Parnassus Digest January 2011

PARNASSUS DIGEST January 2011

Research Insight

The Bureau of Labor Statistics publishes two monthly employment surveys: the payroll survey and the household survey. The payroll survey is derived from payroll data provided by about 400,000 nonfarm businesses, while the household survey is based on personal interviews of about 60,000 households. These two surveys tend to move closely over long periods, but they can diverge over shorter periods due to measurement differences.

A strong year for the stock market in 2010 did not coincide with a swift recovery in the job market. While much has been written about the persistent weak labor market, less attention has been given to the change in the structure of the U.S. labor force. At Parnassus Investments, we strive to take a differentiated approach to current issues. In this edition of the Parnassus Digest, we take a closer look at the employment market and in particular the composition of the work force. We also discuss the likely recovery path for the labor market.

According to the payroll survey, the U.S. economy lost 8.4 million jobs between December 2007 and December 2009. This represents about 6% of the peak employment level reached in December 2007. Job growth has picked up since then, but the economy still needs another 7.2 million jobs to return to the pre-recession employment level. This is a very challenging task. Indeed, the economy has never lost

In late September, the National Bureau of Economic Research (NBER) announced that the U.S. recession that began in December 2007 ended in June 2009. Since the official end of the recession, the U.S. economy has indeed been expanding, albeit at a slower pace relative to past economic recoveries. Although the economy is growing again, the unemployment rate has not improved. This is the reason why this recovery still feels like a recession for many people.

Minh Bui Portfolio Manager & Senior Research Analyst

10 Year

Since Inception

Inception Date

Gross Expense Ratioa

Net Expense Ratioa

6.52 2.29

2.85 1.42

9.44 10.70

12/31/84

1.00

0.99

2.60 -2.84

7.17 2.29

6.87 1.42

9.93 8.35

8/31/92

1.00

1.00

9.07 15.08

2.82 -2.84

7.38 2.29

6.97 1.42

6.39 1.27

4/28/06

0.78

0.78

18.70 25.48

18.70 25.48

4.53 1.05

6.13 4.66

NA NA

5.98 6.97

4/29/05

1.73

1.20

17.05 16.25

37.37 26.85

37.37 26.85

13.61 2.22

10.85 4.47

NA NA

10.94 6.88

4/29/05

1.47

1.20

Parnassus Workplace Fund S&P 500 Index

10.40 10.76

12.96 15.08

12.96 15.08

8.66 -2.84

9.25 2.29

NA NA

8.79 3.63

4/29/05

1.36

1.20

Parnassus Fixed-Income Fund Barclays Capital U.S. Govt/Credit Bond Index

-2.06 -2.17

6.61 6.59

6.61 6.59

5.67 5.60

6.05 5.56

6.32 5.83

6.04 6.35

8/31/92

0.88

0.76

TOTAL % RETURNS

3 Month

Year To Date

1 Year

3 Year

5 Year

Parnassus Fund S&P 500 Index

11.64 10.76

16.71 15.08

16.71 15.08

4.39 -2.84

Parnassus Equity Income Fund - Investor Shares S&P 500 Index

8.01 10.76

8.89 15.08

8.89 15.08

Parnassus Equity Income Fund - Institutional Shares S&P 500 Index

8.02 10.76

9.07 15.08

Parnassus Mid-Cap Fund Russell Midcap Index

10.93 13.07

Parnassus Small-Cap Fund Russell 2000 Index

As of 12/31/10

All returns greater than one year are annualized. 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. a

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) that many jobs during any post World War II recession. The previous largest decline was during the late 1940s recession, when the economy lost about 5% of its national payroll. During the past ten post-war recessions, the economy has lost on average only 3% of its national payroll. The chart below shows the percentage of job losses relative to the peak employment month for post-war recessions.

1%

1% Pre-1981 Average (7 Recessions)

0%

1981

1990

0% 2001

-1%

-1%

-2%

-2%

-3%

-3%

-4%

-4%

-5%

-5%

2007

48

46

44

42

40

38

36

34

32

30

28

26

24

22

20

18

16

14

12

8

10

-7% 6

-7% 4

-6%

2

-6%

0

Percent Job Losses Relative to Prior Peak Employment

Job Losses in Post World War II Recessions

According to a recent paper published by the Center for Economic and Policy Research, an economic policy think tank, the economy will not return to the December 2007 employment level until March 2014. This assumes that monthly job creation matches the pace of the early 2000s expansion. Taking into account population growth, it will take until April 2021 for the economy to absorb the expanded labor force. The Congressional Budget Office has also performed a similar analysis. Using slightly faster job creation rates, it projects the economy to recoup the 8.4 million jobs lost by June 2013, and accommodate the expansion of the labor force by August 2015.

Number of Months After Peak Employment

Journalists and financial commentators often talk about the employment gains or losses in any given month. However, the biggest challenge for the labor market is to overcome the cumulative effect of two years of nearly continuous monthly job losses. Moreover, looking back at the last decade shows a startling observation. The U.S. economy started the decade with a national payroll of 130.8 million workers. As of December 2010, the national payroll level was slightly lower, at 130.7 million. However, the number of potential new workers increased from 142.3 million to 153.7 million during that period. This means that there is now roughly the same number of jobs than a decade ago, yet there are over 11 million additional people competing for them! The quality of the jobs has also deteriorated. The household survey gives a breakdown of employment between full-time and part-time. From the pre-recession peak in December 2007 to December 2010, the number of full-time workers decreased 8.1%, from 121.6 million to 111.7 million. Meanwhile, the number of part-time workers increased 10.5%, from 24.8 million to 27.4 million. It is usually normal to see this substitution from full-time to part-time employment during economic recoveries. However, there seems to be a more secular shift to part-time employment. Over the last decade, the ratio of full-time workers to total workers has decreased from 83% to 80%, while part-time employment has increased from 17% to 20%. This trend is even more evident over a longer time period. When the data series started in 1968, full-time employment represented 87% of total employment and part-time constituted only 13%. This shift matters because substituting part-time for full-time employment tends to lower household income. More importantly, parttime jobs do not usually generate sufficient income that can become selffeeding into spending. In turn, this means that the recovery would likely be protracted.



Clearly, the labor market will likely take time to return to a more normal situation. The good news is that the economy doesn’t need to reach the pre-recession employment level to expand. In addition, the employment market is usually a lagging indicator of future economic activity. So as long as there isn’t another crisis, the economy should continue to recover. As always, the important question for investors is whether current market expectations are discounting such an outcome and anticipating the correct pace of economic growth. This Parnassus Digest draws on data and commentary from the following work: Center for Economic and Policy Research (July 2010), ‘The Urgent Need for Job Creation’. Bureau of Labor Statistics’ Establishment Survey Data, last modified date: January 07, 2011. Bureau of Labor Statistics’ Household Survey Data, last modified date: January 07, 2011. The views expressed in this Parnassus Digest are subject to change at any time in response to changing circumstances in the markets 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 Funds.

For more information: Parnassus Investments 1 Market Street, Suite 1600 San Francisco, CA 94105 (800) 999-3505 www.parnassus.com

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