Fund Fact Sheet
Parnassus Mid-Cap Fund
As of December 31, 2013, the NAV of the Parnassus Mid-Cap Fund was $25.10, so after taking dividends into account, the
total return for 2013 was 28.27%. This compares to 34.76% for the Russell Midcap Index (“Russell”) and 32.46% for the
Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper (“Lipper
We are pleased that the Fund had such a strong return in 2013 but are disappointed that we fell behind our benchmarks. The
reason we lagged is because of our goal to take on less risk than the index, so it’s hard for us to outperform when the market
surges. The Fund’s longer-term track record remains very good. The Fund has outperformed both the Russell and its Lipper
peers over the three-year period. For the five-year period and for the period since inception, the Fund is ahead of its Lipper
peers but slightly behind the Russell.
Below is a table comparing the Parnassus Mid-Cap Fund with the Russell and the Lipper average for the one-, three- and fiveyear
periods and for the period since inception on April 29, 2005. Further down is a graph showing the growth of a
hypothetical $10,000 investment in the Fund since inception.
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 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 Russell Midcap Index 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. Mid-cap companies can
be more sensitive to changing economic conditions and have fewer financial resources than
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 the total operating expenses to 1.20%
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.
Mid-cap stocks soared 34.8% in 2013, well ahead
of the returns predicted by most Wall Street
strategists. So, what happened? As expected,
corporate earnings growth was fair, but investors
paid more for each dollar of company earnings.
Investors believed that a material economic
recovery was underway, driven by housing and
manufacturing sector improvements and
employment gains. The Federal Reserve also kept
interest rates low through its aggressive bondbuying
program, making equities an attractive
investment option relative to low-yielding savings
Aside from a 5.7% market drop in May and June,
when the Greek government was in turmoil and
the Fed began hinting about reducing its bondbuying
program, mid-cap stocks climbed higher
and higher throughout the year. When all was said
and done, the Russell Midcap index rose an
Despite the Fund’s robust 28.3% return, we fell six
percentage points behind the Russell and four
percentage points behind our Lipper peers. From a
high level, we underperformed our index because
we tend to invest in high-quality stocks. This
strategy served us well in down markets like 2008
and 2011, when high-quality businesses in the
index outperformed the market, but it held us back
in 2009, 2010 and this year, when many lowerquality
stocks performed exceptionally well.
Another reason for the Fund’s underperformance
was stock selection. Poor stock picks in the
industrial and consumer discretionary sectors hurt
us the most this year, while good stock picks in the
utilities and financials sectors helped our return.
The Fund had just three stocks that reduced the NAV this year. While together they took a meager 6¢ from the Fund, they
were costly investments, because the Russell went up so much. In fact, these three stocks accounted for almost half of our
underperformance relative to the market.
The stock that hurt us the most was Teradata, a hardware and software provider of complex data analytics systems. The stock
plunged 26.5% during the year, from $61.89 to $45.49, cutting 4¢ from the NAV. Early in the year, the stock was under
pressure after the company missed revenue expectations, because fewer large customers bought its product suite. Deal flow
improved by mid-year, but an abrupt slowdown in demand from China pushed the stock lower at year-end. We’re holding
onto the stock, because we expect enterprise demand to improve and the shares are trading at a depressed valuation.
C.H. Robinson, a trucking brokerage company, fell 7.7% from $63.22
to $58.34, trimming the NAV by 1¢. The company’s net revenue margin
– the difference between what it charges shippers and what it pays
carriers – continues to be under pressure. This is due to a combination
of tepid economic growth that limits demand for higher-margin rush
shipments, new trucking regulations that limit supply and force trucking
prices up and irrational competition that isn’t allowing brokers to pass
through the higher prices to shippers. We believe the company’s net
revenue margin will improve, when either the supply-demand dynamic
shifts or aggressive competitors begin to seek profits. In the meantime,
we are holding our position in this industry leader due to its high
returns on capital, policy of returning excess cash to shareholders and
historically low valuation multiple. We also like the company’s variablecost
business model that provides downside protection in the event of
an economic downturn.
Coach, a handbag and accessories retailer, cut a penny off of the NAV, as
its stock fell 3.3% from $55.51 to $53.68, where we sold the stock. The
stock plummeted in early 2013, as competitive pressures, primarily
from Michael Kors and Kate Spade, hurt Coach’s profits. The stock
recovered mid-year, as a new footwear line boosted sales, but weak
demand for its handbags in North America caused the stock to fall again
in the second half of the year. We sold the stock primarily because we
believe that Coach has damaged its brand by selling too much
merchandise at discount outlet stores. We think the company could face
further market share losses in its core North America handbag business
and worry that management’s transition to a lifestyle brand, with a
broader assortment of apparel and shoes, will pressure earnings.
Most stocks in the Fund had big gains this year, and our three largest
contributors added at least 30¢ each to the NAV. The Fund’s biggest
winner was Pentair, an industrial products manufacturer. The stock
surged 58.0%, from $49.15 to $77.67, adding 40¢ to the NAV. The
stock went up steadily throughout the year, as management reaffirmed
its longer-term performance targets, supported by an improving
residential construction market. We’re holding onto our shares of this
industry leader, because we think the company can realize greater-thanexpected
efficiencies from its recent merger with Tyco Flow Control,
leading to management’s goal of earning $5 per share by 2015, more
than double what the company earned in 2012.
Charles Schwab, the San Francisco-based bank and brokerage firm,
soared 81.1% from $14.36 to $26.00 and added 31¢ to the NAV. While
earnings increased only modestly throughout the year, the real driver for
the stock was not net income, but rather an expected increase in interest rates. With rates currently at
extremely low levels, Schwab earns far less than
normal on its banking assets, money market
products and margin loans to brokerage clients.
When rates eventually return to their pre-crisis
levels, the company should more than double its
current earnings. We sold some of our Schwab
position during the year in response to the stock’s
big move, but we still held a meaningful position
as of year-end.
Applied Materials, a leading maker of
semiconductor manufacturing equipment, saw its
stock jump 54.6% from $11.44 to $17.69, for an
impressive gain of 30¢ to the NAV. Sales
benefitted early in the year, as flat-panel-displaymanufacturers
and chipmakers purchased
Applied’s equipment to expand capacity to build
chips for smartphones and tablets. The stock
moved higher after the company announced a deal to buy Tokyo Electron, a rival Japanese maker of semiconductor production equipment. We believe that CEO Gary
Dickerson and his team’s focus on R&D, cost management and market share gains will drive significant earnings growth
ahead, so we’re hanging on to the stock.
Parnassus Mid-Cap Fund Portfolio of Investments as of 12/31/2013
Outlook and Strategy
The consensus view is that U.S. stocks will go up again in 2014. Strategists are predicting mid-to-high single digit gains for
most market segments. We agree that the domestic economic expansion, supported by population gains, low interest rates,
continuing employment gains and tepid inflation are positive tailwinds for stocks. However, even as the economy improves,
we don’t expect the remarkable returns that we’ve seen over the past few years to persist.
The reason is that there’s little corporate sales growth, and profit margins are at all-time highs. The Russell’s earnings growth is
decelerating, from 19% in 2012 and 13% in 2013, to an estimated 10% in 2014, and earnings growth, fueled by cost
reductions and share buybacks, is getting harder to come by. The multiple that investors are willing to pay for earnings has
crept up, and at 19 times earnings, is 10% above the ten-year average. Finally, the Fed’s December announcement that it will
taper its bond buying program will inevitably drive investors to less risky assets. This also opens the door to eventual rate
tightening, which will temper market bulls.
Fortunately, we are still finding plenty of good opportunities. We recently added to our health care exposure, because we
believe an aging global population, rising incomes in developing markets, greater domestic health care coverage and an
improving domestic economy will lead more people to seek medical treatment.
In this sector, we initiated a position in Allergan, a leader in medical devices and specialty pharmaceuticals. We have followed
the company for years, appreciating its increasing relevancy due to market leading anti-aging and eye care products. The stock
dropped sharply over the summer as investors worried that Restasis, a dry–eye treatment, could face generic competition
when it goes off patent in 2014. We felt that investors overreacted, which provided an opportunity to buy this great business
at an attractive valuation.
We also added to our position in Dentsply, a leading manufacturer of dental consumables and implants. A slowdown in
patient visits has depressed demand for Dentsply’s consumables over the past few years. We see conditions gradually
improving, as unemployment declines and patients return for treatments, such as fillings and root canals, which were put off
over the past few years. We expect the company’s earnings growth to accelerate over the next five years, aided by improving
demand for its leading products and further margin expansion.
In the energy space, we initiated a position in MRC Global, the world’s largest distributor of valves, pipes and fittings to the
energy, utility and industrial sectors. We already own several distributors, including dental distributor Patterson Companies
and pharmaceutical distributor Cardinal Health. We love this business model, because distributors benefit from buying power with suppliers. A pause in customer demand for MRC’s products due to permitting issues gave us an opportunity to
buy this difficult-to-replicate business (the company seamlessly supplies over 200,000 SKUs of specialized pipes to customers
around the world) at a good price.
We also believe that increasing global demand for energy will drive significant capital spending over the next three years,
pushing revenue and earnings growth for MRC, along with our holdings Spectra Energy and Cameron International. We
believe that our energy services and infrastructure stocks will perform well going forward, because each is a leading operator
in a growing market.
Overall, we remain committed to our investment process of investing in increasingly relevant, well-managed companies with
competitive advantages and attractive valuations.
Thank you for your investment.
Matthew D. Gershuny
Lead Portfolio Manager
Lori A. Keith
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.