Parnassus Equity Income Fund
Fourth Quarter 2008
All information, unless otherwise indicated, is as of 12/31/08
Firm Overview
Parnassus Investments is an investment manager that seeks to invest in good businesses that have high returns on capital, ethical business practices, aboveaverage growth prospects and sustainable competitive advantages. Founded in 1984 and independently owned, we believe the most attractive opportunities for investments are when companies with good business fundamentals become temporarily undervalued due to market sentiment.
Total Returns
As of 12/31/2008 Equity Income Fund - Inv. Equity Income Fund - Inst. S&P 500 Index Russell 1000 Index
(a)
3 Mo. -19.16% -19.07% -21.94% -22.48%
YTD -22.95% -22.73% -37.00% -37.60%
1 Year -22.95% -22.73% -37.00% -37.60%
3 Year 0.29% NA -8.36% -8.66%
Annualized 5 Year 2.50% NA -2.19% -2.04%
10 Year 6.11% NA -1.38% -1.09%
Since Inception 8/31/92 8.94% NA 6.93% 9.89%
Since Inception 4/28/06 NA -1.92% -11.57% -4.61%
Gross Expense Ratio (a) 1.04% 0.83% NA NA
Net Expense Ratio (a) 1.00% 0.79% NA NA
Investment Philosophy
Our investment philosophy dictates that sound macroeconomic analysis combined with fundamental research is the most effective way to identify attractive investments. We like to buy companies that are growing faster than the rest of the economy, and we like to buy them at attractive valuations.
Expense ratios include gross expenses and expenses net of contractual waivers as described in the Fund’s current prospectus dated May 1, 2008. Parnassus Investments is contractually obliged to limit the total operating expenses to 0.99% and 0.78% through May 1, 2009, for the Parnassus Equity Income Fund Investor Shares and Parnassus Equity Income Fund Institutional Shares respectively, exclusive of acquired fund fees. The inception dates for the Investor Shares and Institutional Shares are 8/31/92 and 4/28/06 respectively.
Annual Returns
40% 30% 20% 10% 0 -10% -20% -30% -40%
Parnassus Equity Income Fund - Inv. S&P 500 Index
Growth of $10,0001
30,000
22.78% 21.04%
6.36% 9.97% -9.10% -11.89% -3.69% -22.10%
15.69% 28.69%
14.70% 14.13% 9.30% 2.62% 15.79% 5.49% 10.88% 4.91% -22.95% -37.00%
20,000
$18,097
10,000 Parnassus Equity Income Fund - Inv. S&P 500 Index ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 $8,700 ‘08
Objective
Capital appreciation and current income
0 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08
Strategy
We invest principally in equity securities of larger capitalization-companies, including common and preferred stocks and convertible bonds. At least 80% of the Fund’s total assets will normally be invested in equity securities that pay interest or dividends. The remaining 20% may be invested in non-dividend-paying equity securities. We seek to invest in equity securities that pay dividends above the yield of S&P 500 Index and have the potential for capital appreciation.
Ten Largest Holdings2
Johnson & Johnson ............................................. 5.5% Microsoft Corp. .................................................. 5.5% Google Inc. ........................................................ 5.0% Energen Corp. . ................................................... 4.5% Waste Management Inc. .................................... 4.0% Sysco Corp.......................................................... 3.9% Teleflex Inc. . ...................................................... 3.7% Proctor & Gamble Co. ........................................ 3.3% Apache Corp. . ................................................... 3.0% JP Morgan Chase & Co. . .................................... 3.0% Total .................................................................41.4% The chart shows the growth of a hypothetical $10,000 investment over the last 10 years and does not reflect the deduction of taxes a shareholder would pay on fund distributions or the redemption of fund shares. The performance of Institutional Shares will differ from that shown for the Investor Shares to the extent that the Shares do not have the same expenses or inception date. 2 Percent based on total net assets as of date indicated. 3 Excluding cash and and cash equivalents. Performance quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and 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
1
Sector Weightings3
Consumer Discretionary Consumer Staples Energy/Utilities Financials Health Care Industrials/Materials Information Technology Telecom Services
0%
Parnassus Equity Income Fund S&P 500 Index
0% 9% 12% 12% 10% 13% 16% 14% 0% 3% 5% 19% 16% 10% 15% 20% 25% 22% 18% 21% 15%
Risks
The fund’s share price changes daily based on the value of its security holdings. Stock markets can be volatile, and the stock values fluctuate in response to the asset levels of individual companies and in response to general domestic and international market and economic conditions. Security holdings in the fund can vary significantly from broad market indexes.
principal cost. The Standard & Poor’s 500 Composite Stock Price Index (the S&P 500 Index) and the Russell 1000 Index are widely recognized indexes of common stock prices. An individual cannot invest directly in an index. An index reflects no deductions for fees, expenses or taxes. Prior to 3/31/98, the Parnassus Equity Income Fund was a balanced fund. The Investor Shares and Institutional Shares do not reflect the declaration of taxes a shareholder would pay on the fund distributions or the redemption of fund shares. 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.
A prospectus can be obtained on the website, www.parnassus.com, or by calling (800) 999-3505.
PARNASSUS INVESTMENTS
Parnassus Equity Income Fund
Fourth Quarter 2008
All information, unless otherwise indicated, is as of 12/31/08
Fund Facts Portfolio Manager Commentary
While the stock market suffered its worst annual result in decades, we are pleased that the Fund reduced potential shareholder losses by beating the S&P 500 Index by 14 percentage points. Overall, picking the right stocks within sectors added 10% to our return versus the S&P 500 Index, while overweighting and underweighting sectors boosted our results by 4%. The year’s investment highlight was the decision to underweight the financial services sector. Furthermore, our ability to select the best relative performers within this sector significantly enhanced performance. These decisions shielded investors to a certain extent from the financial market meltdown, adding 4.27% to our return versus the S&P 500 Index. Our team and especially analyst Minh Bui did a great job in forecasting the economic crisis. This foresight was invaluable and helped us to focus on investments in this sector only on leading, healthy companies that could emerge stronger from the credit crisis. Wells Fargo, one of the Fund’s largest financial sector investments, actually rose 5.3% from our average cost during the year, as CEO John Stumpf successfully steered the company away from the worst of the financial crisis. Strong stock-picking in industrials and technology added 2.75% and 2.27% of our S&P 500 Index lead, respectively. Analysts Ben Allen and Lori Keith were especially helpful in these areas. Propelled by the takeover offer of chemicalmaker Rohm & Haas, our materials sector exposure added 1.76% of our outperformance versus the S&P 500 Index. A balance of an over-weight position with good stock selection within healthcare boosted our outperformance by 1.46%. Within healthcare, analyst Pearle Lee did a fantastic job recommending biotechnology and pharmaceutical companies, while Matthew Gershuny added value with solid healthcare and business service investment ideas. Overall, the portfolio’s results in 2008 proved the importance of owning great companies at undervalued prices within each sector of our investment universe. For a full recap and strategy outlook please reference the December 31, 2008 Shareholder Report.
Investor Shares PRBLX 701769101 $2,000 1.04% 1.00% 8/31/1992
Institutional Shares PRILX 701769408 $100,000 0.83% 0.79% 4/28/2006
Ticker CUSIP Minimum Investment Gross Expense Ratio* Net Expense Ratio* Inception Date
Fund Manager Since May 2001 Lipper Category Morningstar Category Distribution Frequency Total Net Assets
Todd C. Ahlsten Equity Income Large-Cap Blend Quarterly $1,537.71MM
*Expenses based on total net assets, net of reimbursement.
Portfolio Manager Background
Todd C. Ahlsten began his career at Parnassus Investments in 1994 as a research analyst after he was a Parnassus research intern during his senior year at the University of California, Berkeley. He was subsequently promoted to Director of Research in 1998 and in 2001 became Portfolio Manager for the Parnassus Equity Income Fund. He became Chief Investment Officer in 2008. Todd received his bachelor’s degree in business administration from the University of California, Berkeley Haas School of Business in 1994 with an emphasis in finance and accounting.
Fund Characteristics
Ave. Weighted Mkt Cap ($Bn) P/E Ratio P/B Ratio Number of Holdings Portfolio Turnover (2008 Annual) 30 Day SEC Yield
Fund $46.4 11.3x 2.5x 43 70.2% 2.64%
S&P 500 Index $75.7 19.6x 1.7x 500 NA 3.02%
Fund Statistics (3 year)
Alpha Beta R-Squared Sharpe Ratio Standard Deviation Downside Risk Tracking Error
Fund S&P 500 Index 7.58 0.87 0.92 -0.17 13.87% 11.65% 4.34% 0.00 1.00 1.00 -0.74 15.29% 12.87% NA
Average Weighted Market Cap is the average capitalization of all stocks in the portfolio, weighted by each holding’s size in the portfolio. Price/Earnings (P/E) Ratio is a ratio of a stock’s current price to its per-share earnings over the past 12 months (or “trailing” 12 months). Price/Book (P/B) Ratio is the ratio of a stock’s latest closing price divided by its book value per share. Alpha is a coefficient measuring risk-adjusted performance, considering the risk due to the specific security, rather than the overall market. Beta is a measurement of a fund’s risk in relation to the market, or an alternative benchmark. A beta of 1.00 means that the share price moves exactly in line with the market. A beta over 1.00 suggests that the share price will typically be more volatile than the market, and conversely, a beta below 1.00 indicates that the share price will typically be less
volatile than the market. R-Squared is a measurement of how closely the portfolio’s performance correlates with the performance of a benchmark index such as the S&P 500 Index. Standard Deviation is a calculation used to measure variability (risk) of a portfolio’s performance. Sharpe Ratio is a ratio used to measure riskadjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Downside Risk is a statistical measurement of a portfolio’s dispersion below the mean return of a benchmark. Tracking Error is the standard deviation of the difference between the portfolio return and the desired investment benchmark return.
PARNASSUS INVESTMENTS
1 Market Street, Suite 1600 San Francisco, CA 94105 www.parnassus.com (800) 999-3505