Parnassus Digest Sept 2007
September 2007
Portfolio Manager Insight Jerome Dodson, Parnassus founder and portfolio manager for over 23 years, sums up the subprime mortgage issue and shares his opinion about its affect on the capital markets and investment opportunities. The July and August volatility in the capital markets took place not only in the United States, but also in Europe and Asia. What was the cause of all this commotion? The meltdown in the subprime mortgage market. Securities backed by loans made to people with poor credit lost much of their value, when many of these borrowers stopped making regular payments. I was not surprised when these securities lost value, but I was surprised at the international implications. London hedge funds and local German banks were forced into bankruptcy along with Bear Stearns-sponsored investment funds in New York. I would not
have guessed that overseas financial institutions were investing so heavily in American subprime mortgages. It turned out that investors in Asia and Europe were just as aggressive as those in New York in going after the higher yields of the subprime market. Many hedge funds borrowed heavily to buy subprime paper, and when that paper lost its value and stopped paying interest, there was no way those funds could make payments on their loans. All this turmoil in the subprime mortgage market caused lenders to pull back on making other kinds of loans as well — including those used to finance leveraged buyouts. Investors feared that this reduced lending would add to the troubles of an already weak housing market, and this
Jerome L. Dodson President & Portfolio Manager The Parnassus Funds
MONTHLY PERFORMANCE Annualized Returns as of 6/30/2007 Fund
Since Inception
Gross Commencement Expense Date Ratio(a)
Net Expense Ratio(a)
1 Month
Year To Date
1 Year
3 Year
5 Year
10 Year
Parnassus Fund S & P 500 Index
3.61 1.50
10.02 5.20
20.46 15.13
10.52 12.15
9.67 11.99
5.34 6.75
10.52 12.78
12/31/84
1.02
1.00
Workplace Fund S & P 500 Index
3.35 1.50
6.80 5.20
16.63 15.13
N/A N/A
N/A N/A
N/A N/A
10.80 13.02
4/29/05
4.05
1.21
SmallCap Fund Russell 2000 Index
2.07 2.27
4.40 1.41
12.19 11.36
N/A N/A
N/A N/A
N/A N/A
13.16 15.72
4/29/05
3.05
1.42
MidCap Fund Russell MidCap Index
2.62 0.17
5.93 5.99
14.42 16.18
N/A N/A
N/A N/A
N/A N/A
10.62 16.38
4/29/05
5.31
1.42
Equity Income Fund Inv Shs S & P 500 Index
1.36 1.50
8.53 5.20
15.24 15.13
10.90 12.15
11.20 11.99
10.60 6.75
11.32 10.92
8/31/92
1.07
1.00
Equity Income Fund Inst Shs S & P 500 Index
1.40 1.50
8.68 5.20
15.48 15.13
N/A N/A
N/A N/A
N/A N/A
13.16 11.24
4/28/06
0.86
0.79
Fixed Income Fund Lehman Aggregate Index
0.97 1.23
2.77 3.07
5.00 5.26
4.77 3.70
5.15 4.31
5.45 6.04
6.05 6.31
8/31/92
0.93
0.88
Cal TaxExempt Fund Lehman Muni Bond Index
0.11 -0.43
1.40 0.48
2.40 2.30
1.91 3.54
2.64 4.16
4.27 5.28
5.18 5.87
8/31/92
0.92
0.76
(a) As described in Fund's current prospectus dated May 1, 2007, Parnassus Investments has contractually agreed to limit the total operating expenses to 0.99%, 1.20%, 1.40%, 1.40%, 0.99%, 0.78%, 0.87% and 0.75% of net assets, exclusive of acquired fund fees, through April 30, 2008 for Parnassus Fund, Workplace Fund, Small-Cap Fund, Mid-Cap Fund, Equity Income Fund Investors Shares, Equity Income Fund Institutional Shares, Fixed Income Fund, and Cal Tax-Exempt Fund, respectively. 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 current performance to the most recent month-end is on the Parnassus website (www.parnassus.com). Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the fund and should read the prospectus carefully, which contains this information. The prospectus is on the Parnassus website www.parnassus.com, or you can get one by calling (800) 999-3505. Investment return and principal will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost and you could lose money. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares. The Standard & Poor's 500 Composite Stock Price Index, also known as the S&P 500, the Standard & Poor’s MidCap 400, also known as the S&P MidCap 400, and the Russell 2000 Index are unmanaged indexes of common stocks. The Lehman U.S. Aggregate Bond Index and the Lehman Municipal Bond Index are unmanaged indexes of fixed-income securities. It is not possible to invest directly in an index. Index figures do not take any expenses into account, but mutual fund returns do. Fixed income securities are subject to interest-rate risk, credit risk, prepayment risk, and market risk. Small-cap and Midcap companies can be more sensitive to changing economic conditions and have fewer financial resources than large-cap companies. Prior to May 1, 2004, the Parnassus Fund charged a sales load (maximum 3.5%), which is not reflected in the total return calculations. On March 31, 1998, the Equity Income Fund changed its investment objective from a balanced portfolio to an equity-income portfolio. 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. Returns shown for the Equity Income Fund are for the Fund’s Investor Shares and the performance of Institutional Shares will differ from that shown for the Investor Shares to the extent that the Classes do not have the same expenses or commencement date.
Portfolio Manager Insight (continued) weakness would spread to the stock market and to the general economy. By late July, the stock market was in retreat, and this retreat continued into August. Strange things began to happen in August. The Dow Jones Industrials would go down 100 points one day, then up 100 points the next day. Soon, it would do the same things within one trading day. The Dow Jones would go down 100 points in the morning, then make up the entire loss that day and then gain 100 more points before the end of the day. On “down” days, investors thought that credit conditions would be very tight, that the housing market would get even worse and that all this weakness would spread to the overall economy. On “up” days, investors felt that the Federal Reserve would ease credit conditions, that the housing market would recover and that the overall economy would continue to perform pretty well. My view is that all this turmoil offered some real bargains and presented a unique buying opportunity. I continued buying stocks through July and August. Here’s my thinking. First, the subprime mortgage market is relatively small and probably will not infect the rest of the economy which will remain reasonably strong. Second, if the economy looks as if it’s headed for trouble, the Federal Reserve will step in and ease credit conditions. Third, stocks are pretty inexpensive by recent historical standards with a price/earnings ratio of only 15.5 based on the companies in the S&P 500. Fourth, unemployment remains very low (well under 5%), and outside of housing, the economy is growing nicely. Fifth, after two decades of experience as a portfolio manager, I’m aware that the best buying opportunities come during a crisis.
...................................................................................................................
Inside Parnassus Parnassus Investments is closing its California Tax-Exempt Fund (PRCLX) to focus more management resources on its other funds. The fund has cease accepting new investments and will officially close on December 14, 2007. Part of the move towards reallocating resources occurred earlier this year, when fund portfolio manager Ben Allen was appointed co-portfolio manager of the Parnassus Fixed-Income Fund. “Giving Ben the opportunity to focus on the Fixed-Income Fund and equity research made the most sense for our shareholders,” states Stephen Dodson, Chief Operating Officer. Current shareholders will have the option of exchanging their assets in the California Tax-Exempt Fund to one of the other Parnassus Mutual Funds or sell their shares.
As of early September, it looks as if this strategy has been correct. I know it’s hard to believe, but stocks actually moved higher in August. The S&P 500 gained 1.50% for the month, while the Parnassus Fund gained 3.61%, outperforming by over 2%. For the year-to-date as of August 31, the Fund is up 10.02% compared to 5.20% for the S&P 500, so we’re almost five percentage points ahead. Many of our other funds have also done well (see performance chart on front page). One thing that has helped us outperform this year is that we have had very little exposure to financial stocks and homebuilders. When the subprime crisis came, the stocks that suffered the most were in those two sectors. At some point, banks and other financial stocks will be good investments as will the homebuilders. However, we’re not quite ready to invest in them just yet, as there may be more downside. For the most part, we’re sticking to industrial companies with strong balance sheets. Although things look pretty stable right now, I don’t think we’re out of the woods. I expect volatility to continue — at least through September and October. We’ll use the “down” days to buy bargainpriced stocks, and we’ll use the “up” days to sell stocks if we need cash. Although the roller-coaster ride may be a bit too exciting at times, I think most Parnassus shareholders won’t mind a few bumps in the road, as long as we get to the proper destination.
~ Jerome L. Dodson
Portfolio Manager Insight Jerome Dodson, Parnassus founder and portfolio manager for over 23 years, sums up the subprime mortgage issue and shares his opinion about its affect on the capital markets and investment opportunities. The July and August volatility in the capital markets took place not only in the United States, but also in Europe and Asia. What was the cause of all this commotion? The meltdown in the subprime mortgage market. Securities backed by loans made to people with poor credit lost much of their value, when many of these borrowers stopped making regular payments. I was not surprised when these securities lost value, but I was surprised at the international implications. London hedge funds and local German banks were forced into bankruptcy along with Bear Stearns-sponsored investment funds in New York. I would not
have guessed that overseas financial institutions were investing so heavily in American subprime mortgages. It turned out that investors in Asia and Europe were just as aggressive as those in New York in going after the higher yields of the subprime market. Many hedge funds borrowed heavily to buy subprime paper, and when that paper lost its value and stopped paying interest, there was no way those funds could make payments on their loans. All this turmoil in the subprime mortgage market caused lenders to pull back on making other kinds of loans as well — including those used to finance leveraged buyouts. Investors feared that this reduced lending would add to the troubles of an already weak housing market, and this
Jerome L. Dodson President & Portfolio Manager The Parnassus Funds
MONTHLY PERFORMANCE Annualized Returns as of 6/30/2007 Fund
Since Inception
Gross Commencement Expense Date Ratio(a)
Net Expense Ratio(a)
1 Month
Year To Date
1 Year
3 Year
5 Year
10 Year
Parnassus Fund S & P 500 Index
3.61 1.50
10.02 5.20
20.46 15.13
10.52 12.15
9.67 11.99
5.34 6.75
10.52 12.78
12/31/84
1.02
1.00
Workplace Fund S & P 500 Index
3.35 1.50
6.80 5.20
16.63 15.13
N/A N/A
N/A N/A
N/A N/A
10.80 13.02
4/29/05
4.05
1.21
SmallCap Fund Russell 2000 Index
2.07 2.27
4.40 1.41
12.19 11.36
N/A N/A
N/A N/A
N/A N/A
13.16 15.72
4/29/05
3.05
1.42
MidCap Fund Russell MidCap Index
2.62 0.17
5.93 5.99
14.42 16.18
N/A N/A
N/A N/A
N/A N/A
10.62 16.38
4/29/05
5.31
1.42
Equity Income Fund Inv Shs S & P 500 Index
1.36 1.50
8.53 5.20
15.24 15.13
10.90 12.15
11.20 11.99
10.60 6.75
11.32 10.92
8/31/92
1.07
1.00
Equity Income Fund Inst Shs S & P 500 Index
1.40 1.50
8.68 5.20
15.48 15.13
N/A N/A
N/A N/A
N/A N/A
13.16 11.24
4/28/06
0.86
0.79
Fixed Income Fund Lehman Aggregate Index
0.97 1.23
2.77 3.07
5.00 5.26
4.77 3.70
5.15 4.31
5.45 6.04
6.05 6.31
8/31/92
0.93
0.88
Cal TaxExempt Fund Lehman Muni Bond Index
0.11 -0.43
1.40 0.48
2.40 2.30
1.91 3.54
2.64 4.16
4.27 5.28
5.18 5.87
8/31/92
0.92
0.76
(a) As described in Fund's current prospectus dated May 1, 2007, Parnassus Investments has contractually agreed to limit the total operating expenses to 0.99%, 1.20%, 1.40%, 1.40%, 0.99%, 0.78%, 0.87% and 0.75% of net assets, exclusive of acquired fund fees, through April 30, 2008 for Parnassus Fund, Workplace Fund, Small-Cap Fund, Mid-Cap Fund, Equity Income Fund Investors Shares, Equity Income Fund Institutional Shares, Fixed Income Fund, and Cal Tax-Exempt Fund, respectively. 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 current performance to the most recent month-end is on the Parnassus website (www.parnassus.com). Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the fund and should read the prospectus carefully, which contains this information. The prospectus is on the Parnassus website www.parnassus.com, or you can get one by calling (800) 999-3505. Investment return and principal will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost and you could lose money. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares. The Standard & Poor's 500 Composite Stock Price Index, also known as the S&P 500, the Standard & Poor’s MidCap 400, also known as the S&P MidCap 400, and the Russell 2000 Index are unmanaged indexes of common stocks. The Lehman U.S. Aggregate Bond Index and the Lehman Municipal Bond Index are unmanaged indexes of fixed-income securities. It is not possible to invest directly in an index. Index figures do not take any expenses into account, but mutual fund returns do. Fixed income securities are subject to interest-rate risk, credit risk, prepayment risk, and market risk. Small-cap and Midcap companies can be more sensitive to changing economic conditions and have fewer financial resources than large-cap companies. Prior to May 1, 2004, the Parnassus Fund charged a sales load (maximum 3.5%), which is not reflected in the total return calculations. On March 31, 1998, the Equity Income Fund changed its investment objective from a balanced portfolio to an equity-income portfolio. 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. Returns shown for the Equity Income Fund are for the Fund’s Investor Shares and the performance of Institutional Shares will differ from that shown for the Investor Shares to the extent that the Classes do not have the same expenses or commencement date.
Portfolio Manager Insight (continued) weakness would spread to the stock market and to the general economy. By late July, the stock market was in retreat, and this retreat continued into August. Strange things began to happen in August. The Dow Jones Industrials would go down 100 points one day, then up 100 points the next day. Soon, it would do the same things within one trading day. The Dow Jones would go down 100 points in the morning, then make up the entire loss that day and then gain 100 more points before the end of the day. On “down” days, investors thought that credit conditions would be very tight, that the housing market would get even worse and that all this weakness would spread to the overall economy. On “up” days, investors felt that the Federal Reserve would ease credit conditions, that the housing market would recover and that the overall economy would continue to perform pretty well. My view is that all this turmoil offered some real bargains and presented a unique buying opportunity. I continued buying stocks through July and August. Here’s my thinking. First, the subprime mortgage market is relatively small and probably will not infect the rest of the economy which will remain reasonably strong. Second, if the economy looks as if it’s headed for trouble, the Federal Reserve will step in and ease credit conditions. Third, stocks are pretty inexpensive by recent historical standards with a price/earnings ratio of only 15.5 based on the companies in the S&P 500. Fourth, unemployment remains very low (well under 5%), and outside of housing, the economy is growing nicely. Fifth, after two decades of experience as a portfolio manager, I’m aware that the best buying opportunities come during a crisis.
...................................................................................................................
Inside Parnassus Parnassus Investments is closing its California Tax-Exempt Fund (PRCLX) to focus more management resources on its other funds. The fund has cease accepting new investments and will officially close on December 14, 2007. Part of the move towards reallocating resources occurred earlier this year, when fund portfolio manager Ben Allen was appointed co-portfolio manager of the Parnassus Fixed-Income Fund. “Giving Ben the opportunity to focus on the Fixed-Income Fund and equity research made the most sense for our shareholders,” states Stephen Dodson, Chief Operating Officer. Current shareholders will have the option of exchanging their assets in the California Tax-Exempt Fund to one of the other Parnassus Mutual Funds or sell their shares.
As of early September, it looks as if this strategy has been correct. I know it’s hard to believe, but stocks actually moved higher in August. The S&P 500 gained 1.50% for the month, while the Parnassus Fund gained 3.61%, outperforming by over 2%. For the year-to-date as of August 31, the Fund is up 10.02% compared to 5.20% for the S&P 500, so we’re almost five percentage points ahead. Many of our other funds have also done well (see performance chart on front page). One thing that has helped us outperform this year is that we have had very little exposure to financial stocks and homebuilders. When the subprime crisis came, the stocks that suffered the most were in those two sectors. At some point, banks and other financial stocks will be good investments as will the homebuilders. However, we’re not quite ready to invest in them just yet, as there may be more downside. For the most part, we’re sticking to industrial companies with strong balance sheets. Although things look pretty stable right now, I don’t think we’re out of the woods. I expect volatility to continue — at least through September and October. We’ll use the “down” days to buy bargainpriced stocks, and we’ll use the “up” days to sell stocks if we need cash. Although the roller-coaster ride may be a bit too exciting at times, I think most Parnassus shareholders won’t mind a few bumps in the road, as long as we get to the proper destination.
~ Jerome L. Dodson
