Fund Fact Sheet
Parnassus Equity Income Fund - Institutional Shares
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.
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.
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
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
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
shipments, increased trucking prices caused by new regulations and
certain competitors’ decisions to accept lower prices in order to gain
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.
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
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,
Todd C. Ahlsten
Lead Portfolio Manager
Benjamin E. Allen
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.