Fund Fact Sheet
Parnassus Mid-Cap Fund
Parnassus Funds Quarterly Report: September 30, 2011
As of September 30, 2011, the NAV of the Parnassus Mid-Cap Fund was $16.72, resulting in a loss of 17.31% for the third
quarter. This compares to a loss of 18.90% for the Russell Midcap Index (the "Russell") and a loss of 16.94% for the Lipper
Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper (the "Lipper average").
Although we had a large loss for the quarter and fell slightly behind the Lipper average, we're pleased that we outperformed
the Russell.
For the first nine months of 2011, the Fund is down 8.38% versus a loss of 12.34% for the Russell and a loss of 12.04% for
the Lipper average. We're proud that the Fund has so handily outperformed both its benchmarks year-to-date.
The Fund's long-term performance remains outstanding. Since we began managing the Fund three years ago, the annualized
return is 4.93%, better than the Russell's 3.96% return and the Lipper average's 1.13% return. The Fund's five-year annualized
return is also well ahead of both indices.
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.
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 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 share holder 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
large-cap companies. 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 available 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 limit the
total operating expenses to 1.20% of net assets, exclusive of acquired fund fees, until May 1,
2012. This limitation may be continued indefinitely by the Adviser on a year-to-year basis.
Third Quarter Review
Major indices were flat for most of June, but
dropped sharply in July and August. The market
fell as the long-running European financial crisis
entered a new phase. The concern now is that debt
defaults and poor coordination among European
leaders could provoke bank failures and even
cause some countries to abandon the euro. In the
U.S., a lack of job creation, the stalled housing
market and weak manufacturing trends weighed
on economic growth. Making matters worse,
political gridlock over raising the debt ceiling
caused the first-ever downgrade of U.S. sovereign
debt by a credit agency.
The Russell was not immune to the greater markets'
downturn and plunged 18.90% during the quarter,
more than erasing the 8.08% gain made in the first
half of the year. In the trailing twelve-months, the
Russell is now down 0.88%, but it is still up
104.18% from its low on March 9, 2009.
The Fund provided downside protection in the
quarter, losing 17.31% compared to 18.90% for
the Russell. The Fund beat the Russell this quarter
because of its relatively high exposure to larger
stocks, which went down less than smaller stocks
within the mid-cap universe. The Fund was also
overweighted, in comparison to the index, in
companies with higher returns on equity (ROE),
an indication of profitability and efficiency. Since
these companies did better than companies with
lower ROEs during the quarter, this factor helped
our performance.
On a sector basis, we lost ground in the quarter due to the Fund being overweighted relative to the index in the energy and
industrial sectors, two of the index's worst performing groups. The Fund's underweighted positions in financial and materials
issues, relative to the index, were the most positive allocation decisions for the quarter.
Company Analysis
The Fund's performance was primarily affected by stock selection, as opposed to sector allocation. Poor stock selection in the
energy and financial sectors hurt the Fund the most, while good stock picking in the industrial and information technology
sectors helped us. The five stocks that reduced the Fund's NAV are written up below. We had only one stock that made a
substantial positive contribution to the Fund's performance during the period.
First Horizon, a Tennessee-based bank, hurt the Fund the most, slicing 27¢ off the NAV, as its stock sank 37.5% from $9.54 to
$5.96. Investors are concerned about the bank's exposure to troubled mortgages and home equity loans. While we expect First
Horizon to incur losses, we believe that the amount will be manageable, and that the market has over-reacted, especially
given the company's well-capitalized balance sheet and core earnings power. We also like the stock because the shares are
trading at bargain-basement prices.
Shares of SEI Investments, the investment technology solutions provider and asset manager, plunged 31.7%, sinking from
$22.51 to $15.38, while reducing the Fund's NAV by 26¢. The company makes most of its revenue on fees earned from assets
under administration and management, so the stock went down this quarter with the falling equity markets. Profitability has
also been under pressure as sales cycles have lengthened due to economic uncertainty, and heavy investment continues in the
recently launched service offering, the Global Wealth Platform.
Oil- and gas-producer Plains Exploration & Production plummeted 40.4%, from $38.12 to $22.71, decreasing each Fund
share by 22¢. Oil prices fell to the lowest level of the year this past quarter, moving from $95 per barrel to $79 per barrel,
which reduced Plains' profits.
Shares of Valeant Pharmaceuticals, a developer and marketer of specialty pharmaceutical and branded generic drugs, cost the
Fund 17¢, as its stock fell 28.6% from $51.96 to $37.12. The shares dropped after the company reported weaker-than-expected
financial projections, including slow growth in its U.S. neurology
business. We still like this well-managed company given its fast growing,
overseas generics business and its role as a profitable acquirer in a
fragmented space.
Insperity, a provider of services that help small businesses manage their
employees, cost the Fund 17¢ as its stock dropped 24.9% from $29.61
to $22.25. Insperity makes money when more businesses sign up for its
human resources services, so the stock went down during the quarter as
investors anticipated rising unemployment. The company is also
undergoing an expensive marketing and rebranding campaign, which
has been a drag on profitability.
Our only material winner for the period was consumer products
company WD-40, which added 3¢ to the Fund's NAV, after the stock
shot up 9.1% from $39.04 to $42.59. WD-40 uses petroleum to make
its products, so the stock moved higher early in the quarter when oil
prices plunged. We sold the stock into this strength, believing that lower
input costs wouldn't make up for slumping sales due to the soft
economic environment.
Parnassus Mid-Cap Fund Portfolio of Investments as of 9/30/2011
Outlook and Strategy
The various growth policies enacted since the 2008 financial crisis
haven't been able to offset the weaknesses in our economy.
Unemployment remains high, as do debt burdens for government
entities and consumers. Furthermore, the ugly discord in Washington and a split government means that additional, meaningful Federal stimulus is unlikely. At the same time, the Federal Reserve
is running out of options to boost growth, as is indicated by its latest plan, Operation Twist, which we doubt will have much
of an impact on economic activity. Additional negative factors informing our outlook are the ongoing European sovereign
debt crisis and hints of potential debt problems in China.
Since our investment decisions are company-specific, this outlook is only important to us, when we consider companies that
are especially sensitive to macro factors. Two sectors that contain highly economically-sensitive companies are consumer
discretionary and financials. Not surprisingly, given our rather gloomy outlook, the portfolio is significantly underweight
relative to the Russell in both these sectors.
Conversely, our key overweight sectors are industrials and information technology, where we've identified businesses that
should perform well even if the economy slows down. Our industrial exposure is composed mostly of service providers, like
Waste Management and Verisk, with high degrees of recurring revenue and strong competitive positions. These same positive
factors characterize two of our largest information technology holdings, Paychex and Fiserv.
Regardless of the environment, our core strategy is to execute our fundamental process for stock selection. This leads us to
invest in attractively valued companies with secular growth opportunities, durable competitive advantages and quality
leadership teams. We think this approach will lead to downside protection in declining markets, upside participation in rising
markets and long-term outperformance.
Thank you for your investment.
Yours truly,
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Ben Allen
Portfolio Manager
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Matthew D. Gershuny
Portfolio Manager
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Lori A. Keith
Portfolio Manager
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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.