Fund Fact Sheet
Parnassus Equity Income Fund - Investor Shares
Parnassus Funds Quarterly Report: September 30, 2011
As of September 30, 2011, the NAV of the Parnassus Equity Income Fund-Investor Shares was $24.23, resulting in a loss of
11.06% for the third quarter (including dividends). This compares to a loss of 13.87% for the S&P 500 Index ("S&P 500")
and a decline of 13.41% for the Lipper Equity Income Fund Average, which represents the average equity income fund
followed by Lipper ("Lipper average").
For the first nine months of 2011, the Fund fell 7.10% versus losses of 8.69% for the S&P 500 and 7.94% for the Lipper
average. I don't like to lose money, but I'm pleased that the Fund outperformed its peers during a tough quarter and
year-to-date period. In addition, our long-term record remains outstanding. Our three-, five- and ten-year annualized returns
beat the S&P 500 and Lipper average for every period.
To the left is a table that compares the
performance of the Fund with that of the S&P 500
and the Lipper average for the one-, three-, fiveand
ten-year periods.
The total return for the Parnassus Equity Income Fund-Institutional Shares from
commencement (April 28, 2006) was 4.10%. 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, 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 website, or one can be obtained by calling (800) 999-3505. As
described in the Fund's current prospectus dated May 1, 2011, Parnassus Investments has
contractually agreed to limit the total operating expenses to 0.99% and 0.77% of net assets,
exclusive of acquired fund fees, through May 1, 2012 for the Investor Shares and Institutional
Shares, respectively. These limitations may be continued indefinitely by the Adviser on a
year-to-year basis.
Third Quarter Review
The S&P 500 plunged 13.9% during the third
quarter, as concerns about the European debt
crisis and a slowing global economy slammed
stock prices. These factors especially hurt stocks in
the index's financial and industrial sectors, which
fell on average 22.0% and 21.0%, respectively.
Fortunately, the Fund's underweight position in
financials, as compared to the index, added 25
basis points (one basis point equals 0.01%) to our
return versus the benchmark, and our excellent
stock picking in industrials contributed 136 basis
points relative to the index.
The biggest contributor to our outperformance in
industrials was Waste Management, which also
happens to be the largest holding in the portfolio.
My conviction in this investment increased this
past month after I visited the company's
impressive waste-to-energy operation in Altamont
Pass, California. In this facility, Waste
Management turns landfill gas into electricity and
transportation fuel for specially-designed waste
collection vehicles. Parnassus Director of Research,
Ben Allen, has done outstanding work monitoring
our Waste Management investment.
The Fund had two additional portfolio allocations
that meaningfully boosted our outperformance.
We had an average cash position of 8.7% during
the quarter, which cushioned our loss by 113
basis points versus the S&P 500. This abnormally
high cash balance resulted from sales during the
quarter of a broad range of stocks, mostly in the
financials, technology and energy sectors.
The final driver of our third quarter performance was the Fund's consumer discretionary stocks, which cushioned our loss by
62 basis points versus the S&P 500. Our investments in this sector, which consist of Nike and Target, fell only 0.5% in
aggregate, well below the 12.8% loss for the average consumer stock in the index. Parnassus Mid-Cap Fund portfolio manager
and senior analyst Matt Gershuny has done an outstanding job executing our Target investment process.
Company Analysis
Four stocks reduced the NAV by at least 20¢ each. Technology titan Hewlett-Packard (HP) fell 38.3% during the third quarter
from $36.40 to $22.45 and trimmed 30¢ off the Fund's NAV. Amazingly, this stock is down 46.7% for the year, despite the
fact that expectations for HP's 2011 earnings haven't changed much since the beginning of the year.
Unfortunately, management missteps and concerns about HP's long-term business prospects have reduced the
price-to-earnings ratio to a historic low of five times this year's expected earnings. Most of the damage was done on
August 18th, when the stock plunged 20% due to three significant issues.
First, HP announced its intent to pay $10.3 billion, or over 10 times sales, for British software maker Autonomy. To highlight
how rich this valuation is, consider that HP was trading at 0.5 times sales just before announcing the deal. This huge price tag
raised concerns that HP management, led by then CEO Leo Apotheker, was destroying shareholder value. It also called into
question Mr. Apotheker's credibility, since he publicly stated in June that he would not make a large acquisition in the near
future. The second piece of bad news was that HP abandoned its long-term earnings guidance of $7 per share. The third
announcement was of a "potential spin off" of HP's struggling PC business. Management's lack of clarity regarding the timing
and rationale for this major corporate action put the PC franchise at risk of share loss and further value erosion.
Despite these serious concerns, I bought more HP stock after it dropped, because the stock price decline was too extreme. I
still think the company has compelling products, especially in its server and storage units, and its printing business generates
profitable, recurring revenue. While I acknowledge that the PC business is struggling, I'm not overly concerned, because it
represents only 15% of HP's earnings. And even though I don't like the deal's price, the Autonomy acquisition should greatly
improve the company's software and cloud computing offerings. Finally, in late September, the Board decided to replace Leo
Apotheker with Meg Whitman, the former eBay chief executive. Ms. Whitman has a history of creating value for shareholders,
and represents an upgrade from her predecessor.
Oil and gas companies Energen and Plains Exploration and Production
reduced the NAV by 28¢ and 24¢, respectively. Energen's stock fell
27.6% to $40.89 from $56.50, while Plains' shares declined 40.4% to
$22.71 from $38.12. These shares fell because oil prices plunged during
the third quarter due to concerns about weakening demand for the
commodity. Energen's stock fell less than Plains, because it has a small
natural gas utility operation, whose results aren't impacted by oil prices.
In addition, Energen has contracts in place to sell a portion of its 2012-
2014 oil and gas production at fixed prices, so it's not as affected by
short-term moves in commodity prices.
Financial services company SEI Investments fell 31.7% during the
quarter from $22.51 to $15.38 and reduced the Fund's NAV by 21¢.
Since SEI earns money based on clients' assets under management, the
stock market's decline during the quarter reduced the company's
expected earnings, and the stock went down as a result.
Two companies helped the Fund's NAV. Google, the world's leading Internet
search business, rose 1.6% from $506 to $514 and added 8¢ to the NAV. We
sold some of our position during the quarter at an average price just under
$600, which contributed a significant portion of our gain. The stock went up
because Google reported strong quarterly results, highlighted by 32% annual
growth in sales. Unfortunately, the stock retreated from its quarterly high
when Google announced its intent on August 15 to buy Motorola Mobility
for $12.5 billion. While Google is paying a high price forMotorolaMobility,
the deal will significantly strengthen the company's patent portfolio that
supports itsmobile business.
The second winner was MasterCard, which rose 5.3% to $317 from $301 per share and added 6¢ to the NAV. In early August,
the company announced annual revenues and earnings growth of 22% and 36%, respectively. The company's payment
processing platform continues to expand across the globe, so I think there's plenty more growth ahead for this company.
Parnassus Equity Income Fund Portfolio of Investments as of 9/30/2011
Outlook and Strategy
The global economy weakened again this quarter, and the possibility of a recession in the U.S. increased. The key issue is that
the global deleveraging process, which began in the wake of the 2008 financial crisis, may take several more years to
complete. While this process plays out, a significant amount of money that would otherwise contribute to economic growth
instead goes to pay down debt and absorb losses from defaulting borrowers.
The area I'm most concerned about is Europe, where Greece may soon default on its sovereign debts, and other economies
such as Portugal, Italy and Spain are also showing signs of weakness. The risk is that these sovereign debt crises could push
large European banks into insolvency, because they lent large sums to these countries. Not only would a European banking
crisis necessitate an enormous bailout, but it would also put a damper on business investment, which depends in large part
on bank financing. Since many American companies do business in Europe, these problems across the Atlantic could
eventually affect our economy.
Moving to Asia, I'm increasingly concerned that China may experience a significant slowdown in growth. I continue to read
reports that China's real estate market is beginning to soften, bad loans are on the rise and questionable accounting standards
are hurting confidence. Slower growth in China has negative implications for the U.S. economy, because China is an
important trading partner for us.
Returning home, despite record deficit spending and low interest rates, the U.S. economic recovery that began in 2009
appears to be weakening. Unfortunately, I don't think that the Federal Reserve's low interest rate strategy or President
Obama's job plan will help spur growth enough to make a meaningful drop in the 9.1% unemployment rate. History shows
that when economies experience financial shocks and then enter a period of deleveraging, the process takes many years to
play out. This means that short-term fixes probably won't work, despite the best intentions of our representatives in
Washington.
Notwithstanding my pessimism regarding the global economy's near-term prospects, I'm optimistic that eventually we'll
regain our footing and start to grow again. I'm excited about the 41 companies that are in the portfolio. These businesses
should thrive in a wide range of potential economic outcomes. One of the strengths of our relatively concentrated approach is
that even when the economic outlook is gloomy, there are still enough companies for me to build a high conviction
portfolio.
As noted above, I reduced the Fund's exposure in financial, technology and energy stocks. In contrast, I added to our exposure
in economically-resistant healthcare companies with strong competitive advantages, such as Gilead Sciences, Abbott Labs,
Novartis and Patterson Companies. These companies should grow earnings over the next several years even if the economy
stays weak. They are also trading at attractive valuations.
We own a high quality portfolio of stocks that reflect our time-tested investment approach. Our process has generated
strong long-term returns and I'm confident that it will continue to do so. Thank you for your trust and investment in the
Parnassus Equity Income Fund.
Yours truly,
Todd C. Ahlsten
Portfolio Manager
Parnassus Investments
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.