Our Funds

Parnassus Fixed-Income Fund

 

Ticker: PRFIX

As of March 31, 2013, the NAV of the Parnassus Fixed-Income Fund was $17.41, producing a loss for the quarter of 0.43% (including dividends). This compares to a loss of 0.16% for the Barclays Capital U.S. Government/Credit Bond Index ("Barclays Capital Index") and a gain of 0.23% 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. For March 2013, the 30-day subsidized SEC yield was 0.62% and the unsubsidized SEC yield was 0.59%.

prfix returns

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, 2013, Parnassus Investments has contractually agreed to reduce its investment advisory fee to the extent necessary to limit total operating expenses to 0.68% of net assets for the Parnassus Fixed-Income Fund effective May 1, 2013. This limitation continues until May 1, 2014, and may be continued indefinitely by the investment adviser on a year-to-year basis.

First Quarter Review

Economic forecasters increased their projections for U.S. economic growth during the quarter, as politicians reached a compromise on the fiscal cliff and postponed the debt ceiling issue to May. There were also encouraging signs in economic data related to housing and manufacturing activity. As a result, the first quarter U.S. GDP growth forecast increased from 1.5% at the start of the year to over 2% by the end of the quarter.

As expectations for economic growth picked up, investors moved out of the safety of Treasury bonds and into riskier investments, such as corporate bonds and stocks. Interest rates increased during the first quarter, especially for long-dated Treasury bonds. The yield on the 10-year Treasury note increased 9 basis points to 1.85%, while the 30-year bond yield finished the first quarter up 15 basis points to 3.10%.

Long-dated Treasury bonds suffered larger losses than short-dated ones, as bond prices move inversely to interest rates. Treasury bonds with a maturity greater than 20 years fell 2.89%, while bonds with maturities between 10 and 20 years declined only 0.77%. In contrast, renewed economic growth helped the returns for corporate bonds, particularly the ones issued by financial institutions, and commercial mortgage-backed securities (CMBS). During the first quarter, financial corporate bonds returned 0.88% and CMBS gained 0.13%.

During the first quarter, the Fund had a loss of 0.43%, because of our exposure to long-dated Treasury bonds. Our Treasury bond holdings reduced the NAV by 8¢, which was partially offset by a 2¢ gain from our corporate bonds.

For the quarter, the Fund trailed the Barclays Capital Index by 27 basis points, due to our larger exposure to the Treasury market and lower weighting in corporate bonds. As of the end of the first quarter, the Fund's asset class allocation included 65.0% of the total net assets invested in Treasury bonds and 29.0% in corporate bonds. This compared to 60.3% in Treasury bonds and 39.7% in corporate bonds for the Barclays Capital Index.

The Fund lagged the Lipper average by 66 basis points in the first quarter, as we didn't own any financial corporate bonds or CMBS. As of the end of the first quarter, the Fund owned primarily corporate bonds issued by companies in the industrial, technology and healthcare sectors. While these bonds were up during the quarter, they didn't match the stronger returns of financial corporate bonds. Most of our peers also didn't have much exposure to the underperforming Treasury market.

Outlook and Strategy

In my opinion, the zero interest rate polices of central banks have forced many investors toward riskier investments in search of better returns. As a result, investors have bid up many corporate bonds to valuation levels that have usually resulted in poor future returns.

According to a Deutsche Bank report, credit spreads, or the difference between U.S. corporate bond yields and Treasury bond yields, are currently at levels that have historically generated negative excess returns. This means that the returns over the next year for corporate bonds are expected to be worse compared to Treasury bonds.prfix ocmp

I think that it's unlikely to see the outperformance of corporate bonds from last year repeated again this year. This is simply because credit spreads are now much tighter. For example, based on Deutsche Bank calculations, financial credit spreads would need to turn negative to achieve comparable returns to last year. In other words, investors would assume the very unlikely scenario where Treasury bonds are perceived to be riskier than financial corporate bonds.

It seems to me that investors are becoming too complacent and that the risks are now more weighted on the downside. Therefore, I think that a defensive investment strategy is appropriate in such an environment. As of the end of the first quarter, U.S. Treasuries were our largest holding, representing 65.0% of the Fund's total net assets. The rest of the portfolio includes corporate bonds (29.0%), convertible bonds (0.5%), supranational bonds (2.3%), and short-term investments and other assets and liabilities (3.2%).

Thank you for your trust and investment in the Parnassus Fixed-Income Fund.

Yours truly,

bui signature
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.

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