Parnassus Digest 2010 July
PARNASSUS DIGEST July 2010
Research Insight Portfolio construction at Parnassus Investments is focused on stock selection, however we believe it’s important to take sector weightings into account. Energy and Utilities combined make up 14.4% of the S&P 500 Index (as of 6/30/10). Recent attention called to these sectors as a result of the BP1 oil spill leads us to address the subject of investing in energy with Maria Kamin, Manager of ESG Research. Parnassus Investments’ approach to energy is pragmatic. We aim to grow the wealth of our shareholders by choosing undervalued companies, and by balancing the practical need for energy with the need for a healthy, green planet. While our investment horizons vary for the companies we hold, as a competitive mutual fund company, we consider an industry’s current state and its future prospects when selecting companies. “Overwhelmingly, Americans think the nation needs a fundamental overhaul of its energy policies, and most expect alternative forms to
TOTAL RETURNS
replace oil as a major source within 25 years.” This quote from authors John Broder and Marjorie Connelly, describing the results of a June 2010 new York Times/CBS News poll, alludes to the importance renewable energy has gained in the public debate. However, as Lawrence Livermore National Laboratory (LLNL) has depicted,2 the U.S. economy is still heavily dependent on fossil fuels. LLNL estimated that only 4.8% of U.S. energy came from renewable sources like solar, wind, geothermal, and biomass in 2008. The difference between the investable “clean” and “green” energy we’d like to have in place and the current realities is one of the challenges for stock selection. Currently, there are many more energy companies based in fossil fuels than there are in renewable energy. Parnassus
Maria Kamin Manager, ESG Research
10 Year
Since Inception
Inception Date
Gross Expense Ratioa
Net Expense Ratioa
As of 6/30/10
3 Month
Year To Date
Parnassus Fund S&P 500 Index
-13.32% -11.41%
-7.15% -6.64%
17.19% 14.43%
-4.48% -9.80%
2.72% -0.79%
-1.63% -1.59%
8.65% 10.01%
12/31/84
1.00%
0.99%
Parnassus Equity Income Fund - Investor Shares S&P 500 Index
-11.04% -11.41%
-7.60% -6.64%
13.51% 14.43%
-1.89% -9.80%
4.43% -0.79%
4.65% -1.59%
9.21% 7.33%
8/31/92
1.00%
1.00%
Parnassus Equity Income Fund - Institutional Shares S&P 500 Index
-10.97% -11.41%
-7.51% -6.64%
13.73% 14.43%
-1.67% -9.80%
4.63% -0.79%
4.75% -1.59%
3.03% -3.54%
4/28/06
0.78%
0.78%
Parnassus Mid-Cap Fund Russell Midcap Index
-8.34% -9.88%
-2.83% -2.06%
21.48% 25.13%
-3.98% -8.19%
2.30% 1.22%
NA NA
2.53% 2.63%
4/29/05
1.73%
1.20%
Parnassus Small-Cap Fund Russell 2000 Index
-6.55% -9.92%
4.30% -1.95%
28.57% 21.48%
0.08% -8.60%
5.94% 0.37%
NA NA
6.25% 2.34%
4/29/05
1.47%
1.20%
Parnassus Workplace Fund S&P 500 Index
-12.82% -11.41%
-9.46% -6.64%
16.48% 14.43%
0.61% -9.80%
5.14% -0.79%
NA NA
5.09% -0.14%
4/29/05
1.36%
1.20%
3.20% 3.88%
5.33% 5.49%
10.19% 9.65%
6.84% 7.37%
5.93% 5.26%
6.47% 6.48%
6.14% 6.47%
8/31/92
0.88%
0.76%
Parnassus Fixed-Income Fund Barclays Govt/Credit Bond Index
1 Year
3 Year
5 Year
All returns greater than one year are annualized. a As described in Fund’s current prospectus dated May 1, 2010, Parnassus Investments has contractually agreed to limit the total operating expenses (exclusive of acquired fund fees and expenses) to 0.99%, 0.99%, 0.78%, 1.20%, 1.20%, 1.20% and 0.87% of the net assets of the Parnassus Fund, the Parnassus Equity Income Fund–Investor Shares, the Parnassus Equity Income Fund–Institutional Shares, the Parnassus Mid-Cap Fund, the Parnassus Small-Cap Fund, the Parnassus Workplace Fund, and the Parnassus Fixed-Income Fund, respectively. These limitations may be continued indefinitely by the Adviser on a year-to-year basis. Without these fee waivers and/or expense reimbursements, the Funds’ returns would have been lower.
Performance shown for the Parnassus Equity Income Fund – Institutional Shares prior to the inception date of April 28, 2006 reflects the performance of the Parnassus Equity Income FundInvestor Shares and includes expenses that are not applicable to and are higher than those of the Institutional Shares. 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, and the most recent month-end performance is available on the Parnassus Investments website (www.parnassus.com). Investment return and principal will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original principal cost. The S&P 500 Index, the Russell Midcap Index, and the Russell 2000 Index are widely recognized indexes of common stock prices. The Barclays Capital U.S. Government/Credit Bond Index is a widely recognized index of fixed-income security prices. An individual cannot invest directly in an index. An index reflects no deductions for fees, expenses or taxes. Returns shown for the Funds do not reflect the declaration of taxes a shareholder would pay on the fund distributions or the redemption of fund shares. Prior to March 31, 1998, the Parnassus Equity Income Fund was a balanced fund. Prior to May 1, 2004, the Parnassus Fund charged a sales load of a maximum of 3.5%, which is not reflected in the total return figures. Common stock prices fluctuate based on changes to a company’s financial condition and on overall market and economic conditions. Small- and mid-cap companies can be particularly sensitive to changing economic conditions and have fewer financial resources than large-cap companies. Investments in fixed-income securities are subject to interest rate risk, credit risk and market risk, each of which could have a negative impact on the value of the Fund’s holdings. 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 information. A prospectus can be obtained on the website, www.parnassus.com, or by calling (800) 999-3505.
Research Insight (continued) Investments believes we cannot avoid theenergy sector entirely, as that would vary our funds too far from their benchmarks and expose them to sector bias. This means that Parnassus Investments has to differentiate the energy companies with proprietary research. We comprehensively evaluate companies – considering what they do, how they do it, and how they interact with their stakeholders. We evaluate financial performance and the competitive landscape, and consider Environmental, Social and Governance (ESG) factors. Generally, we prefer companies with proven technologies, as more reliable indicators of value, and prefer natural gas to oil and coal, as a cleaner available option for the U.S. We are pleased to find companies with investments in renewable energy, as those satisfy an immediate consumer interest and indicate the company is focused on the long-term. Here are some of the companies with interesting renewable energy benefits that the Parnassus Funds hold: - Applied Materials (AMAT): This manufacturer produces products used in solar photovoltaic cells and energy-efficient glass. - Cooper Industries (CBE): Serving electric utilities as one of its primary markets, this company has recently acquired Eka Systems, which is innovating towards a wireless smart grid. - MDU Resources (MDU): This utility company has a wind farm and intends to double the equivalent of that farm’s capacity with wind and other renewable energy capacity in the next five years. - Praxair (PX): This manufacturer of gases and technologies has multiple products with environmental benefits, including those that assist in reducing their customers’ Greenhouse Gas (GHG) emissions. - Waste Management (WM): This company is addressing its own GHG emissions, and exploring methods of extracting energy from the waste stream. Through our consideration of ESG issues, Parnassus Investments supports a variety of initiatives relevant to the future of energy, such as disclosure on sustainability issues, reduced usage, recycling, responsible waste
management, energy efficiency, and responsible environmental, health and safety management. One notable benefit to owning companies in a controversial industry is that it gives Parnassus Investments an opportunity to engage with the companies we own – to question senior management directly, to vote on shareholder resolutions, and to keep long-term considerations in front of companies pressured by short-term earnings reporting. Our engagement with companies is informed by our research and, ultimately, by the interests of our shareholders. If you are interested in providing feedback on our responsible investing processes, or have questions, we invite you to provide feedback to Parnassus Investments via email to: [email protected]
1
None of the Parnassus Funds hold or have held BP shares.
At the time of publication, 2008 was the most recent data image available from Lawrence Livermore National Laboratory: https://publicaffairs.llnl. gov/news/news_releases/2009/images/energy-use.pdf. 2
Percentage of Parnassus Funds represented by the companies in this article, as of June 30, 2010: AMAT is 3.4% , 4.5%, 5.3% and 4.0% of PRBLX, PARNX, PARWX and PARMX, respectively; CBE is 2.6% and 4.4% of PRBLX and PARMX, respectively; MDU is 3.2%, 3.5% and 1.1% of PRBLX, PARWX and PARMX, respectively; PX is 2.7% of PRBLX; WM is 5.4% and 4.8% of PRBLX and PARMX, respectively. The views expressed in this Digest are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds. Any specific securities discussed may or may not be current or future holdings of the Fund.
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me mber s. In t he proc es s of s ear c h i n g for an an al ys t t o ove r se e the en vi ronm ental , soc i al an d gover n an c e ( ES G ) r e se a r c h at Pa rnas s us Inve s tm en ts, we foun d two h i gh l y q u a l i f i e d ind iv idual s t hat com pl i m en ted eac h oth er’s s k i l l s. Rec o g n i z i n g the g rowi ng dem and for ES G res earc h , M ari a Kam i n a nd I ya ssu Essaya s we re offered rol es w i th i n th e i n ves tm en t m an a g e me nt
For more information: Parnassus Investments 1 Market Street, Suite 1600 San Francisco, CA 94105 (800) 999-3505 www.parnassus.com
gro u p , and joi ne d t h e fi rm i n th e fi rs t h al f of 2010 . Ma r i a Ka min i s t he m anager of ES G r es earc h . M ar i a was p r e v i o u sl y the research product man ager an d a s us tai n abi l i ty a n a l yst a t MSC I, Inc.; f orm e rl y Ri s k M etri c s G roup. M ari a r ec e i ve d h e r b a chelor’s degree i n p ol i ti c al s c i en c e fr om Tufts U ni ve r si t y, and a m as ter’s degree i n Pac i fi c i n ter n ati on al aff a i r s f r o m UC San Di e go. Iyas s u Es s ayas i s a res earc h an al ys t . P r i o r t o jo ining t he f i rm , Iyass u was a Par n as s us i n tern i n 20 0 8 a n d received hi s bache l or’s degree i n bi ol ogy from th e U ni ve r si t y o f San Franci s co.
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