢ during the quarter. MDU Resources, a diversified energy company, lost 8.6% as its stock dropped from $23.60 to $21.58 to drive down the NAV by 6¢. The company lowered expectations for production growth in 2010, which negatively impacted the stock. However, the company has strong liquidity and cash flow, which should enable it to ramp up production as natural gas prices recover.

Parnassus Mid-Cap Fund Portfolio of Investments as of 3/31/10

Outlook and Strategy

Our focus for 2010 continues to be on how the economy will behave, after the government withdraws its significant and temporary support. As the effect from the Federal stimulus wanes and interest rates rise, we are concerned that stock markets might weaken. At the same time, we recognize that the economic recovery could have set permanent roots, and that the markets might run higher.

While we’re certainly hoping for the latter, we’ve positioned the portfolio for both scenarios. Specifically, we are limiting the Fund’s exposure to sectors that would be hardest hit if the economy turns down again and investing heavily in companies with secular growth opportunities and strong competitive positions. As a result, relative to the Russell, we continue to be significantly underweighted in the financial and consumer sectors. Conversely, we’re heavily invested in companies competing in the information technology, industrial, and healthcare sectors.

The sector we are most significantly underweighted relative to the index is consumer discretionary. While opportunities arise here from time-to-time, we find it difficult to invest in this sector given the lack of long-term secular growth opportunities and sustainable competitive moats. We believe the portfolio’s cyclical exposure is best weighted toward technology and industrial issues. In these sectors, we think companies are more likely to enjoy attractive secular growth trends and lasting competitive advantages.

Thank you for your investment with us.

Yours truly,

allen signature gershuny signature keith signature
Ben Allen Matthew D. Gershuny Lori A. Keith
Portfolio Manager Portfolio Manager Portfolio Manager

PARNASSUS SMALL-CAP FUND

As of March 31, 2010, the NAV of the Parnassus Small-Cap Fund was $20.00, so the total return for the quarter was 11.61%. By comparison, the Russell 2000 Index (“Russell”) of smaller companies was up 8.85% and the Lipper Small-Cap Value Average, which represents the average small-cap value fund followed by Lipper, a Thomson Reuters company (“Lipper average”) gained 8.03%, so we beat both our benchmarks by a substantial amount for the quarter. We are also substantially ahead of our benchmarks for the longer-term as well.

Below is a table comparing the Parnassus Small-Cap Fund with the Russell 2000 Index and the Lipper average. In addition to the one- and three-year periods, we’ve also included the period since inception and the return since September 30, 2005, which is the approximate date when the Fund first had most of its assets invested in stock (as opposed to cash). As you can see from the table, the Fund is substantially ahead of all the benchmarks for all time periods. Especially noteworthy is the three-year period with the Fund gaining an average of 4.55% per year compared to an average annual loss of 3.99% for the Russell 2000. Over that time period, the Fund has gained an average of more than eight percentage points per year over the index.

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 Investments 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, which contains this and other information. The prospectus is on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 1.20% of net assets, exclusive of acquired fund fees, until May 1, 2010. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.

Parnassus Small-Cap Fund Portfolio of Investments as of 3/31/10

Company Analysis

Four companies contributed the most to our strong performance during the quarter, with each one adding 18¢ or more to the NAV. Only one company had a major negative impact on the Fund, and that was W&T Offshore, an independent oil and gas exploration company. Its stock dropped 28.2% from $11.70 to $8.40, slicing 21¢ off the NAV. While the company reported improved profitability, management lowered expectations for revenue growth in 2010 because of weak natural gas prices and ramp-up delays with one of its deep-water projects. W&T has strong liquidity, so it should be able to make acquisitions at bargain prices and increase revenue and production when natural gas prices rebound. For these reasons, we’ll continue to hold the stock.

The stock helping us the most was Bridgepoint Education, a for-profit college with mostly on-line courses, which added 42¢ to the NAV, soaring from $15.02 to $24.58 for a gain of 63.7%. For 2009, the company had revenue growth of 108%, and management indicated that revenue growth would continue to be strong in 2010.

parsx portfolio

Finisar provides fiber optic subsystems and network performance test systems for use in telecommunications. Its stock rocketed up 76.1% during the quarter from $8.92 to $15.71 for a contribution of 32¢ to each fund share. Sales of all its optical products have been strong, but the driving force behind the stock has been sales of ROADM, a device that allows telecommunication firms to reconfigure optical networks remotely to allow for changes in wavelengths and power needs.

Increasing use of on-line transmissions (caused by more use of smart phones, high-speed internet and video) means more demand for equipment used in fiber optic networks, and this has helped not only Finisar, but also Ciena. The latter’s stock soared 40.6% during the quarter from $10.84 to $15.24 for a gain of 30¢ on the NAV. Ciena recently acquired the optical equipment assets of Nortel Networks, the Canadian telecommunications company that went bankrupt last year. The acquisition will give Ciena increased market share, economies of scale and a dominant position in the market for telecommunications equipment and Ethernet components. The company reported that sales trends were improving for all optical equipment.

Terra Industries, a leading producer of nitrogen fertilizer, had an increase of 26.3% in its stock price, as it rose from $32.19 at the start of the quarter to $40.66, where we sold it for an increase of 18¢ for each fund share. Terra’s stock price moved higher because of a bidding war between fertilizer companies CF Holdings and Yara International of Norway, with CF ultimately acquiring the company. Terra’s earnings were headed higher because of increased demand for nitrogen fertilizer and lower prices for the natural gas used in producing the fertilizer.

Yours truly,

dodson signature
Jerome L. Dodson, President
Parnassus Investments

PARNASSUS WORKPLACE FUND

As of March 31, 2010, the NAV of the Parnassus Workplace Fund was $20.20, so the total return for the quarter was 3.86%. This compares to 5.39% for the S&P 500 and 5.39% for the Lipper Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper, a Thomson Reuters company (“Lipper average”), so we underperformed for the quarter. However, on a longerterm basis, the Parnassus Workplace Fund is substantially ahead of its benchmarks. In fact, as mentioned in my opening letter to shareholders, Lipper recently named the Parnassus Workplace Fund the best multi-cap core fund in America for the three years from 2007– 2009.

Below is a table comparing the Parnassus Workplace Fund with the S&P 500 and the Lipper average. In addition to the one- and three-year periods, we’ve also included the period since inception and the returns since September 30, 2005, which is the approximate date when the Fund first had most of its assets invested in stocks (as opposed to cash). As you can see from the table, the Fund is ahead of all its benchmarks for all time periods. Especially noteworthy is the three-year number, with the Fund earning an average of 7.76% per year while the S&P 500 had a negative return of 4.17% per year. For that time period, then, the Fund has beaten the S&P 500 by almost 12 percentage points per year. This is certainly an indication that investing in companies that are great places to work can produce excellent investment returns.

parws 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 Investments 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, which contains this and other information. The prospectus is available on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 1.20% of net assets, exclusive of acquired fund fees, until May 1, 2010. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.

Parnassus Workplace Fund Portfolio of Investments as of 3/31/10

Company Analysis

Five companies contributed the most to the Fund’s performance during the quarter, with each adding 7¢ or more to each fund share. No company had a significant negative impact during the quarter. The reason the Fund underperformed for the first quarter is not because our companies did poorly, but because they didn’t go up as much as the averages. The companies in the Parnassus Workplace Fund did so well over the past three years, they were already at fairly high levels compared to the averages, and the average company caught up somewhat during the quarter. As our companies approach full valuation, we will sell them and invest in new companies that are undervalued. I’ll do my best to keep the Parnassus Workplace Fund performing at a high level.

The stock that helped the most during the quarter was SEI Investments. Like Parnassus Investments, the company is an asset manager, but it also provides accounting, software and transfer agent services for mutual funds and other money managers. SEI contributed 14¢ to each fund share during the quarter, as its stock climbed 25.4% from $17.52 to $21.97. There are two main reasons the stock climbed higher. First, much of the company’s revenue is based on assets under administration, so as the stock and bond markets climbed higher, SEI’s revenue increased. Second, the company was able to reduce expenses, because much of its investment in new software systems had been completed.

parwx portfolio

On-line auctioneer eBay saw its stock increase by 14.5% from $23.54 to $26.95 for an addition of 13¢ per fund share. The company’s marketplace business has improved and its PayPal unit for on-line transactions has had an even bigger improvement.

Autodesk, the leading provider of design software for architects and engineers, contributed 8¢ to each fund share, as its stock climbed 15.8% from $25.41 to $29.42. Sales are improving as professionals start to buy design software in anticipation of increased construction activity. The company has also done a good job with cost control.

Tractor-maker Deere & Co. saw its stock rise 9.9% from $54.09 to $59.46, resulting in a contribution of 8¢ to the NAV. Order growth for agricultural equipment has been stronger than expected, and the outlook for 2010 and 2011 is excellent as the economy comes out of the recession.

Intel’s stock increased 9.1% during the first quarter from $20.40 to $22.26, adding 7¢ to the NAV. In January, the company reported impressive financial results, driven by 13% quarterly revenue growth and record-high gross margins of 64.7%. The surprise in revenue growth came primarily from microprocessors and chipset sales. Increases in selling prices and factory utilization helped gross margins.

Yours truly,

dodson signature
Jerome L. Dodson, President
Parnassus Investments

PARNASSUS FIXED-INCOME FUND

As of March 31, 2010, the NAV of the Parnassus Fixed-Income Fund was $16.96, producing a total return for the quarter of 2.06% (including dividends). This compares to a gain of 1.55% for the Barclays Capital U.S. Government/Credit Bond Index (“Barclays Capital index”), and a gain of 2.41% for the Lipper A-Rated Bond Fund Average, which represents the average return of all A-rated bond funds followed by Lipper, a Thomson Reuters company (“Lipper average”).

Below is a table comparing the performance of the Fund with that of the Barclays Capital index and the Lipper average. Average annual total returns are for the one-, three-, five- and ten-year periods. The 30-day SEC yield for the Fund for March 2010 was 2.32%. I’m pleased to report that our longterm returns are better than the Lipper average for the three-, fiveand ten-year periods as of the end of March. Also, our returns are ahead of the Barclays Capital index for the one-, three- and five-year periods.

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 Investments 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 Capital U.S. Government/ Credit 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, which contains this and other information. The prospectus is on the Parnassus Investments website, or one can be obtained by calling (800) 999--3505. As described in the Fund’s current prospectus dated May 1, 2009, Parnassus Investments has contractually agreed to limit the total operating expenses to 0.87% of net assets, exclusive of acquired fund fees, until May 1, 2010. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.

First Quarter Review

This first quarter represented a volatile beginning of the year for investors. The equity market started out by dropping 7% through early February, before surging more than 12% to finish the quarter up 5.4%. Treasury yields followed a similar wild pattern. While the 10-year benchmark yield ended the quarter mostly unchanged at 3.83%, the intra-quarter swings were nerve-racking. The yield on the 10-year swung from a low of 3.53% to a high of 3.92%.

Credit concerns over Greece’s sovereign debt and rising political and regulatory risk for U.S. financial institutions kept investors nervous in the first half of the quarter. Sentiment quickly turned positive, as corporate earnings results for the fourth quarter of 2009 came in higher than investors’ expectations. Reported revenues for the S&P 500 were on average 2.6% higher than expected, while earnings were 9.0% stronger than consensus expectations. These strong results gave investors confidence in owning risky assets and reduced the perceived risk of corporate bonds. As such, corporate bonds performed well during the quarter, with a gain of 2.3%, according to the Barclays Capital Credit Bond Index.

The Fund performed better than the Barclays Capital index during the quarter. Within the benchmark, corporate bonds returned 2.3%, compared to a gain of 1.1% for government bonds. Compared to the benchmark, the Fund has a larger weighting in corporate and convertible bonds than in government bonds. Therefore, the Fund’s relative outperformance was due to it being overweighted in the higher returning corporate and convertible bonds. Our investments in corporate and convertible bonds added a total of 28¢ to the NAV, while the investments in government bonds contributed only 7¢ to the NAV.

prfix portfolio

For the quarter, the Fund trailed the Lipper average by 35 basis points. The main reason is that the Fund doesn’t have investments in commercial mortgage- backed securities (CMBS). The latter returned more than 9% during the quarter, according to the Barclays Capital CMBS Index. While the Fund is not restricted from investing in securitized products, such as CMBS, I think that their current valuation is too expensive given the weak fundamentals of the commercial real estate market. The latest report from Realpoint, a leading provider of credit analysis and rating of CMBS, showed that delinquency rates hit an all-time high of 6% in March. Also, the overall delinquent unpaid balance for CMBS has almost quadrupled from a year ago. More importantly, the delinquency rate is projected to increase to between 8% and 9% through mid-2010 and potentially surpass 12% by the end of 2010.

Parnassus Fixed-Income Fund Portfolio of Investments as of 3/31/10

Outlook and Strategy

There has been no significant change in my investment outlook since the last quarterly report, and the composition of the portfolio is mostly unchanged from the end of last year. For the rest of the year, I expect interest rates to stay range-bound on weak inflation and potentially lower-than-anticipated economic data. Weak personal income growth combined with a still-fragile labor market should keep inflation tame. I also think that corporate earnings estimates have increased too much and there is now a higher chance of disappointment. Indeed, the consensus forecast now expects 2010 profit margins for the S&P 500 to be back to the previous cycle peak.

I remain skeptical of the sustainability of this government-induced recovery. The fundamental problem of excessive debt in the economy has still not been resolved. From a big picture standpoint, the government response to the crisis has merely been to shift the balance sheet risk from the private sector to the public sector. So far, this swap has had only marginal impacts on government yields. To be sure, longer-term, the effect of sovereign credit concerns and increased supply of Treasuries will likely push yields higher. The probability of such an event has also increased recently, as policymakers appear willing to perpetuate the cycle of bailouts, and fiscal austerity measures are still missing from the government’s agenda.

However, for now, I think that strong demand from the Baby Boomers for high quality, incomeproducing strategies remains a powerful counteracting force. This appetite for income yield is evident in the healthy inflows into fixed-income funds since the start of the year. During that period, total inflow into bond funds was $90.6 billion, compared to only $2.4 billion for domestic equity funds, according to the Investment Company Institute.

I’m mindful that the range of possible economic outcomes is complex and the actual outcome could differ from the outlook described above. As always, I continue to monitor the economic outlook and financial market developments and will adjust the portfolio as necessary.

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

Yours truly,

bui signature
Minh T. Bui
Portfolio Manager

RESPONSIBLE INVESTING NOTES

By Milton Moskowitz and Jerome Dodson

Lists are staples of the business world. And that includes the responsible investing sector. Just out is the 2010 list of the 100 Best Corporate Citizens. Now in its 11th year, it’s compiled by CRO, an association of corporate responsibility officers. It includes only publicly traded U.S. companies. Gracing this list are 13 Parnassus portfolio companies: Intel (in second place), Microsoft (14), Procter & Gamble (15), Nike (23), 3M (32), Texas Instruments (33), Johnson & Johnson (34), Applied Materials (53), Symantec (66), JP Morgan Chase (72), Accenture (75), Deere & Co. (76) and Medtronic (77). Then there is the world’s 100 Most Ethical Companies, compiled by Ethisphere, a New York City think tank. This is an unranked list that includes private and publicly-traded companies, drawing applicants from all over the world. On the 2010 list are 14 Parnassus portfolio companies: Ecolab, Nike, Accenture, Paychex, Adobe Systems, Symantec, American Express, Texas Instruments, Waste Management, AFLAC, Deere & Co., Google, Cisco Systems and Target. Finally, there’s the Global 100: Most Sustainable Corporations in the World, compiled by a Canadian magazine “for clean capitalism,” Corporate Knights. Ranked on this list are publicly-traded companies from 24 countries. The country with the most winners in 2010 is the United Kingdom, with 14 companies, second is the United States with 12. The No.1 ranked company is General Electric. Only two Parnassus companies make the list: Procter & Gamble (in 13th place) and Intel (39).

Methodologies differ, hence the variations in the lists. For an expert, lively dissection of the CRO list, along with comments from Internet browsers, see Marc Gunther’s blog at www.marcgunther.com. Gunther is a contributing editor at Fortune magazine and author of the book, Faith and Fortune: How Compassionate Capitalism is Transforming American Business. His overall conclusion: “All I can say is that anyone who uses this list to make an important decision ought not to be in a position to make important decisions.” Parnassus makes its own decisions based on its own research.

Google, which didn’t even make the CRO list, won plaudits for standing up to the Chinese government and exiting mainland China rather than censor search results on its popular site. It thus remained true to its stated mission, “do no evil.” David Carr, media columnist for the New York Times, hailed the action as “a blow for free speech”. . . 3M, which made only one of the three lists, entered into an agreement with a unit of the Department of Energy to explore pathways to alternative energy sources. The St. Paul, Minnesota-based technology company will work with the National Renewable Energy Laboratory on research and development projects in three areas: thin-film photovoltaics, solar power concentration and biofuels . . . Intel, which made two of the three lists, amended its corporate charter to include “corporate responsibility and sustainability performance” as issues its board of directors must address. As a result, Intel’s board will now be required to review regular reports on how the company is dealing with corporate responsibility and sustainable performance. The charter change flowed from shareholder resolutions introduced by Harrington Investments, a Napa, California-based investment advisor serving socially-conscious investors . . . Procter & Gamble, which made two of the three lists, has launched a conservation program to show consumers how they can save water, waste and energy when using the company’s products. Products such as Tide, Pampers and Duracell will be labeled “Future Friendly,” with explanations of how simple usage changes, such as switching to Tide Coldwater, “can help them lower their impact on the environment”. . . The Swiss pharmaceutical giant Novartis, which didn’t make any of the three lists, said it would give shareholders an advisory vote on executive compensation. More than 60 companies have now adopted this policy. Novartis also published a 264-page annual report characterized by a high degree of transparency. The company discloses, for example, that last year it received 913 reports of misconduct, up from the 884 reported in 2008. Of these reports, 240 were substantiated — and 155 employees were fired for misconduct.

Walgreen plans to offer fresh fruit and salads to shoppers in its 7,000 stores. As Haiti continues its rebuilding efforts from the devastating earthquake, Walgreen wrapped up its in-store giving campaign with customers donating nearly $2 million to the American Red Cross Haiti Relief and Development Fund . . . Target has launched permanent community recycling stations in all 1,740 stores to kick off a month-long celebration of the 40th anniversary of Earth Day. The retailer also eliminated all farmed salmon from its seafood offerings.

Speaking of transparency, check out the Corporate Responsibility Report issued by Nike early in 2010. Covering the years 2007, 2008 and 2009, it runs to 187 pages jam-packed not with lofty rhetoric but the nuts-and-bolts of the athletic company’s programs across a wide range of its operations: workers and factories, environment, philanthropy, communities, diversity and public advocacy. The information disgorged is amazing. Nike contracts with 618 locally-owned factories in 46 countries. China accounts for 35% of footwear production. The factories employ 823,026 people. Nike itself has 32,800 employees. These plants are monitored and given letter grades covering management, environmental, safety and health standards. In 2009, 22 factories received “D” grades, meaning they were noncompliant with Nike standards. There are 100 “C” grades, indicating that those factories were making no progress in correcting poor conditions. In the past five years, the percentage of African-Americans in Nike’s workforce has gone from19% to 22%. In the past three years, the percentage of African-Americans in management has increased from 7% to 11%. Nike reduced the weight of its top-selling running shoe, Pegasus, by 13%, and the Air-Sole unit, which provides cushioning, now uses 83% recycled content. Nike supports soccer programs for homeless community members in more than 60 countries. Its top contribution in 2009 went to the Lance Armstrong Foundation.

Of special interest is the dedication of Nike’s report, “with gratitude,” to Neil Kearney, general secretary of the International Textile, Garment & Leather Workers’ Federation, who died last November at 59. He was one of those labor leaders who used to harass Nike for squalid conditions in their plants. “In those early days,” reads the dedication, “Neil harangued us. But from that rocky beginning, we learned to see that his voice was our mirror. Because of that, his was a voice of a true friend: a friend to the worker, but also to those companies struggling to find solutions to the issues he raised.” CEO Mark Parker puts it well in his introductory letter: “Transparency is an asset, not a risk.”

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.