Fund Fact Sheet
Parnassus Mid-Cap Fund
Ticker: PARMX
As of March 31, 2013, the NAV of the Parnassus Mid-Cap Fund was $22.26, so the total return for the quarter was 9.82%.
This compares to a gain of 12.96% for the Russell Midcap Index (the "Russell") and 10.44% for the Lipper Multi-Cap Core
Average, which represents the average multi-cap core fund followed by Lipper (the "Lipper average"). We are pleased that the
Fund started the year with such a large gain, but are disappointed that we fell behind our benchmarks.
The Fund's long-term track record remains excellent. The Fund outperformed both the Russell and its Lipper peers over the
three- and five-year periods. Since we assumed management of the Fund on October 1, 2008, the Fund has generated an
annualized return of 12.47%, ahead of the Russell's 12.10% return and the Lipper average's 8.76% return.
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, 2013, 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, 2014. This limitation may be continued indefinitely by the Adviser on a year-to-year
basis.
First Quarter Review
Domestic equity markets moved much higher in
the first quarter of 2013, with all major indices
topping records set in 2007. The quarter started
off well, when corporate earnings growth came in
better than expected. The economy marched
ahead, as banks lent more money, the housing
market improved and the unemployment rate
dropped. On top of that, Federal Reserve
Chairman Ben Bernanke reassured investors that
interest rates will remain low until the
unemployment rate drops much further. This
increased the appetite for higher-return
investments, such as stocks. Unlike in the past,
negative events such as the U.S. sequester, which
cuts Federal spending by $85 billion this year, and
weak economic reports out of Europe didn't
dampen investor optimism.
Mid-cap stocks led the advance in the overall
markets, as the Russell Midcap Index rose 13.0%
in the quarter, above the 12.4% jump in the
small-cap Russell 2000, and well ahead of the
10.6% gain for the large-cap S&P 500. The Russell
Midcap Index is now at an all-time high, 12.9%
above its July 2007 peak, and an astonishing
183.4% above its March 2009 low.
The Fund's first quarter return was impressive, but
it still trailed the Russell by 3.1 percentage points
and its Lipper peers by 62 basis points (a basis
point is 1/100th of 1%). The Russell's surge was
driven by financial services and consumer
discretionary stocks, which went up more than the
overall market due to better than expected
housing and consumer spending activity. The
Fund owns fewer businesses in these sectors than
the benchmarks, which hurt our performance
during the quarter. Another main factor holding
back performance was our industrial stocks, which
lowered the Fund's return by 2.3 percentage
points versus the Russell.
Company Analysis
The Fund had two stocks that meaningfully reduced the NAV this quarter. The stock that hurt us the most was Expeditors
International, a best-in-class freight-forwarder that matches carriers and shippers for air and ocean deliveries. The stock took
8¢ from each fund share, as it dropped 9.7%, from $39.55 to $35.71. When we initially bought the stock in the fourth
quarter of 2012, demand for the company's services seemed to be at a trough. This quarter, the stock dropped further, because
Expeditors couldn't pass along higher-than-expected air carrier costs to shipping customers, and that compressed margins. We
added to our position on this weakness, believing that demand and margins will improve over time.
Our other big loser was Insperity, which dropped 12.9% from $32.56 to $28.37, for a loss of 6¢ per fund share. Insperity, a
provider of human resource services to small- and mid-sized businesses, was the Fund's top performer in 2012, but in early
February, after posting solid December-quarter results, the stock dropped when management reported unexpected client
losses and a weak year-end selling season in its mid-sized client practice. As a result, the company started 2013 with almost
5% fewer clients than expected, so management materially reduced its 2013 financial guidance. We're holding onto the stock,
because management is committed to solving its client retention and sales force issues. Insperity should benefit as the
economy improves and more clients sign up for its value-added human resource services.
Five companies each added 12¢ or more to the NAV. The stock that helped us the most during the quarter was Questar, a
Rockies-based company with a regulated gas utility, a natural gas pipeline and storage business and a subsidiary called
Wexpro, which produces low-cost natural gas for its utility affiliate. The stock soared 23.1% from $19.76 to $24.33, adding
17¢ to each fund share. Robust industrial demand for natural gas drove better than expected earnings results. The stock
moved higher, after the company announced a plan to increase utilization of its Southern Trails Pipeline.
Medical device supplier Teleflex added 15¢ to the NAV, as its stock
climbed 18.5% from $71.31 to $84.51. The company reported solid
financial results, aided by strong demand for its surgical care supplies
and higher pricing across its product lines. Teleflex's 2012 acquisition of
LMA International, a company that makes masks for anesthesia and
emergency care, also boosted profits. We see further upside as the
company benefits from its restructuring efforts.
Waste Management, a leading provider of waste collection, disposal and
recycling services in North America, contributed 13¢ to each fund share,
as its stock climbed 16.2% from $33.74 to $39.21. The stock moved
higher after the company reported better than expected volumes in its
Industrial Collection and Landfill segments. In addition, strong cost
reduction efforts bolstered profits during the quarter. Investors are also
anticipating improving pricing and volume trends for its residential
waste collection business this year as the housing market recovers.
Valeant Pharmaceutical added 12¢ to each fund share, as its stock
soared 25.5% from $59.77 to $75.02. Strong demand for its
dermatology products, along with solid traction in its emerging markets
business, drove better-than-expected revenue results. The stock marched
higher later in the quarter after the company announced a bid for Obagi
Medical, which extends Valeant's strong presence in the dermatology
products business.
Charles Schwab's stock jumped 23.2% to $17.69 from $14.36, adding
12¢ to the NAV. While Charles Schwab is known as a brokerage firm, its
earnings are heavily dependent on interest rates. For several years, the
company hasn't been able to charge its full fees for managing money
market funds, because of low interest rates. During the first quarter, the
stock moved higher as investors anticipated that interest rates would
eventually rise. Once interest rates move higher, Schwab can lift money
market fees and earn more on its banking assets, which will
dramatically increase profits.
Outlook and Strategy
About one-third of our portfolio is invested in information technology and industrial companies, with a focus on businesses
that are capturing share in growing end-markets. Our industrial holdings are particularly attractive over the long-run, due to
their secular growth opportunities, recurring revenue streams and difficult-to-replicate assets. These investments should
provide protection in down-markets and participation in up-markets. Our technology holdings are well-positioned to benefit
from long-term secular drivers spanning a multi-year period. The trends towards mobile shopping, social media and
smartphones are creating an explosion of data, which will boost demand for products and services from our holdings
Teradata and Verisk. The compression in technology product cycles creates greater demand for capital equipment and
software development tools from our holdings in Applied Materials and Synopsys.
Our utility and energy holdings account for 18% of the Fund's assets. Natural gas prices are currently depressed, but we expect
this to change over the next several years, as industrial and electricity power generation demand picks up. Our natural gas
transmission and distribution investments like Questar, MDU Resources and Spectra Energy have critical infrastructure assets
such as pipelines, gas processing and storage facilities. These businesses charge a steady fee for their pipeline and utility
services, providing reliable cash flow. The switch to natural gas from diesel fuel by the trucking industry provides a material
opportunity for Questar, as the company rolls out natural gas refueling stations for trucks. Energen and Concho Resources,
which are focused on high-margin oil production today, are well-positioned to benefit from continued oil demand. Their
deep inventories of natural gas reserves should help the stocks, as natural gas prices recover.
We also continue to own fewer financial services stocks than our benchmarks. The market ignored the recent flare-up in
Cyprus, when the country's two largest banks became insolvent. However, we remain concerned that the problems in Cyprus
could have implications for the entire European Union, and in-turn, U.S. banks with international exposure. As a result, most
of our financial services exposure is limited to domestically-focused lender First Horizon, asset manager Charles Schwab and
financial technology provider SEI Investments. All of these companies have solid return profiles and stable balance sheets.
Thank you for your investment in the Parnassus Mid-Cap Fund.
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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.