Fund Fact Sheet
Parnassus Fund
Parnassus Funds Quarterly Report: March 31, 2012
Ticker: PARNX
As of March 31, 2012, the net asset value per share ("NAV") of the Parnassus Fund was $41.41, so the total return for the
quarter was 17.54%. This compares to 12.58% for the S&P 500 Index ("S&P 500") and 12.46% for the Lipper Multi-Cap Core
Average, which represents the average multi-cap core fund followed by Lipper ("Lipper average"). For the quarter, the Fund
was up about five percentage points over both of the benchmarks. Most of our strong gains can be attributed to a "bounceback"
phenomenon. The Fund underperformed last year, losing about 5%, and this drop pushed our stocks into undervalued
territory. As the economy got stronger late last year and early this year, our stocks snapped back, giving us a good return.
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. You'll notice that we're behind the S&P 500 for the one-year period, but ahead of the Lipper average. We're
well ahead of both indices for the three- and five-year periods.
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. As described in the Fund's current prospectus dated May 1,
2012, Parnassus Investments has contractually agreed to limit the total operating expenses to
0.99% 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.
Company Analysis
Five companies made the biggest contributions to the quarter's strong performance, each adding 42¢ or more to the value of
each fund share. Homebuilder PulteGroup soared 40.3% from $6.31 to $8.85, which added a substantial 55¢ to each
Parnassus Fund share. More jobs, the improving economy and higher home sales pushed all homebuilder stocks higher.
Ciena Corporation, a maker of optical equipment
for use in telecommunications networks, added
53¢ to the NAV, as its stock shot up 33.8% from
$12.10 to $16.19. The stock had a difficult time in
2011 when the big telecom service-providers
delayed capital expenditures. Orders have since
picked up, since the service-providers need to
make big investments in order to keep up with the
exploding amount and complexity of data being
sent over their networks.
Like Ciena, Finisar makes optical equipment for
telecommunications networks, and its stock
contributed 47¢ to each fund share, rising from
$16.75 to $20.15 during the quarter. In previous
reports, I wrote about reduced orders at Finisar
because of excess inventory building up with
customers. That inventory seems to have declined
to normal levels, so investors are anticipating that
telecom service-providers will have to increase
their equipment purchases to meet the demand
for bandwidth.
Shares of San Francisco-based Wells Fargo climbed
23.9% from $27.56 to $34.14, adding 45¢ to the
Fund's NAV. The bank is reaping the rewards of
prudent lending-decisions made during the boom
years, and is using its healthy balance sheet to take
market share from weakened competitors who are
saddled with bad loans. Wells Fargo now
originates 30% of all mortgages in America and
will benefit enormously as the housing market
recovers.
Qualcomm, a provider of software and semiconductors used in cellular telephones, soared 24.4% during the quarter from
$54.70 to $68.02, contributing 41¢ to each fund share. The company is hitting on all cylinders, as it beat earnings
expectations last quarter. Its licensing division is benefiting from the growth in smart phones and tablets, while its
semiconductor division won a contract for the baseband chip for the Apple iPhone 4S.
Outlook and Strategy
Note: This section represents the thoughts of Jerome L. Dodson and applies to the three funds that he manages, the Parnassus
Fund, the Parnassus Workplace Fund and the Parnassus Small-Cap Fund. The other portfolio managers discuss their thoughts
in their respective reports.
A large portion of our positive activities depend on spontaneous optimism rather than mathematical expectations…Most of our
decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be
taken as the result of animal spirits --- a spontaneous urge to action or inaction, and not as the outcome of a weighted average
of quantitative benefits multiplied by quantitative probabilities. --- John Maynard Keynes
I have always admired John Maynard Keynes for his keen understanding of the reality of economic activity. The above quote
comes from his 1936 book, The General Theory of Employment, Interest and Money. In 1936, much more than today, the
economy was mired in economic difficulties, and it was hard to get businesses and consumers to take economic action to pull
the nation out of the slump now known as the Great Depression. Much like today, bankers were reluctant to lend, consumers
were reluctant to spend, people were reluctant to buy houses and
businesses were reluctant to invest. Keynes' argument was that when
there weren't enough animal spirits around, the government would
have to take action to prime the pump and get economic activity going
again. He indicated, though, that government action was not enough,
because economic growth required private economic activity to keep
things moving.
We're certainly not in a depression now and we're not even in a
recession, but economic activity is weak, and we're not having the
robust recovery that normally follows a recession. What's surprising is
that all the elements are in place for a resumption of strong economic
activity but we just can't get started. Corporate earnings are strong and
growing, there's a lot of cash on corporate balance sheets, housing prices
are low and so are interest rates. Inflation is low, a lot of people are
looking for work and banks have money available.
Normally, housing leads the economy out of a recession. When interest
rates and home prices are low, people usually start buying houses.
When people buy houses, construction jobs are created. When a family
buys a house, they purchase a lot of other things at the same time such
as furniture, home appliances, building materials, landscape items, pots
and pans, dishes, drapes and rugs. The purchase of these items creates
more jobs, so more people are working, more people have money and
they buy more things. This creates a virtuous circle.
This time, though, it's not working --- at least not to any great degree.
The questions I pose to myself are: Why aren't people buying homes
and all that other stuff? Why aren't bankers lending more? Why aren't
corporations using more of that money to invest? Why aren't employers
hiring more of those people who are looking for work?
The answer, I think, lies more in the realm of psychology than it does in
the realm of finance and economics. It goes back to the animal spirits
described by Lord Keynes. We've just come through a terrible economic
time --- the worst since the Great Depression. Large corporations and financial institutions have gone bankrupt, the financial system teetered on the brink of insolvency, millions of houses have
gone into foreclosure and unemployment rose above 10% as the economy lost seven million jobs. This is a traumatic
experience and the psychological damage has not been easy to repair. Bankers who made home loans to anyone who was
breathing in 2007 are now reluctant to make loans even to people who are good credit risks. Corporations want to hang onto
their cash instead of investing it, because of concerns that they might not be able to sell the increased goods or services that
they would produce. Even if they could qualify for a loan, many people don't want to make a financial commitment to buy a
house, if they are afraid of being laid off like seven million other people were.
At some point, though, the animal spirits will return. I don't know for sure when, but I think it will be this year. The economy
has picked up somewhat with the GDP going from 1.8% growth in the third quarter of 2011 to 3.0% in the fourth quarter of
2011. The most important number, though, is the jobs number. For the five months from November of 2011 through March
of 2012, the economy has produced an average of 200,000 net new jobs per month. This should be enough to get the
economy moving again. People who have jobs buy homes and all that other stuff, and this should help start the virtuous
circle.
Even with the big first-quarter gain in the stock market, equities are trading at relatively low valuations. I think the stock
market will follow the economy higher. It will not, however, be an uninterrupted move upward. I'm expecting a lot of
volatility --- much more than usual. The headlines will be mixed and with each bad number, the market will move down a
lot. Almost anything can trigger this: bad economic news from Europe, trouble in the Middle East, hints of inflation and
higher interest rates or increased government deficits at home and abroad. Because of the terrible economic conditions we've
just been through, investors are nervous, and that means much more volatility than usual.
We'll continue to look for good companies to invest in, and when we find them, we'll try to make volatility our friend by
Yours truly,
Jerome L. Dodson
Portfolio Manager
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.