Fund Fact Sheet
Parnassus Fixed-Income Fund
Parnassus Funds Quarterly Report: March 31, 2012
Ticker: PRFIX
As of March 31, 2012, the NAV of the Parnassus Fixed-Income Fund was $17.30. After taking dividends into account, the total
return for the quarter was a loss of 0.86%. This compares to a gain of 0.08% for the Barclays Capital U.S. Government/Credit
Bond Index ("Barclays Capital Index") and a gain of 1.34% for the Lipper A-Rated Bond Fund Average, which represents the
average return of all A-rated bond funds followed by Lipper ("Lipper average").
Below is a table comparing the performance of the Fund with that of the Barclays Capital Index and the Lipper average.
Average annual total returns are for the one-, three-, five- and ten-year periods. Both the subsidized and unsubsidized 30-day
SEC yields for the Fund for March 2012 were 0.68%.
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 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
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, 2013, and may be continued indefinitely by the investment adviser on a year-to-year
basis.
First Quarter Review
U.S. equity markets had one of their best first quarter returns of the past decade. Data on retail sales, employment and
housing largely exceeded expectations, providing support to the view that U.S. economic growth is accelerating. The situation
in Europe also appears to be stabilizing. The European Central Bank's liquidity injections and a successful debt swap
agreement in Greece eased investors' fears of a potential European banking crisis.
As a result, stocks, corporate bonds and other
riskier assets performed significantly better than
safer securities, such as Treasury bonds. During the
first quarter, interest rates moved higher,
especially for long-dated Treasury bonds. The
yield on the 10-year Treasury bond increased 33
basis points (one basis point equals 0.01%) to
2.21%, while the 30-year bond yield finished the
first quarter up 44 basis points to 3.34%.
U.S. Treasuries were down 1.02% in the first
quarter, with long-dated bonds suffering larger
losses than short-dated bonds. Treasury bonds
with a maturity greater than 20 years declined
6.61%, compared to a loss of only 0.11% for
bonds with maturities between one and five years.
In contrast, signs of strength in the economy
boosted the returns for corporate bonds and
commercial mortgage-backed securities (CMBS).
During the first quarter, corporate bonds returned
2.08% and CMBS gained 3.46%.
During the first quarter, the Fund had a loss of
0.86% due to our large Treasury bond holdings.
Our corporate bonds increased the NAV by 7¢,
while our convertible bonds were flat.
Unfortunately, this gain didn't offset the loss from
our Treasury bonds, which reduced the NAV by
20¢.
For the quarter, the Fund trailed the Barclays
Capital Index by 94 basis points. As of the end of
the first quarter, the Fund had a similar percentage
of total net assets invested in Treasury bonds
compared to the Barclays Capital Index. However, the duration of our Treasury bonds was 7.3 years, which is longer than the duration of 5.6 years for the Treasury bond
holdings of the index. This means that our Treasury bond prices were more sensitive to the changes in higher interest rates.
Consequently, the Fund's Treasury holdings suffered greater losses relative to the Barclays Capital Index.
The Fund lagged the Lipper average by 220 basis points in the first quarter, as our losses in U.S. Treasuries largely outweighed
the gain from our corporate bonds. In addition, we underperformed the Lipper average because we didn't participate in the
rally in the CMBS market. I didn't invest in CMBS during the quarter because I think that the current yields on CMBS don't
offer adequate compensation for risks. For now, I prefer to wait for more attractive potential returns.
Outlook and Strategy
While U.S. economic momentum was stronger than I anticipated in the first quarter, unusually warm weather in the U.S. may
have distorted some of the early year data. According to the National Oceanic and Atmospheric Administration, average
temperatures for December, January, and February were the fourth highest since national data were recorded in 1890. As a
result, this unseasonably warm weather likely pulled certain spending and projects earlier into the year. This means that this
shift might lead to softer economic activities in the coming quarters.
More importantly, there may be some early signs of slower growth
ahead. In the last few weeks of the first quarter, economic data surprises
have been less positive, with worrying signs in durable goods and other
manufacturing data. In particular, three regional Federal Reserve Banks
published much weaker than anticipated March manufacturing activity,
with poor readings in the sub-index for new orders.
I think that the markets may have overreacted to the better data, which
could end up being a temporary blip rather than an improving trend. In
my opinion, the sustainability of the recent positive economic trend is
questionable. There are still plenty of risk factors that could derail the
current general positive sentiment. These include slowing economic
growth in China, the ongoing European recession, corporate profit
margins peaking, and numerous fiscal austerity measures holding back
private spending.
For the rest of the year, I think that the most likely scenario is that U.S.
economic growth will decelerate more than previously anticipated. In
such a scenario, interest rates would likely move lower, which would
benefit Treasury bonds. As of the end of the first quarter, the Fund's
composition remains similar compared to the end of 2011. U.S.
Treasuries continue to be our largest holding, representing 56.3% of the
Fund's total net assets. The rest of the portfolio includes corporate
bonds (29.8%), cash and short-term securities (12.5%), and convertible
bonds (1.4%).
As always, I remain vigilant with regard 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.