Fund Fact Sheet
Parnassus Fixed-Income Fund
As of September 30, 2013, the NAV of the Parnassus Fixed-Income Fund was $16.99,
producing a gain for the quarter of 0.11% (including dividends). This compares to
a gain of 0.57% for the Barclays U.S. Aggregate Bond Index ("Barclays Aggregate
Index") and a gain of 0.43% for the Lipper A-Rated Bond Fund Average, which represents
the average return of the A-rated bond funds followed by Lipper ("Lipper average").
For the first three quarters of 2013, the Fund posted a loss of 1.97%, which compares
to losses of 1.89% for the Barclays Aggregate Index and 2.41% for the Lipper average.
Below is a table comparing the performance of the Fund with that of the Barclays
Aggregate Index and the Lipper average. Average annual total returns are for the
one-, three-, five- and ten-year periods. For December 2013, the 30-day subsidized
SEC yield was 1.32%, and the unsubsidized SEC yield was 1.24%.
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 U.S. Aggregate 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, (as Amended
and Restated September 30, 2013), Parnassus Investments has contractually agreed
to limit total operating expenses to 0.68% of net assets for the Fund. This agreement
will not be terminated prior to May 1, 2014, and may be continued indefinitely by
the Adviser on a year-to-year basis.
The past year was a tumultuous period for bond markets, as the Federal Reserve instituted
a policy change and dominated headlines. In late 2012, the Federal Reserve removed
the deadline from its Quantitative Easing (QE) program. Because of the open-ended
nature of the program, it was quickly dubbed "QE-infinity" and the markets rejoiced
at the continued flow of cheap money. This led to higher asset prices and lower
yields, with the yield on the 10-year Treasury initially dropping to 1.63% by May
2nd from 1.83% on January 1st.
In May, the Federal Reserve first communicated its desire to gradually remove the
monthly bond purchases, as the exceptionally low yields were not reflective of the
country's growth rate. Bond investors spent the summer trying to decipher the timing
of the first reduction in purchases and carefully watched each economic data release
for clues. Investors widely expected that the Federal Reserve would begin tapering
in September, and so the 10-Year Treasury rose to 3.00% in anticipation of the policy
However, the economy slowed over the summer, due to concerns about both higher interest
rates and political infighting in Washington. As a result, the market received a
"September Surprise" when the Federal Reserve made no changes to its QE program.
This sent the 10-year Treasury from 3.00% back to 2.50% by the end of October.
By the third quarter of the year, Gross Domestic Product (GDP) accelerated to an
annualized rate of 4.1%. The economy added approximately 200,000 jobs per month
and consumer spending increased. Since 2010, the economy added 7.4 million jobs,
a substantial percentage of the 8.7 million jobs lost during 2008 and 2009. Finally,
Congress departed from its now-typical brinksmanship by announcing a longer-term
budget deal, giving both businesses and individuals better clarity on future policies.
As a result of these positive developments, the Federal Reserve opted to reduce
its monthly stimulus in December. Beginning in January 2014, monthly purchases will
be reduced from $85 billion per month to $75 billion. Investors reacted to this
announcement by sending the 10-year Treasury yield back to 3.00%.
When interest rates rise, bond prices fall. However, these events had different
impacts on asset classes within the bond market. The Barclays Aggregate Index, the
Fund's benchmark, has three major categories: Treasuries, Corporate Credits and
Treasury bond prices felt the greatest impact from the year's rising interest rates,
declining by 3.35%. During the latter half of the year, the percentage of Treasury
bonds in the Fund decreased substantially. Treasury bonds represented 62% of the
Fund as of January 1st, but declined to 45% by the end of the year. I decreased
the allocation of Treasuries to invest more heavily in asset classes that would
directly benefit from the improving economy and generate a higher return for investors.
However, the allocation to Treasury bonds is still above the 36% weighting in the
benchmark. The Fund's heavy weighting in Treasuries meant that its performance very
closely reflects this return.
Corporate Credits lost less value during the year than Treasury bonds because credit
spreads tightened. Credit spreads represent the premium an investor receives to
hold riskier corporate debt instead of Treasury bonds, and is therefore referred
to as a "spread over Treasuries". In times of rising interest rates, or when the
base Treasury rate increases, this credit spread can act as a buffer and shrink,
protecting some of the value of the bonds. Because corporations continued to perform
well and have robust balance sheets, investors accepted a smaller premium over Treasuries
during 2013. Within the benchmark, corporate credits lost 1.53% over the year. The
Fund benefitted from its relatively high allocation to corporate credits for the
year of 37% versus 22% for the index.
The final major component of the Barclays Aggregate Index is asset-backed, or securitized,
bonds. Securitized bonds are typically composed of multiple loans that have physical
collateral, usually real estate. Most securitized bonds are built from mortgages,
so they have different characteristics than corporate credits or Treasury bonds,
and are an important component of a diversified portfolio. Securitized debt represents
32% of the benchmark and, due to a prospectus modification made on September 30th,
the Fund is now able to invest in this asset class. Because Quantitative Easing
(QE) involves purchasing both Treasury bonds and mortgage-backed securities, it's
my belief that the gradual reduction of QE will push prices down since the Federal
Reserve, currently the largest buyer, will no longer artificially elevate demand.
I believe there will be opportunities throughout 2014 to increase the Fund's allocation
to this asset class from its year-end weight of 10%.
Parnassus Fixed-Income Fund Portfolio of Investments as of 12/31/2013
Outlook and Strategy
In the upcoming year, it's likely that the Federal Reserve will continue to take
center stage. Navigating through the end of QE, while keeping the market informed
and the economy on track, will be a gargantuan task.
During most of the past four years, companies were rewarded by their shareholders
for holding exceptionally high levels of cash. While this gave investors in both
their stocks and bonds increased confidence in corporate credit profiles, cash stockpiling
was a major drag on economic growth. This sentiment began to evaporate last year
as investors became aggravated by extremely high corporate cash levels, since cash
provides a much lower return, especially when compared to the return on producing
a new product line or entering a new market. This, to me, signals the beginning
of higher growth: as companies are pressured to deploy their cash and reinvest in
their businesses, the economy grows.
Because of this outlook, I have positioned the Fund for a growing economy. First,
this means that the Fund's duration is shorter than the Barclays Aggregate Index's,
so it will have comparatively lower interest rate sensitivity. Second, the Fund
still has a relatively high allocation to corporate credits. It's my expectation
that increasing consumer demand, and productivity gains due to advances in software,
will drive revenues and cash flows higher. This should continue to benefit corporations,
particularly those sensitive to capital expenditures, such as high-tech industrial
Next, convertible bonds will likely play a more important role in the upcoming year.
The Parnassus Fixed-Income Fund can invest up to 20% of its assets in convertible
bonds. This asset class typically does well during periods of growth, since it benefits
from equity price appreciation, so it can be a way to supplement fixed-income returns.
Finally, mortgage pools will be opportunistically added throughout 2014, so that
the Fund reaps the benefits of this asset class as the housing market continues
Thank you for your investment in the Parnassus Fixed-Income Fund.
Samantha D. Palm
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.