Fund Fact Sheet
Parnassus Equity Income Fund - Institutional Shares
Ticker: Investor Shares - PRBLX
Ticker: Institutional Shares - PRILX
As of March 31, 2013, the NAV of the Parnassus Equity Income Fund-Investor Shares was $32.81. After taking dividends into
account, the total return for the first quarter was 12.70%. This compares to increases of 10.61% for the S&P 500 Index ("S&P
500") and 10.56% for the Lipper Equity Income Fund Average, which represents the average equity income fund followed by
Lipper ("Lipper average").
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. We're pleased with the Fund's performance over the past decade, which has witnessed two major bull
markets and one bear market. We outperformed
during this period by significantly limiting our
loss in the only down year for stocks (2008) and
capturing enough of the upside in the positive
years. While we slightly underperformed for the
three-year period, we're satisfied that we captured
95% of the S&P 500's gain in such a strong market
environment.
The total return for the Parnassus Equity Income Fund-Institutional Shares from
commencement (April 28, 2006) was 8.86%. 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. As described in the Fund's
current prospectus dated, May 1, 2013, 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, 2014 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
2013 got off to a great start with the S&P 500
registering a 10.6% gain for the first three months
of the year. The index closed the quarter at 1,569,
an all-time high and a staggering 132% above its
March 2009 low. Stocks surged on an
improvement in the outlook for the U.S.
economy, with consensus expectations for 2013
GDP growth increasing from 1.5% to 2.0% during
the quarter. Given the recent market rally, it's
harder to find excellent businesses trading at
discounted prices. Nevertheless, we think there's
still considerable long-term upside for our
holdings.
Stocks gained this quarter, even in the face of two
significant events that we thought would have
caused at least a temporary retreat. The first was
the inability of Congress to avoid the automatic
budget cuts known as "the sequester." This action
took effect March 1st, and will reduce 2013
government spending by $85 billion in an
arbitrary fashion. The cuts will continue into 2014
and beyond, unless our representatives in
Washington agree to a more thoughtful approach
to balancing our nation's budget. We were
surprised that investors didn't react negatively to
the sequester, since recent government impasses
have caused stock market declines.
The second event that worried us, but seemed not
to bother the market, was the banking crisis in
Cyprus. While this tiny island nation doesn't play
a significant role in the global economy, its financial collapse evidences the fragility that still plagues Europe's banking sector. In the Outlook and Strategy section, we
explain why recent events in Cyprus could signal a worsening of Europe's multi-year financial drama, and how we've
positioned the portfolio to account for this risk.
The Fund beat the soaring S&P 500 by more than two percentage points during the quarter. We're delighted with this result,
especially since our investment process typically yields a portfolio with less risk than our benchmark, so it often lags when
stocks rally sharply. There were no overarching themes, such as sector weightings, that explain our outperformance for the
quarter. We beat the index simply by owning a large number of big winners and just one significant loser.
Company Analysis
The only stock that meaningfully reduced the NAV in the quarter was Expeditors International, a freight-forwarder that serves
shippers for air and ocean deliveries. This stock trimmed the NAV by 13¢, falling 9.7% from $39.55 to $35.71 per share. The
stock dropped because Expeditors wasn't able to pass along higher-than-normal air carrier costs to shipping customers, which
compressed margins. This setback enabled us to increase our position in the first quarter at attractive prices.
We expect margins to bounce back and we think the company has an incredibly valuable customer network, a best-in-class
reputation and a customs expertise that is hard to replicate. Furthermore, since the company doesn't have to invest heavily in
depreciating assets, shareholders benefit from its abundant free cash flow, which management uses for dividends and share
repurchases.
The Fund had six stocks that contributed at least 20¢ to the NAV. Gilead Sciences, the Fund's biggest winner of 2012, repeated
as our largest gainer for the first quarter. The stock soared 33.2% to $48.93 from $36.73 and boosted the NAV by 29¢.
Gilead's hepatitis C drug, Sofosbuvir, continued to demonstrate excellent cure rates in clinical trials during the first quarter.
This therapy, which should launch in 2014, could be among the world's top-selling drugs in just a few years. Gilead also
reported strong sales for its new "four-in-one" HIV pill called Stribild. This once-daily medication is quickly gaining patients,
as it offers fewer psychiatric side-effects than Gilead's previous generation HIV drug, Atripla. While Gilead's long-term
prospects are still outstanding, we trimmed our position in the first quarter, in response to the stock's incredible run.
Teleflex, a maker of single-use medical products, such as catheters, boosted the NAV by 22¢, as the stock rose 18.5% from
$71.31 to $84.51. After several years of shedding non-medical businesses, Teleflex posted strong results as a pure-play medical
company. Management expects revenue growth to accelerate to 11-14% in 2013, up from just 1% in the previous year.
Teleflex's 2012 acquisition of LMA International, a company that makes masks for anesthesia and emergency care, is one of
the reasons why the growth profile has improved.
Charles Schwab had a great quarter, climbing 23.2% to $17.69 from $14.36 and adding 22¢ to the NAV. While Charles
Schwab is known as a brokerage firm, its earnings are heavily dependent on interest rates. For several years, interest rates have
been too low for the company to charge its full fees for managing money market funds. This has been a stiff headwind for the
stock. However, a rising stock market and improved economic outlook suggest that the timeframe for higher interest rates
may have shortened. Once interest rates begin to move higher, Charles Schwab can start lifting money market fees and
earning more on its banking assets, which will dramatically increase profits.
While the company waits for interest rates to rise, management is doing a great job building the firm's long-term earnings
power. During its February business update, Charles Schwab announced that it reached a major milestone of $2 trillion in
client assets, up 13% from last year's total. The company continues to add clients by offering strong customer service, low
prices and better investment tools than the competition.
Applied Materials, the largest maker of semiconductor manufacturing equipment, jumped 17.8% to $13.48 from $11.44 and
increased the NAV by 21¢. Responding to strong demand, Applied Materials' customers are increasing capacity to build chips
for smartphones and tablets. In addition, as computer chips shrink and run faster, their manufacturing processes require more
expensive equipment. This trend continued during the first quarter, as key customer Intel raised its 2013 forecast for
chip-building expenditures from approximately $10 billion to $13 billion.
We think that investing in Applied Materials is a great way to gain exposure to the mobile computing industry, without
having to predict which device-maker will dominate the market. In addition, we're confident that the company's culture and management have improved greatly under the leadership of President Gary Dickerson and new CFO Bob Halliday. It's for
these reasons that Applied Materials was our fourth largest holding at quarter-end.
Questar, a Utah-based natural gas utility, pipeline operator and energy producer, added 21¢ to the NAV, as its stock rose
23.1% from $19.76 to $24.33. The company's CEO, Ron Jibson, has positioned Questar for solid, low-risk growth for many
years to come. In late March, the company announced that the Utah Public Service Commission approved Wexpro II, which
essentially extended Questar's original Wexpro deal. (Wexpro allows Questar to earn a 20% investment return on its low-cost
natural gas wells that supply its utility.) The agreement has been a huge "win-win," as Wexpro has boosted earnings for
Questar, and the company's utility customers have saved $1.3 billion on their gas bills since 1981.
PepsiCo rounds out our winners, as its stock climbed 15.6% to $79.11 from $68.43, adding 20¢ to the NAV. Since we bought
the stock just over a year ago, Pepsi has reported better productivity, innovation and marketing across its product suite. These
improvements should yield solid, mid-single digit revenue growth in 2013. We've held onto the shares, though they're up
18.5% from our average cost, because we think the stock still has an attractive risk-reward profile.
Outlook and Strategy
As we mentioned earlier, one of the key economic developments that we closely monitored in the quarter was the financial
crisis in Cyprus. This country's two largest banks, Bank of Cyprus and Laiki Bank, made terrible investments and loans over
the last few years. These poor decisions have caused the value of the banks' assets to drop below the value of their liabilities,
meaning that the banks are now insolvent and require a capital infusion.
Normally, a recapitalization of Cypriot banks would have little bearing on our investment strategy. The reason it does now is
that European officials and the International Monetary Fund (IMF) handled this episode very differently than previous crises,
such as those in Ireland and Greece. In those earlier cases, depositors took no losses, as the bulk of the capital infusions came
from public coffers. This time, however, depositors with more than
€100,000 in savings stand to lose about half of their money; potentially
up to 80%in the case of Laiki Bank.
Though previous publicly-funded bailouts have been questionable, at
least they've reduced the risk that one nation's banking crisis would
trigger capital flight from the banks of other troubled countries. With
the example of Cyprus now fresh in the minds of investors and
depositors, the risk has increased that future European bank
recapitalizations could spark a broader financial crisis. The reason is that
private creditors can no longer count on overwhelming public assistance
in times of strain.
While a "multi-national bank-run" scenario appears to have a low
probability at this point, if it were to occur, financial stocks throughout
Europe and the United States would drop significantly. This is one of
the reasons why our Fund is still significantly under-invested in banks,
relative to the index. Simply put, we don't think the stock prices of
banks, especially those with international operations, reflect the fragility
that we see in the global financial system.
Despite the market's surge, we bought additional shares in seven
existing portfolio companies during the quarter. Our largest increase
was in Expeditors International of Washington, a relative newcomer to
the Fund. In addition, we initiated an investment in Mondelez, a
company with sustainable competitive advantages and terrific growth
prospects. This global food giant boasts a large portfolio of brands,
including eight that each generate more than $1 billion in annual
revenues: Cadbury, Milka, Oreo, Nabisco, Trident, Jacobs, Tang and LU.
Our investment in Mondelez increased our holdings in the consumer
staples sector to 20% of the portfolio. At quarter-end, staples represented our largest sector overweight relative to the index. We also have a high relative exposure to industrials and
utilities. The Fund is significantly under-invested in financial, consumer discretionary and energy stocks, as compared to the
S&P 500. These sector weightings represent a defensive posture, which should help us limit losses in the event of a pullback in
stocks. If the market continues to rally through the end of 2013, we hope that our high-quality portfolio will continue to
outperform as it did in the first quarter.
Thank you for your trust and investment in the Parnassus Equity Income Fund.
|
|
|
|
Todd C. Ahlsten
Portfolio Manager
|
Benjamin E. Allen
Portfolio Manager
|
|
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.