Fund Fact Sheet
Parnassus Mid-Cap Fund
Parnassus Funds Quarterly Report: March 31, 2012
Ticker: PARMX
As of March 31, 2012, the NAV of the Parnassus Mid-Cap Fund was $19.88, so the total return for the quarter was a gain of
12.38%. This compares to a gain of 12.94% for the Russell Midcap Index (the "Russell") and a gain of 12.46% for the average
multi-cap core fund followed by Lipper (the "Lipper average"). We're pleased with the Fund's double-digit rise this quarter,
even though it fell slightly behind its benchmarks.
The Fund's long-term performance remains excellent. The Fund has outperformed its Lipper peers in the one-, three- and fiveyear
periods and for the period since inception, and the Russell in the one- and five-year periods. Under the current team's
tenure, which began on October 1, 2008, the Fund has returned 11.51% per year, versus 7.50% for its Lipper peers and
10.65% for 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.
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
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 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, 2012, 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, 2013. This limitation may be continued indefinitely by the
Adviser on a year-to-year basis.
First Quarter Review
Domestic equity markets soared in the first quarter, with all indices posting double-digit gains. This is a welcome start to the
year, considering last year's market volatility and lackluster performance. It seems that the unusually warm winter weather
combined with a general lack of bad news put investors in a buying mood: they bid stocks up through the quarter, and shrugged off concerns about the slowing Chinese
economy and European sovereign debt.
Mid-cap stocks had an especially strong quarter, as
the Russell rose 12.94%, ahead of the small-cap
Russell 2000 Index's 12.44% and the large-cap
S&P 500 Index's 12.58%. The Fund also went up a
lot, gaining 12.38%, just a little behind its Lipper
peers' 12.46% return. Even though our return is
slightly behind both benchmarks this quarter,
we're pleased that the Fund participated to such a
great extent in the rally and provided a large gain
for investors. We are not too concerned with the
underperformance, because the market's first
quarter jump was driven by appreciation in risky
assets, and the Fund's long-term strategy for
outperformance is to own less risky companies,
with larger market values and higher returns on
capital.
As usual, stock selection had a greater influence on
the Fund's return than sector allocation. Good
stock picking in the financial and energy sectors
helped us the most this quarter, while poor stock
picking in healthcare hurt the Fund. Our
information technology stock picks didn't go up
as much as the index, but we gained ground by
being overweighted this sector, relative to the
Russell. The Fund's overweighted positions in the
industrial and healthcare sectors were also positive
allocation decisions for the quarter. The Fund lost
ground in the quarter by owning fewer consumer
discretionary and financial stocks than the index,
which performed relatively well.
Company Analysis
Three stocks added at least 16¢ to the Fund's NAV in the first quarter of 2012. The biggest winner was business analytics
leader Teradata, which added 18¢ to each fund share, as its stock surged 40.5% from $48.51 to $68.15. Strong enterprise
demand for data analytics software boosted Teradata's profits during the quarter. The company saw a pick-up of sales most
notably with its communications and financial customers, spurred by the explosion of mobile and web data. We believe the
company is on track to deliver strong earnings growth with its innovative new data warehouse products, expansion into the
mid-market and strong share buyback program.
First Horizon, a Tennessee-based bank, added 17¢ to the NAV, as its stock rose 29.8% from $8.00 to $10.38. After a difficult
first nine months in 2011, the stock has come roaring back, as the bank's national mortgage and home equity loan losses
continue to improve, and a timely share buyback reminded investors of its very strong capital position. We believed that the
market was overly punishing the stock in 2011, and we took the opportunity to add to our position at bargain-basement
prices. The bank has strong core earnings power and a management team that is committed to building shareholder value,
and we believe that significant upside remains in the shares.
Pentair sells water filtration systems and thermal protection for electrical systems. Its stock went up 43.0% during the quarter,
from $33.29 to $47.61, adding 16¢ to each Fund share. The stock jumped because the company announced it would
combine its business with Tyco's flow control business unit. Tyco Flow Control makes valves and controls for the energy and
industrial sectors as well as pipes for water systems. The combined company will be a global leader in flow, filtration and
equipment protection, with leading positions in high-growth
geographies and end-markets.
The Fund had three stocks that reduced the value of each Fund share by
2¢ or more. The biggest loser was natural gas producer Ultra Petroleum,
which lost 23.6%, as its stock dropped from $29.63 to $22.63 to drive
down the NAV by 4¢. A glut of natural gas and unusually warm
temperatures caused natural gas prices to tumble 28.9% during the
quarter, from $3.02 to $2.15 per million British thermal unit, to the
lowest level in a decade. The stock fell after Ultra cut back its drilling
program and lowered earnings expectations in response to weak natural
gas prices. Ultra shares are trading at a very depressed valuation, but
should move higher as natural gas prices recover.
Iron Mountain, the leader in document storage services, dropped 6.5%,
from $30.80 to $28.80, cutting 3¢ from the NAV. The stock dropped
after the company reduced its guidance for 2012 earnings. A lower than
expected price for paper is hurting the company's recycling business,
and the weak euro is dragging down the value of profits made in
Europe. We're not too concerned about these short-term events, since
the company has a terrific competitive position and is committed to
returning capital to shareholders in the form of stock buybacks and
dividends. Also, by the end of the second quarter, we'll find out if the
company will convert to a real estate investment trust (REIT), a
corporate structure that will reduce taxes at the corporate level and
enable shareholders to receive higher dividends.
AGL Resources, a natural gas distribution company, fell 7.2% during the
quarter from $42.26 to $39.22, taking 2¢ from the NAV. Unusually
warm weather drove down customer usage which caused earnings
results to fall short of expectations. Demand for its gas storage services
also slumped, as natural gas prices fell to a 10-year low. We believe the
stock will move higher, as the company benefits from a favorable rate
case structure and long-term customer contracts.
Outlook and Strategy
The best economic news to come out of the United States this quarter was job creation. The massive government stimulus of
the past few years seems to be working because the private sector is adding jobs, the unemployment rate is coming down and
consumer confidence is moving higher. We're hopeful that these stabilizing trends have created enough sparks to enable the
economy to stand on its own two feet, without the help of the government.
At the same time, we look at the Russell, up an amazing 159% from its March 2009 lows, and wonder if enough has changed
for the market to have moved so high so fast. Yes, the banks are more stable, the consumer is strengthening, the housing
market isn't getting any worse, corporate earnings have recovered, and market multiples are reasonable, but it seems that
investors have turned a blind eye to potential market disrupting pitfalls.
Many investors aren't considering the cost of the bailout and stimulus: an escalating budget deficit and debt load. There are
also the issues of moderating corporate earnings growth, potential high inflation here in the United States, slowing economic
growth in China, continuing debt worries in the Euro zone and a potential military conflict involving Iran. So, while the
market had a great first quarter, we don't see a smooth ride ahead.
The Fund's positioning continues to be cautious, with a focus on owning quality issues that are larger, less-leveraged, and
have higher returns on capital than the Russell as a whole. This positioning is the result of our bottom-up investment process,
which focuses us on companies with attractive growth rates, competitive positions, management teams and valuations. These
companies should do better than their peers over time regardless of the economic environment.
We continue to be underweight in the consumer discretionary and financial sectors relative to the Russell, because few
companies currently meet our competitive advantage, risk and valuation criteria. We remain overweight in the information
technology and industrial sectors relative to the Russell, owning businesses that are increasing their share in growing markets
due to competitive advantages and competent management teams. We are fully invested, with an eye on protecting
shareholder capital in down markets and participating in up markets.
In other news, Ben Allen will be stepping down from the Fund's portfolio management team on May 1 of this year, because
he is joining Todd Ahlsten in managing the Parnassus Equity Income Fund. Since Ben is also the Director of Research, and
because Parnassus has a team-oriented, collaborative culture, he will continue to influence the Fund's research process and
holdings. As always, we remain committed to our investment process, which is the cornerstone of our long-term strategy for
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.