Fund Fact Sheet
Parnassus Equity Income Fund - Investor Shares
Parnassus Funds Quarterly Report: March 31, 2012
Ticker: Investor Shares - PRBLX
Ticker: Institutional Shares - PRILX
As of March 31, 2012, the NAV of the Parnassus Equity Income Fund-Investor Shares was $28.28. After taking dividends into
account, the total return for the first quarter was 7.62%. This compares to an increase of 12.58% for the S&P 500 Index ("S&P
500") and an increase of 8.76% for the Lipper Equity Income Fund Average, which represents the average equity income fund
followed by Lipper ("Lipper average").
In a normal start to the year, I'd be very pleased with a quarterly return of 7.62%. This time, I'm disappointed because the
Fund significantly underperformed the S&P 500, which registered its best first quarter return since 1998. Stocks soared, as concerns eased over the European debt crisis and
the U.S. economy showed signs of recovery.
Our investment strategy is to own undervalued,
high-quality companies with sustainable
competitive advantages and strong growth
prospects. Given this quality bias, we often lag in
quarters when the stock market rises rapidly.
Although the Fund lagged its benchmarks for the
one- and three-year periods, our five- and ten-year
returns beat the S&P 500 by a substantial margin.
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.
The total return for the Parnassus Equity Income Fund-Institutional Shares from
commencement (April 28, 2006) was 6.93%. 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 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, 2012, 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,
2013 for the Investor Shares and Institutional Shares, respectively. These limitations may be
continued indefinitely by the Adviser on a year-to-year basis.
Manager Promotion Announcement
I'm very excited to announce that Ben Allen will
join me as Portfolio Manager of the Parnassus
Equity Income Fund beginning May 1st. At that
time, I will assume the title of Lead Portfolio
Manager. Ben has the right temperament, intellect
and investment skills to help me manage the
Fund.
Ben was born and raised in Massachusetts, and
graduated from Georgetown University with a
bachelor's degree in government. After college, he
gained valuable skills and experience working in
Morgan Stanley's investment banking and venture
capital units. In the spring of 2004, I had the good
fortune of receiving a call from Ben to discuss our
Parnassus research intern program. That introductory
call turned out to be an engaging talk that lasted
almost two hours! Our conversation spanned a wide
variety of topics, including the stock market, politics,
history and baseball. I was extremely impressed with
his intellect and his wide range of interests. After
completing the first year of his MBA program at
University of California, Berkeley Haas School of
Business, Ben joined the firm as an intern. Shortly
after his internship ended, the Boston Red Sox finally
won the World Series after an 86 year drought, just as
Ben predicted on our first call!
Upon graduation in 2005, Ben started full-time as a research analyst at Parnassus. In an increasingly complex world, he
demonstrated a great ability to focus on what's important, avoid risks and think independently. In 2008, Ben succeeded me as
Director of Research and became a portfolio manager of the Parnassus Mid-Cap Fund. He has performed exceptionally well in
both those positions.
Ben is happily married with three young children and has an abiding concern for future generations, the environment and
society at large. Given his talents and the growing size of the Parnassus Equity Income Fund, I feel the timing is right to add
Ben as Portfolio Manager. I'm confident that together we can continue the strong long-term track record of the Fund.
First Quarter Review
The biggest contributor to our underperformance during the first quarter was the technology sector, which trimmed 225 basis
points (one basis point equals 0.01%) off our return relative to the S&P 500. We didn't own Apple, which jumped over 50%
during the quarter and reduced our return relative to the index by an amazing 107 basis points. I've avoided Apple over the
years, because of concerns that their string of hot new products would slow, and profit margins would shrink due to
competition. Unfortunately, I've been wrong as Apple has done far better than I anticipated. Apple is clearly a fantastic
company, but at a market capitalization close to $600 billion, I don't think it's currently undervalued.
There have been two significant changes to our technology investments
since the last report; I sold our Hewlett Packard (HP) position and
bought shares of semiconductor equipment-maker Applied Materials.
My key concern regarding HP is that its printing and PC businesses face
secular headwinds. On the other hand, Applied Materials has
sustainable long-term competitive advantages and is undervalued due
to cyclical weakness in its solar and display segments. Going forward,
Applied Materials should outperform HP.
The Fund had three other sources of meaningful underperformance in
the quarter. First, our cash position averaged 7%, which trimmed our
return by 81 basis points versus the S&P 500. Our cash position
typically ranges from 1% to 10%, and is a function of timing differences
between buy and sell decisions. Second, our utility stocks reduced our
return by 72 basis points versus the S&P 500. While the Fund's utility
investments offer attractive long-term growth and income, they clearly
weren't in favor during the first quarter, as compared to companies in
higher growth sectors. Finally, the financial services sector reduced our
return by 66 basis points versus the benchmark. This group performed
very well last quarter, and the Fund was underweight the sector.
Company Analysis
The Fund had four stocks that reduced the value of each Fund share by
at least 2¢. While these stocks had a modest impact on the NAV, they
are worth reviewing because they meaningfully trailed the soaring index
during the quarter, and therefore contributed to our relative
underperformance. The biggest loser was Iron Mountain, the leader in
document storage services, which dropped 6.5% from $30.80 to $28.80
and reduced the NAV by 3¢. The stock went down after management
reduced its guidance for 2012 earnings. I'm not overly concerned about
this because the reduction was caused by temporary factors out of the
company's control: a lower than expected price for paper and the weak
euro.
Iron Mountain has a terrific competitive position and loyal customers, and is keenly focused on returning capital to
shareholders in the form of stock buybacks and dividends. Since announcing its shareholder payout plan in the spring of
2011, the company has returned $1.2 billion, and promised to return another $1 billion by the end of 2013. The company is
also investigating the possibility of converting to a real estate investment trust (REIT), a corporate structure that would enable
shareholders to reduce taxes and receive higher dividends.
The next three underperformers are all utilities with terrific competitive positions and high dividend yields. As mentioned
above, utility stocks across the board performed very poorly in the first quarter, and ours were no exception. AGL Resources, a
natural gas distribution company, cost the Fund 2¢, as its shares dropped 7.2% from $42.26 to $39.22. During the quarter,
the company reported weak results from its retail segment, which markets natural gas to residential, commercial and
industrial customers. Due to the sluggish economy and warm weather, the demand for natural gas was low. AGL's storage
division has also been weak of late. Customers will pay high rates to store natural gas only if they think the commodity's price
will go up. In recent quarters, the price trend has been down, so the natural gas storage business is depressed.
A weak economy, warm weather and the storage issue also hurt Northwest Natural Gas, an Oregon-based provider of natural
gas distribution and storage services. The stock sank 5.3% in the quarter, going from $47.93 to $45.40, and sliced 2¢ off the
NAV. In spite of the current problems facing the company, I'm excited about its long-term prospects. Northwest Natural Gas
once again scored in the top two for customer satisfaction in last year's national survey conducted by J.D. Power and
Associates, and it signed a 5-year $250 million investment agreement to secure low-cost gas for its customers for the next 30
years. Further highlighting the long-term nature of this investment, the company announced last November that it would
increase its dividend, keeping alive its now 56-year streak of dividend growth.
The third utility that hurt our performance was Questar, which dropped 3.0% from $19.86 to $19.26, and reduced the NAV
by 2¢. This Rockies-based holding company operates a natural gas pipeline and storage business, a regulated utility and a
subsidiary called Wexpro, which produces low-cost natural gas for its utility affiliate. Other than an increase in pension
expenses, the company actually performed well during the quarter, even though the stock price went down.
The Fund had three big winners that each added at least 13¢ cents to the Fund's NAV. Charles Schwab, the San Franciscobased
discount brokerage, was the Fund's biggest winner, adding 21¢ to the NAV. The stock climbed 27.6% from $11.26 to
$14.37, mostly on hopes that interest rates will move up as the economic recovery gathers steam. In a low rate environment,
such as the one we're in currently, Charles Schwab can't earn enough on its assets under management to achieve its full
earnings potential. I didn't sell any shares during the quarter, even after the big upswing, because I like the company's longterm
strategy for growth and its differentiated suite of services.
Gilead Sciences, the biopharmaceuticals business that specializes in medicines to treat HIV/AIDS and liver diseases, added
21¢ to the NAV during the quarter, as its stock jumped 19.4% from $40.93 to $48.85. In November of last year, Gilead
announced that it would acquire Pharmasset, a company with an extremely valuable pipeline of drugs to treat chronic
hepatitis C virus (HCV). In early February, the stock jumped when the company released positive clinical data for its most
promising HCV drug, GS-7977, as well as progress in its well established HIV/AIDS franchise. Even though the stock dropped
two weeks later on disappointing results from another GS-7977-related trial, it still posted a significant gain for the quarter.
Qualcomm, a maker of software and semiconductors for mobile devices, climbed 24.4% from $54.70 to $68.02, boosting
each Fund share by 13¢. I originally bought Qualcomm because its software licensing business has an amazing competitive
position and benefits from the proliferation of mobile devices, such as smart phones and tablet computers, such as the iPad.
At the time, I had modest expectations for the company's semiconductor business. Fortunately, chip sales have been growing
very well recently, with one of its key products being used in the new Apple iPhone 4S. These positive business trends have
translated into growing free cash flow, which the company is using to fund a recently announced 16% dividend increase and
a $4 billion stock buyback plan.
Outlook and Strategy
Neither my outlook nor my strategy has changed meaningfully since the beginning of the year. While there has been some
improvement in economic data in the U.S., and the European Central Bank has acted aggressively to ease its continent's debt
woes, I still think the range of outcomes for the global economy in 2012 is unusually wide. Risk management is at the core of the Fund's strategy, so I've positioned the portfolio to limit the downside if the economy continues to grow below its
potential. If the stock market keeps going up, the Fund should deliver attractive returns, even with its risk-averse posture,
because our portfolio companies have terrific business prospects.
An old adage that summarizes my concerns about the economy and financial markets is "there's no such thing as a free
lunch." This common-sense idea applies now because our central bank and federal government have provided a staggering
amount of "free" lunches since the credit crisis erupted in late 2008. Our Federal Reserve bankers have driven down interest
rates to extremely low levels, to the benefit of mortgage holders in need of refinancing and corporations that use debt to fund
their operations. Meanwhile, our representatives in Washington have chalked up an unprecedented $4 trillion in deficit
spending in just the last three fiscal years. These combined actions have clearly boosted economic activity since the Great
Recession ended, and most importantly, helped millions of people who have suffered through a tepid recovery.
Some of the cost of these benefits is already being borne by savers and people living on a fixed income. These groups are
collecting a much lower yield on their investments as a result of the Federal Reserve's loose monetary policy. Their pain is
further compounded by the fact that the prices of vital goods like food and gasoline are rising, while their incomes are
shrinking.
The good news is that our Fund is full of companies that produce attractive, growing yields, and have characteristics that
should protect them against inflation. The key factor that my team analyzes with regard to a dividend-yielding company is the
predictability and growth prospects of its free cash flow. With regard to inflation protection, we look for companies that can
raise their prices enough to offset any increase in their costs. To maintain pricing power over the long-run, a company has to
have meaningful and sustainable competitive advantages over their competitors.
The Fund owns 44 companies, and they offer attractive risk-reward characteristics. Included in this number are five new
holdings, which operate in a diverse set of industries: Walgreen, Shaw Communication, PepsiCo, Applied Materials and
Compass Minerals. I'm confident that our Fund will preserve its strong, long-term track record of risk-adjusted returns. I thank
you for your investment in the Parnassus Equity Income Fund.
Highest regards,
Todd C. Ahlsten
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.