Fund Fact Sheet
As of December 31, 2013, the net asset value per share (“NAV”) of the Parnassus Fund was $45.86, so after taking dividends
into account, the total return for the year was 34.22%. This compares to 32.38% for the S&P 500 Index (“S&P 500”) 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 average”). It was a great year for the stock market and especially for the Parnassus Fund; since we beat our
benchmarks by almost two percentage points. If you held your shares at the beginning of the year, the value of those holdings
has increased by more than a third.
Below is a table comparing the Parnassus Fund with the S&P 500 and the Lipper average over the past one-, three-, five- and
ten-year periods. As you can see, we are well ahead of both benchmarks for all periods. Most striking is the five-year number,
where we have gained an average of 22.64% per year since the end of 2008. This is almost five percentage points per year
ahead of the benchmarks.
Further down, you will also see a graph that shows the growth of a hypothetical $10,000 investment in the Fund over the past
ten years. The graph shows that the Fund has grown more than the same amount invested in either of the benchmarks.
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 S&P 500 Composite Stock Index (also known as the
S&P 500) 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. Prior to May 1, 2004, the Parnassus Fund charged a sales load (maximum of
3.5%), which is not reflected in the total return calculations.
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.
EZchip Semiconductor was the only company that
had a significantly negative impact on the Fund
during the year, but it only cut 17¢ off the NAV, a
figure that pales in comparison to the gains
contributed by the eight companies that topped
our winners list. The company designs
semiconductors used in data centers, enterprise
networks and telecommunications equipment.
EZchip’s stock dropped 25.6% during the year
from $33.07 to $24.61. The stock plunged early in
the year, when a large customer, Huawei, decided
to design its own network-processing chips rather
than purchasing them from EZchip. The issue
sank further when its largest customer, Cisco, also
announced plans for a new chip, but the stock
rebounded somewhat, when Cisco clarified that
its new semiconductor would not replace that of
EZchip. We’ve had a lot of ups and downs with
this stock, but we’re hanging on to it, because of
its best-in-class technology and its undisputed
leadership in network-processors.
Eight companies each accounted for a gain of 39¢
or more on the NAV. Ciena, maker of optical
equipment for telecommunications, had the
biggest impact. It contributed an astounding
$1.15 to each Parnassus share during the year, as
its stock soared 52.4% from $15.70 to $23.93.
This put it at the top of our winners list. The next
time you make a phone call, take a moment of
silence to reflect on Ciena and show some
appreciation for the boost it has given your
Parnassus shares. We bought Ciena several years
ago with the idea that the big phone companies would have to purchase more equipment, because all the telecom traffic was straining their networks. Somehow, the carriers
were able to postpone major purchases until this year when the dam finally broke. Ciena’s order backlog hit record levels and
the company gained market share.
Right up there with Ciena was Applied Materials, maker of equipment used in semiconductor-manufacturing, which added
$1.10 to the NAV, as its stock rocketed up 54.6% from $11.44 to $17.69.
Applied had a strong start in 2013. Robust demand from chipmakers
and manufacturers of flat-panel displays helped earnings and pushed
the stock higher. The big event, though, was the announcement that
Applied would merge with Tokyo Electron, a rival Japanese maker of
semiconductor equipment. The stock moved higher on the news, since
the combined company will benefit from a wider customer base,
enormous cost savings and much greater pricing power.
Finisar makes optical equipment for use in telecommunications and
data centers, and it contributed 90¢ to each fund share, as its stock shot
up 46.8% from $16.30 to $23.92. Shares dropped at the beginning of
the year, as its telecommunications customers delayed investment in
additional network capacity. Later in the year, the shares moved much
higher with strong sales in its data-communications division, which
now accounts for almost 70% of revenue. Customers of this division
have been upgrading their servers in their data-centers to handle
increased Internet traffic. I had originally bought the stock because I was
counting on much higher sales to telecommunications companies, but
this has not yet happened. All I can say is that I was very fortunate that
the data-center sales have materialized. I’m still hopeful that telecom
sales will have a sharp increase, and if they do, I believe the stock
should move much higher.
Charles Schwab, the San Francisco-based bank and brokerage firm,
soared 81.1% from $14.36 to $26.00, adding 82¢ to the NAV. Although
earnings increased modestly this year, what drove the stock was not
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 funds and margin loans to brokerage
clients. When rates eventually return to their pre-crisis levels, I believe
the company should more than double its current earnings. We sold
some of our Schwab shares in response to the stock’s big move, but we
still hold 500,000 shares.
Parnassus Fund Portfolio of Investments as of 12/31/2013
Credit-card-issuer Capital One climbed 32.3% from $57.93 to $76.61
for a gain of 61¢ per fund share. The company got off to a slow start this
year, reporting disappointing quarterly earnings related to its acquisition
of online bank ING Direct and HSBC’s private label credit-card
portfolio, which had customer losses and higher expenses than
expected. The stock dropped and we added to our position, because we
believed the acquisitions were sound strategic fits and management’s
execution would improve. This is what actually happened late in the
year, as earnings moved higher and so did the stock.
Homebuilder PulteGroup added 47¢ to the NAV, as its stock rose
12.2% from $18.16 to $20.37. At first glance, it may be hard to
understand how Pulte could contribute 47¢, while only going up 12.2%
from the beginning of the year to the end. The explanation is that we
sold 350,000 shares around $21 each during the period of March through July, and then we bought back 650,000
shares around $16 each during the month of
August. Pulte climbed higher early in the year, as
the housing market recovered and people bought
new homes, and this is the period when we sold
stock. The housing market slumped during the
summer, as a jump in interest rates led to a
slowdown in new home sales. That’s when we
bought more shares. During the fourth quarter,
new home sales bounced back, and so did shares
Autodesk makes software for architects, engineers
and designers, and its stock rose 42.4% from
$35.35 to $50.33 for an increase of 42¢ to the
NAV. Weak demand for its software in Europe
caused the company to miss earnings expectations
in early 2013, causing the stock to fall. We added
100,000 shares to our position, because we
expected demand to increase due to improved conditions for manufacturing and construction. The stock did move higher later in the year, as conditions improved and
investors became more bullish. The company then announced plans to shift to a more predictable subscription-based pricing
model. Autodesk is poised to benefit from its leading design and engineering software, as the recovery continues in
construction and manufacturing.
Shares of San Francisco-based Wells Fargo rose 32.8% from $34.18 to $45.40 for a gain of 39¢ for each fund share. Unlike
other large banks, Wells Fargo did not make many bad loans, so it came out of the financial crisis with a strong balance sheet.
This has enabled the bank to become the biggest real estate lender in the country, and one of the largest lenders to business
and consumers. Wells Fargo has been increasing its market share, and with the housing market recovering and the economy
improving, the bank has now reported ten consecutive quarters of record earnings, with each quarter higher than the one
Outlook and Strategy
Note: This section represents the thoughts of Jerome L. Dodson and applies to the Parnassus Fund and the Parnassus
In general, I’m an optimist, but I wasn’t optimistic enough about last year’s returns. It’s an understatement to say that I was
amazed that the stock market was up 30% last year. The market is a leading indicator, so that means that the economy should
be very strong in 2014. I think that’s correct. The housing market is strong, and that always drives the economy higher. Janet
Yellen has been confirmed as head of the Federal Reserve, so she will provide plenty of fuel to keep the economy growing.
Also, unemployment is now down to 7%, and more jobs means more spending which is good for the economy. I wish it was
down to 4%, but at least it’s headed in the right direction. Democrats and Republicans in Congress have stopped feuding – at
least over the budget – and that’s definitely a plus for the economy.
Does all this good economic news mean the stock market will move much higher in 2014? In the long-run, the stock market
moves along with the economy, but in the short-run, valuations have a big impact on what the market does. Right now, the
market looks fully-valued. While I expect the market to move higher in 2014, I don’t think the gains will be that big – maybe
something in the 5-10% range. Of course, I don’t think it’s possible for anyone, including me, to make accurate predictions
on the market, so this is just my personal opinion.
Usually, the market cools off after a year of 30% gains, but sometimes it can keep on going much higher. For example, the
Parnassus Fund was up 26% in 2012, so I expected modest gains in 2013. Instead, the Fund was up 34% last year. Because
the market is so unpredictable, it’s better not to make investment decisions based on market forecasts.
My expertise is in identifying good companies, putting a value on them, then investing in the ones that are undervalued.
Those are the ones in our portfolios right now. Although I believe our stocks are undervalued, they aren’t as undervalued as
they were at the beginning of 2013. I anticipate modest gains in 2014.
Jerome L. Dodson
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.