Fund Fact Sheet
Parnassus Fixed-Income Fund
Parnassus Funds Quarterly Report: September 30, 2011
As of September 30, 2011, the NAV of the Parnassus Fixed-Income Fund was $17.67, resulting in a gain of 3.84% for the third
quarter (including dividends). This compares to a gain of 4.74% for the Barclays Capital U.S. Government/Credit Bond Index
("Barclays index") and a gain of 2.38% for the Lipper A-Rated Bond Fund Average, which represents the average return of all
A-rated bond funds followed by Lipper ("Lipper average"). Since the beginning of the year, the total return for the Fund was
6.20%, compared to a gain of 7.47% for the Barclays index and a gain of 5.33% for the Lipper average.
Below is a table comparing the performance of the Fund with that of the Barclays index and the Lipper average. Average
annual total returns are for the one-, three-, five- and ten-year periods. The 30-day SEC yield for the Fund for September 2011
was 0.82%.
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. 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 cost. Returns
shown in the table do not reflect the deduction of taxes a shareholder would pay in fund
distributions or redemption of shares. The Barclays Capital U.S. Government/Credit Bond
Index is an unmanaged index of bonds, 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.
Before investing, an investor should carefully consider the investment objectives, risks, 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 reduce its investment advisory fee to the
extent necessary to limit total operating expenses to 0.75% of net assets for the Parnassus
Fixed-Income Fund. This limitation continues until May 1, 2012, and may be continued
indefinitely by the investment adviser on a year-to-year basis.
Third Quarter Review
It was a challenging third quarter for global markets, as Europe's sovereign debt crisis escalated, and U.S. economic data
continued to point to a weak recovery. Global financial markets have not only been pummeled by the rising possibility of a
Greek default, but also by a lower global economic growth outlook. Late in the quarter, the International Monetary Fund downgraded its global growth forecasts for both
2011 and 2012. In the meantime, the Federal
Reserve Open Market Committee commented on
"significant downside risks to the economic
outlook, including strains in global financial
markets."
In an attempt to revive the U.S. economy with
credit growth, Ben Bernanke, the Federal Reserve
Chairman, announced a plan to lower long-term
interest rates. Unlike previous monetary
interventions, this new program will not pump
additional money into the economy. Instead, the
Federal Reserve Open Market Committee will
merely alter the composition of its securities
portfolio, by selling $400 billion of Treasury
securities with maturities below three years and
reinvesting the proceeds in maturities of six to 30
years.
As a result of this announcement and a general
flight to safety, Treasury yields fell to extremely low
levels. The long-end of the yield curve, 10-year to
30-year maturities, decreased the most. The 10-year
bond yield dropped 124 basis points (one basis
point equals 0.01%) to 1.92% during the third
quarter. The yield on the 30-year bond fell 146
basis points to 2.91%. This fall in interest rates was
quite significant, and Treasury bonds had the
highest quarterly returns in almost three years.
The Fund's performance benefited from this
falling yield environment, with a gain of 3.84%
for the quarter. Our Treasury bonds were the
biggest winner, adding 50¢ to the NAV. Corporate
bonds increased the NAV by 18¢, while our
convertible bonds were flat.
Despite the huge gain from the Treasury market, the Fund couldn't keep up with the Barclays index. For the third quarter, the
Fund trailed the Barclays index by 90 basis points. This underperformance was mainly due to the fact that we had less
exposure than the benchmark to the U.S. government bond market. As of the end of the quarter, U.S. government bonds
represented 62% of the Barclays index, compared to 51% for the Fund.
The Fund was ahead of the Lipper average by 146 basis points, primarily due to our higher weighting in the U.S. Treasury
market. Most of our peers also owned mortgage-back securities (MBS) and commercial mortgage-back securities (CMBS),
while we don't currently have any exposure to these securities. During the third quarter, these securities didn't perform as well
as U.S. Treasury bonds, as MBS returned only 2.36% and CMBS had a loss of 0.86%. This compares to a gain of 5.85% for
U.S. government bonds.
Outlook and Strategy
In my view, the problems that led to a global panic in 2008 have been left unresolved and we are seeing them now reemerge
amid slowing economic growth. The issue was, and still is, rooted in unsustainable increases in debt levels to fuel
consumption growth. When I look at policymakers' responses, it seems to me that they haven't grasped our predicament. We
are facing a global debt crisis with excessive leverage and slow growth, which is unlikely be solved by piling on more debt.
I think that the recent monetary stimulus will have limited lasting results in reviving the U.S. economy. Credit growth in the
U.S. is lackluster, not because of high interest rates, but due to lack of confidence in the prospects for the U.S. economy. I
think that households and businesses are currently more preoccupied with lowering their debt burdens to improve their
financial stability than adding more leverage.
Financial markets are likely to continue to be tremendously volatile, as the global economy is balancing on a knife's edge
between a slowdown and another outright recession. It's still unclear which way the outlook may break, but both prospects
are definitely negative for investors' sentiment. Adding to the uncertainty is the fact that most governments continue to
implement austerity and deficit reduction measures despite slowing growth.
Notwithstanding potential negative shocks coming from Europe or the developing markets, my view over the next quarters
remains unchanged from last quarter. I think that the U.S. economy should continue to grow, albeit at a very tepid pace.
Because I see more downside risks than upside potential, the portfolio
remains in a defensive position for now. As of the end of the third
quarter, U.S. Treasury bonds continue to be our largest holding,
representing 51% of the Fund's total net assets. The rest of the portfolio
consists of corporate bonds (33%), Treasury Inflation-Protected
Securities (3%), convertible bonds (3%), and cash and short-term
securities (10%).
Parnassus Fixed-Income Fund Portfolio of Investments as of 9/30/2011
Cash and short-term investments have increased during the third
quarter, because I think that the current yields offered by bonds are too
low. For now, I prefer to wait for better investment opportunities rather
than chase higher yields in riskier investments.
As always, I remain vigilant to changes in the economic and financial
outlook and will position the portfolio accordingly.
Thank you for your trust and investments in the Parnassus Fixed-
Income Fund.
Yours truly,
Minh T. Bui
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.