Parnassus Small-Cap Fund
As of March 31, 2013, the NAV of the Parnassus Small-Cap Fund was $24.93, so the total return for the quarter was 4.88%. By
comparison, the Russell 2000 Index ("Russell 2000") of smaller companies was up 12.39% and the Lipper Small-Cap Core
Average, which represents the average small-cap core fund followed by Lipper ("Lipper Average") was up 11.99%. Although
earning almost 5% in a quarter would normally be an excellent return, in this case it was far below our benchmarks.
Weakness in our technology and telecommunications stocks hurt our performance and we didn't have enough winners. The
silver lining to this cloud, though, is that many of the stocks in our portfolio are undervalued on a relative basis, and I believe
they will bounce back before long.
Below is a table comparing the performance of the Parnassus Small-Cap Fund with that of Russell 2000 and the Lipper
average over the past one-, three- and five-year periods and the period since inception. You'll notice that our weak relative
performance in the quarter has pulled us well below our benchmarks for the one- and three-year periods, but longer-term, we
are well ahead of the benchmarks for the five-year period and since inception.
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 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
Three stocks accounted for losses of 20¢ or more
on the NAV. Finisar had the biggest negative
impact, as its stock slumped 19.1% from $16.30
to $13.19, slicing 22¢ off the value of each fund
share. The company makes optical equipment
used in telecommunications, and its customers
delayed investing in additional network capacity,
because they are hesitant to commit significant
sums of money until the economy strengthens.
Because Internet traffic continues to have strong
growth, at some point telecommunications
companies will have to make substantial new
investments in network capacity, and at that
point, sales at Finisar will move much higher –
and so will the stock.
EZchip Semiconductor, a designer of
semiconductors used in data centers, enterprise
networks and telecommunications equipment,
saw its stock drop 27% during the quarter, from
$33.07 to $24.13 for a loss of 21¢ per fund share.
EZchip reduced its long-term revenue outlook
after one of its customers, Huawei, decided to
design its own semiconductors rather than
purchase from EZchip. Investors are worried that
other customers may begin to design their own
chips. Although this is a risk, we think that
EZchip's technology is of such a high quality, and
the costs to switch to in-house chip design are so
great, that the company will remain the
undisputed leader in network-processors. After the
drop in price, the stock is trading at its lowest
valuation in two years.
Riverbed Technology knocked 20¢ off the NAV, as
it sank 24.4% during the quarter from $19.72 to
$14.91. The company makes software for use in optimizing wide-area networks (WANs), which speed the flow of information within an organization from site-to-remotesite.
The stock dropped after management reduced its earnings outlook for the upcoming quarter, citing sluggish public sector
demand for its core WAN product and higher integration costs from its recent acquisition of OPNET Technologies. We expect
demand for Riverbed's core WAN optimization software will rebound, as trends toward mobile computing and virtualized
workplaces drive greater data traffic across wide-area networks. New product releases and merger synergies should also boost
profits next year.
Four of our portfolio companies each accounted for gains of 13¢ or more for each fund share. The biggest contributor was
Calgon Carbon, a manufacturer of activated carbon used to remove pollutants from air and water. The stock added 20¢ to the
NAV, soaring 27.6% from $14.18 to $18.10, as the company announced $30 million in cost savings, which could double
profitability in two years. Longer-term, Calgon offers significant upside, and it has a positive environmental impact, through
products that contribute to safe drinking water and less pollution from power plants.
PMC-Sierra, a designer of semiconductors for data-storage and telecommunications, shot up 30.3% from $5.21 to $6.79 for a
gain of 18¢ per fund share. The company continues to win storage market-share from its key competitor.
Telecommunications-carriers such as AT&T, Sprint, Deutsche Telekom and China Mobile plan to buy more equipment in
2013, so this should help PMC-Sierra.
Questar, a natural gas and pipeline company, saw its stock soar 23.1% from $19.76 to $24.33, adding 16¢ to each fund share.
Robust industrial demand for natural gas from Questar's utility subsidiary drove better-than-expected earnings results. The
stock moved higher after the company announced a plan to convert its underutilized Southern Trails natural-gas pipeline to
one carrying crude oil from West Texas to California. This should boost earnings and cash flow.
Shares of Pinnacle Financial surged 24% from $18.84 to $23.36
contributing 13¢ to the NAV. Based in Nashville, Tennessee, the bank
was founded in 2000 by local industry veterans Terry Turner and Robert
McCabe, with the idea that creating a bank that would be a great place
to work would result in superior customer service. This is exactly what
has happened, and last quarter Pinnacle's growth rate jumped as the
Nashville economy improved.
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.