Fund Fact
Sheet
Parnassus Small-Cap Fund
Parnassus Funds Quarterly Report: September 30, 2011
As of September 30, 2011, the NAV of the Parnassus Small-Cap Fund was $18.79, resulting in a loss of 23.12% for the third
quarter. By comparison, the Russell 2000 Index of smaller companies ("Russell 2000") had a loss of 21.87% and the Lipper
Small-Cap Core Average, which represents the average small-cap core fund followed by Lipper ("Lipper average"), had a loss
of 21.33%. For the year-to-date, the Small-Cap Fund is down 21.54%, compared to a loss of 17.02% for the Russell 2000 and
a loss of 16.13% for the Lipper average.
The Fund's performance for this year looks terrible, but our longer-term performance still looks pretty good. Below is a table
comparing the performance of the Small-Cap Fund with that of the Russell 2000 and the Lipper average for the one-, threeand
five-year periods and the period since inception. As you can see from the table, we're behind for the one-year period, but
we're well ahead of both our benchmarks for the three- and five-year periods and the period since inception.
One reason our performance looks so bad this year is that many of our stocks have been hit by panic-selling amidst the sharp
downdraft of the stock market. We think that many of these quoted prices are far below the stocks' intrinsic value, and when
reason prevails once again, the quotes will be substantially higher. We have not changed our investment objective and we're
picking stocks the same way we've always done for the Small-Cap Fund, and we think there's a lot of intrinsic value in our
portfolio.
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 2000 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. Small-cap companies can
be particularly 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, which contains this and other information. The prospectus is on the Parnassus
website, or one can be obtained by calling (800) 999-3505. As described in the Fund's current
prospectus dated May 1, 2011, 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,
2012. This limitation may be continued indefinitely by the Adviser on a year-to year basis.
Company Analysis
Five stocks reduced the value of each fund share
by 29¢ or more during the quarter, with no
company making a substantial positive
contribution. The one that hurt us the most was
Quicksilver Resources, a natural gas-producer. The
stock sank 48.6% during the quarter from $14.76
to $7.58 for a loss of 38¢ for each fund share.
Natural gas prices dropped 15% during the
quarter from $4.33 to $3.67 per million British
thermal units, and this hurt the stock, but the
stock sank even further when the company
announced plans to spend more on drilling
programs without any indication that production
would be higher. Despite the bad news, we're
holding the stock because the price is so low, and
we expect that Quicksilver will be able to increase
production and revenue over the next few years.
Oil- and gas-producer W&T Offshore saw its stock
fall 47.3% from $26.12 to $13.76, while cutting
33¢ off the NAV. Crude oil prices dropped sharply
during the quarter from $95 to $79 a barrel, and
the company's drilling costs have not dropped as
much as the price of crude oil. We're holding the
stock, since we expect oil prices to rise again and
drilling costs to drop.
Homebuilder PulteGroup dropped 48.4% during
the quarter from $7.66 to $3.95, chopping 33¢ off
the NAV. See the discussion on PulteGroup in the
Parnassus Fund section to get my views on the
stock.
Brocade Communications, a provider of storage and networking equipment, sliced 31¢ off each fund share, as its stock fell
33.1% from $6.46 to $4.32. The company announced quarterly results that were below its previous guidance. Brocade's
financial results have been inconsistent since it acquired Foundry Networks in 2008, but we think execution will improve
over time. The company has the leading market share in fiber channel for the data center and a strong product platform in the
growing networking equipment space.
First Horizon, a Tennessee-based bank, cut 29¢ off each fund share, as
its stock sank 37.5% from $9.54 to $5.96. Investors are concerned about
the bank's exposure to mortgages and home equity loans in the national
market. Early in the last decade, the bank had a disastrous foray into the
national lending market, and the stock is still suffering the
consequences. We think the bank can handle any additional losses it
may incur, because of its strong balance sheet and earning power. First
Horizon has now pulled back to its base in Tennessee, where it has
profitable, well-managed operations. Selling at only 75% of tangible
book value, the stock is on the bargain table.
Parnassus Small-Cap Fund Portfolio of Investments as of 9/30/2011
There were no stocks that made a substantial positive contribution to
the Fund's performance during the period.
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.