Fund Fact Sheet
Parnassus Equity Income Fund - Investor Shares
Ticker: Investor Shares - PRBLX
Ticker: Institutional Shares - PRILX
As of September 30, 2013, the NAV of the Parnassus Equity Income Fund-Investor Shares was $35.28. After taking dividends
into account, the total return for the third quarter was 6.74%. This compares to increases of 5.24% for the S&P 500 Index
("S&P 500") and 3.92% for the Lipper Equity Income Fund Average, which represents the average return of the equity income
funds followed by Lipper ("Lipper average"). For the first nine months of 2013, the Fund posted a return of 21.98%, which
compares favorably to gains of 19.79% for the S&P 500 and 17.49% for the 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.
The total return for the Parnassus Equity Income Fund-Institutional Shares from
commencement (April 28, 2006) was 9.41%. 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.
Third Quarter Review
The S&P 500 continued its multi-year rally by
gaining 5.2% in the third quarter. The index is
now up an astonishing 149% from its low point
reached in March of 2009. Stocks rose in the
quarter, as the economy continued its modest
expansion and corporate profits grew faster than
consensus expectations. Another positive was the
Federal Reserve's continued support of financial
markets, in the form of quantitative easing. The
basic idea behind this program is simple: the Fed
creates money, then uses it to buy $85 billion of
government and mortgage bonds each month.
Quantitative easing boosts bond prices and drives
down interest rates, making it less expensive for
businesses, consumers and government entities to
borrow. It also indirectly supports equity markets,
because the newly-created money increases the
funds available for investors to buy other assets,
such as stocks.
The Fund performed better than the S&P 500 and
our Lipper peers for the quarter, posting a gain of
6.74%. Our sector allocations and modest cash
position had a slightly negative impact on the
portfolio's performance, relative to the index.
Because of this, we attribute all of the Fund's
quarterly outperformance to individual stock
selection. The Fund had only one investment that
reduced the NAV by more than 5¢ and nine that
increased it by at least 10¢. In the following
section, we discuss our one significant loser and
our three biggest winners.
Compass Minerals, which earns most of its money
by selling salt used for highway deicing, trimmed
the NAV by 7¢, as its stock slid 9.8% to $76.27
from $84.53. The stock fell in sympathy with the
price of sulfate of potash (SOP), a fertilizer that
Compass produces in one of its smaller segments.
The value of potash fertilizers dropped after Russia's Uralkali, a leading global producer, announced a plan to increase
production. Since Uralkali had previously agreed with other potash companies to limit supply, and therefore keep prices
high, their new strategy is clearly bad for industry profits.
The good news is that Compass still owns very attractive assets. The company's crown jewel is a salt mine located in Goderich,
Ontario. Given its unique geological characteristics, it's relatively easy to extract salt from the Goderich mine. Since it's located
near a deep port on Lake Huron, Compass can transport the salt by boat to cities along the Great Lakes, further driving down
operating costs. In addition to Goderich, Compass also owns a low-cost solar evaporation plant on Utah's Great Salt Lake,
which processes salt and SOP. These unique assets, combined with a high-quality management team, make Compass a solid
long-term investment, so we bought more of the stock during the quarter.
The Fund's biggest winner was Energen, a domestic producer of oil and natural gas, whose stock jumped 46.2% from $52.26
to $76.39, boosting the NAV by 28¢. The Fund has held Energen shares continuously since November of 1996, making it the
longest-tenured position in the portfolio. When we first bought the stock, the company earned most of its profits from a
natural gas utility based in Alabama. Over the years, Energen has diversified its business by investing in oil and natural gas
production. After a few years of disappointing results, Energen announced a game-changing oil discovery in the Permian
Basin in Texas during the third quarter. This news drove the stock up because it meant that Energen's growth prospects have
Apple, a relative newcomer to the portfolio, soared 20.4% to $477 from
$396 and boosted the NAV by 27¢. In mid-September, Apple
announced that their latest iPhone launch yielded record results, with
9 million units sold in just three days. The success of this launch
demonstrates the power of Apple's global distribution and brand.
Regarding the latter, New York-based consultancy, Interbrand, recently
announced its annual valuation estimates for global brands. With an
estimated value of $98 billion, Apple came in at number one, ending
Coca-Cola's 13-year reign atop the list.
We know that competitive dynamics can shift quickly in consumer
electronics markets. As a result, we're paying close attention to other
smartphone makers, especially Samsung, as they pose a serious threat to
Apple's valuable franchise. For now, we're still comfortable with Apple's
competitive position and stock valuation, so we didn't sell any of our
shares during the quarter.
Applied Materials, a leading maker of semiconductor manufacturing
equipment, rose 17.6% to $17.54 from $14.91 and increased the NAV
by 24¢. In September, the stock jumped after the company announced a
transformational deal to buy rival Tokyo Electron for $9 billion, creating
an industry titan with a combined stock market capitalization of $29
billion. This deal will broaden Applied Materials' exposure to
increasingly important areas of chip manufacturing, such as dielectric
etch and chemical vapor deposition. We think there's enough
differentiation in the two companies' product lines to avoid any serious
antitrust concerns, but there's still a chance that government officials in
either the United States or Japan will prohibit this deal.
Outlook and Strategy
As the stock market continues its incredible multi-year run, our strategy
remains unchanged. We still favor high-quality businesses with
defensive investment characteristics. While this approach occasionally
leads to underperformance in bull markets, it tends to limit the Fund's
losses when stocks go down. We consistently employ this strategy,
because we think it's the best way to compound wealth for our
shareholders over the long-term.
When stocks rally as they have for the last four and a half years, it's tempting to ignore our guiding principles and reach for
returns by investing in riskier stocks, which typically outpace the index during bull markets. As you can see from the Fund's
quarter-end holdings and sector weights, we've resisted this temptation. As of this writing, the Fund has limited exposure to
two highly cyclical sectors, financials and consumer discretionary. In addition, the portfolio has relatively large concentrations
in less cyclical sectors, such as utilities and consumer staples. We don't know when the next bear market will come, but when
it does, we expect the Fund to hold up relatively well, given its defensive posture.
It's worth noting that our positioning doesn't necessarily mean that we'll lag our index and our peers if stocks continue
recording new highs. Our performance over the last year proves this point. When the Fund has outpaced a bull market despite
its overall defensive approach, it's almost always due to the contribution of just a handful of stocks. Since the Fund normally
invests in about 40 holdings, even a small number of individual securities can have a big impact on our results. Our
concentrated approach also means that all of our investment decisions have been fully vetted and carefully timed, which
reduces the chance that we'll make a mistake.
The bar is so high for a stock to gain entry into our portfolio that we only bought one new company during the quarter.
Xylem, which is based in White Plains, New York, is an industrial firm divided into two segments. Water Infrastructure, which
accounts for over 60% of total revenue, sells equipment primarily to utilities to assist in the transportation, treatment and
testing of water. The smaller segment, Applied Water, sells a diverse suite of water-related products to residential, commercial,
industrial and agricultural customers. Both segments also sell aftermarket parts and a wide range of services, so Xylem can
make money from customers for many years after an initial equipment sale. We're excited about the long-term prospects of
this business and hope to discuss it as a winner in the Company Analysis section of a future shareholder letter.
Todd C. Ahlsten
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.