Fund Fact Sheet
Parnassus Mid-Cap Fund
As of September 30, 2013, the NAV of the Parnassus Mid-Cap Fund was $24.13, so the total return for the quarter was 7.24%.
This compares to 7.70% for the Russell Midcap Index ("Russell") and 6.88% for the Lipper Multi-Cap Core Average, which
represents the average return of the multi-cap core funds followed by Lipper ("Lipper average").
For the year-to-date, we are behind both the Russell and the Lipper average, as we have gained 19.04%, compared to 24.34%
for the Russell and 21.28% for the Lipper average. Normally, we'd be delighted with a return of 19% for nine months, but for
this period, it doesn't look great in comparison with our benchmarks.
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. As you can see, the Fund is essentially in line with the
Russell for the three- and five-year periods, but slightly behind for the period since inception. We handily beat the Lipper
average during the three- and five-year periods and for the period 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%
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.
Third Quarter Review
Mid-cap stocks marched 7.7% higher this quarter.
The quarter started off well, when corporate
earnings and economic data came in better than
investor expectations. The Federal Reserve's
decision to maintain its economic stimulus
program also supported stocks during the quarter.
The Fed said it will wait for more evidence of an
economic recovery before ending its quantitative
easing. The market even shrugged off potential
U.S. military intervention in Syria and the
possibility of a Federal government shutdown to
reach a multi-year high in September.
The Fund trailed the Russell by 46 basis points
(one basis point equals 0.01%), and beat the
Lipper average by 36 basis points. We were
disappointed that we didn't beat the Russell, but
in this surging market, we are pleased that our
lower-risk strategy captured 94% of the index's
gain. During the quarter, our stock selection in the
consumer and materials sectors hurt the Fund's
performance by 140 basis points. Another factor
holding back our performance was our health care
investments, which lowered the Fund's return by
30 basis points. Thankfully, our gains in the
financial, utilities and information technology
sectors offset most of these losses.
Two stocks in the portfolio reduced the Fund's
NAV by 3¢ or more in the quarter. The stock that
hurt us the most was Compass Minerals, a leading
salt and fertilizer producer in the United States,
which sank 9.8% from $84.53 to $76.27, slicing
4¢ from the NAV. The stock went down after the
world's largest potash fertilizer producer, Uralkali,
announced plans to slash its potash price to boost
market share. Since Compass gets 20% of its revenue from potash, investors dumped the shares. We bought more shares during the quarter because we believe the stock
price decline was overdone. We also like the company's position as the low-cost producer of deicing salt and believe that
demand and pricing for salt will improve, especially if we get a cold winter.
Sysco, a leading North American food-service distributor, dropped 6.8%, from $34.16 to $31.83, reducing each fund share by
3¢. Sluggish demand from restaurants caused the company to miss earnings expectations during the quarter. A slower than
expected roll-out of its new enterprise resource planning system has also weighed on earnings results, as cost savings from the
new system have been pushed into 2014. We're holding our shares because we believe Sysco, with its wide-moat distribution
network, breadth of products and services and stringent cost management, will benefit as restaurant sales recover.
Fortunately, four companies contributed 12¢ or more to the NAV. Our biggest winner was Insperity, a provider of humanresource
services to small- and mid-sized businesses. The shares soared 24.1% from $30.30 to $37.60, adding 17¢ to the
NAV. The stock jumped after management announced good quarterly results, highlighted by lower-than-expected health care
expenses and progress in fixing its sales force issues. Valuation is also rising, because investors are optimistic that confusion
around the Affordable Care Act will push employers to outsource health care insurance services management to Insperity.
Oil- and gas-producer Energen added 15¢ to the Fund's NAV, as its
stock surged 46.2% to $76.39 from $52.26. The company's profits
surpassed investor expectations during the quarter, as oil prices climbed
10.8%, from $93 to $103 a barrel, because of supply disruptions in the
Middle East. The stock also got a big boost when the company reported
impressive production results from its exploratory drilling sites in the
Permian Basin in Texas, which will boost its drilling inventory by over
5,000 locations. Energen should benefit from its extensive drilling
inventory and scale advantages in the Permian Basin, so we're hanging
on to our shares.
Applied Materials, a leading maker of semiconductor manufacturing
equipment, saw its stock climb 17.6% from $14.91 to $17.54, for a gain
of 12¢ on the NAV. During the quarter, the company agreed to buy
Tokyo Electron, a rival Japanese maker of semiconductor production
equipment. By combining two of the industry's three largest players,
Applied Material's competitive moat will widen, as now even fewer
companies in the world possess the ability to develop equipment for
increasingly complex chips. The combined company will also benefit
from an expanded customer base and higher earnings potential due to
Autodesk, a leading software provider for architects, engineers and
designers, added 12¢ to each fund share, as its stock price jumped
21.3% from $33.94 to $41.17. Solid demand for its design software by
engineering and construction firms drove better than expected earnings
results. Investor sentiment moved higher after the company announced
plans to shift to a more predictable subscription-based business
model. We believe Autodesk has a bright future, as manufacturing and
construction firms increasingly adopt the company's design suites.
Outlook and Strategy
As we write this, the government is shut down due to a budget impasse.
The debt ceiling debate is looming, and pundits are pessimistic about
the outcome. Beyond our borders, the European economy is stagnant,
and their financial system is vulnerable. You might be wondering how
we are adjusting our portfolio for the current environment, and the
answer is that we're not.
We believe that it's very difficult to predict market movements in the short-term, and that few investors consistently do it well.
We're interested in macro events only insofar as they impact the range of outcomes for our stocks.
Looking at our portfolio, almost a quarter of our Fund is invested in the industrials sector, which is typically highly cyclical.
However, most of our holdings in this sector have relatively low cyclicality. About half are business service-related companies,
performing non-discretionary tasks such as collecting waste and storing documents. The ties that bind them together are
secular growth opportunities, wide moats, steady cash flows and limited downside.
Our largest position in the sector is Pentair, a diversified industrial, that makes pumps and filtration equipment for residential
and commercial sites, such as swimming pools and restaurants. The company also has an enclosures segment that makes
equipment that protects electronics. The business is becoming increasingly relevant to its customers, as the world population
increases and water supplies become constrained. Management has spent the last decade building up a technologically
advanced product suite with recognizable brands, which should lead to increased pricing power. Following a merger last year
with Tyco's Flow Control unit, there are now opportunities for margin expansion.
Our newest addition to the Fund is Xylem, a pure-play industrial provider of water infrastructure products that benefits from
trends similar to those impacting Pentair. Most of the company's revenue comes from the Water Infrastructure segment,
which primarily sells equipment to utilities to assist in the transportation, treatment and testing of water. The smaller
segment, Applied Water, sells a wide range of products to residential, commercial, industrial and agricultural customers. We
like the company's razor-razorblade model because it requires customers to buy maintenance and replacement parts over
time, ensuring recurring revenue well after initial equipment sales are made.
The Fund continues to have a relatively large concentration of technology stocks, where we see companies with differentiated
growth opportunities and excellent balance sheets. The Fund has relatively few financial and consumer discretionary stocks,
where we believe the downside risks are large.
We continue to focus on businesses that can increase their intrinsic values faster than the overall market over the long-run.
Our portfolio is currently made up of 41 businesses that are attractively valued, increasingly relevant to their customers,
competitively advantaged and well-managed. Our goal for the Fund is that it should outperform the market over the long-run
by participating in up markets, gaining significant ground on our index in down markets and avoiding permanent capital
losses in severe market corrections.
Thank you for your investment in the Parnassus Mid-Cap Fund.
Matthew D. Gershuny
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.