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Parnassus Funds, et al. – ‘N-CSR’ for 12/31/14

On:  Friday, 2/6/15, at 11:54am ET   ·   Effective:  2/6/15   ·   For:  12/31/14   ·   Accession #:  1193125-15-36791   ·   File #s:  811-04044, 811-06673

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/06/15  Parnassus Funds                   N-CSR      12/31/14    4:3.1M                                   RR Donnelley/FA
          → Parnassus Asia Fund ⇒ Investor Shares (PAFSX)
          → Parnassus Mid Cap Fund ⇒ Investor Shares (PARMX)
          → Parnassus Mid Cap Growth Fund ⇒ Investor Shares (PARNX)
          → Parnassus Small Cap Fund ⇒ PARSX
          → Parnassus Value Equity Fund ⇒ Investor Shares (PARWX)
          Parnassus Income Funds
          → Parnassus Core Equity Fund ⇒ Institutional Shares (PRILX) — Investor Shares (PRBLX)
          → Parnassus Fixed Income Fund ⇒ Investor Shares (PRFIX)

Document/Exhibit                   Description                      Pages   Size 

 1: N-CSR       Certified Annual Shareholder Report of a            HTML   1.62M 
                          Management Investment Company                          
 2: EX-99.(A)(1)  Code of Ethics                                    HTML     14K 
 4: EX-99.906CERT  Section 906 Certifications                       HTML      8K 
 3: EX-99.CERT  Section 302 Certifications                          HTML     11K 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: Parnassus Funds (811-04044) and Parnassus Income Funds (811-06673)

Parnassus Funds

Parnassus Income Funds

(Exact name of registrant as specified in charter)

1 Market Street, Suite 1600, San Francisco, California 94105

(Address of principal executive offices) (Zip code)

Marc C. Mahon

Parnassus Funds

Parnassus Income Funds

1 Market Street, Suite 1600, San Francisco, California 94105

(Name and address of agent for service)

Registrant’s telephone number, including area code: (415) 778-0200

Date of fiscal year end: December 31

Date of reporting period: December 31, 2014

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Item 1: Report to Shareholders

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PARNASSUS FUNDS^®

ANNUAL REPORT  ¡  DECEMBER 31, 2014

PARNASSUS FUNDS

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February 3, 2015

Dear Shareholder:

2014 was a great year for the economy and the stock market. GDP grew at an annual rate of 5.0% in the third quarter and almost three million new jobs were created last year, which works out to an average of about 246,000 a month. This drove the unemployment rate down to 5.6% from 6.7% at the beginning of the year.

The stock market went up 13.68%, as measured by the S&P 500 Index. Although it was a good year for stocks, it was not a good year for stock-pickers. According to Bloomberg, only 10% of the actively-managed equity mutual funds available in the United States were able to beat the S&P 500^*. According to Lipper, the average diversified U.S. stock mutual fund gained only 7.60% in 2014.

By comparison, the Parnassus Funds had a great year with four of our six equity funds beating their benchmarks. In other words, 67% of our funds beat their respective indices, while only 10% of the other funds accomplished that feat. Although the Parnassus Mid Cap Fund did not beat its index, it did beat its Lipper peer group, so 83% of our funds were ahead of mutual funds with similar strategies.

Our best-performing fund was the Parnassus Endeavor Fund (formerly the Parnassus Workplace Fund); it was up 18.51% for the year. This made it the fourth-best performer of the 770 multi-cap core funds followed by Lipper, and it was the third-best performer of 388 multi-cap core funds since the Fund was established on April 29, 2005. (For the three- and five-year periods respectively, the Fund was #24 of 685 funds and #73 of 581 funds.) Second was the Parnassus Fund, which gained 14.68%, and a close third was the Parnassus Core Equity Fund-Investor Shares, which gained 14.48%. If you own shares in any of these three funds, you should be very happy.

The fourth fund of note was the Parnassus Asia Fund, which returned 7.84% for the year. This may not sound like a lot, when you compare it to the 13.68% earned by the S&P 500, but when you compare it to the 0.39% return of the MSCI AC Asia Pacific Index, it sounds very good. While the composite Asian markets were basically flat for the year in dollar terms, the Parnassus Asia Fund was up 7.84%. Enclosed you will find the annual reports for all our funds. We think you’ll find they will make very interesting reading.

Company News

The dynamic duo of Todd Ahlsten and Ben Allen, who manage our Parnassus Core Equity Fund, have just been named as one of the five finalists for Morningstar’s Domestic-Stock Fund Manager of the Year. We congratulate them for this well-deserved recognition.

Our senior research analyst Robert Klaber has just been named to the Forbes’ magazine list of 30 under 30 rising stars in finance. We offer our congratulations to 29-year old Robby.

Parnassus Survey

In the last three reports, I mentioned that I knew all of our shareholders by name 30 years ago, when I started the Parnassus Fund. In those days, we had only a few million dollars in assets, so communication was easy. Although there’s no way I can know each of you by name now, I would like to know more about you and why you chose the Parnassus Funds. You can help me to gain a better understanding of our shareholders by completing a survey that should take you no more than five

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minutes. Your answers will be completely anonymous and your privacy will be respected. To participate in the survey, please go to www.parnassus.com/survey.

I thank all of you for investing with us.

Yours truly,

Jerome L. Dodson

President

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. Please see the following pages for more detailed information regarding each Fund’s performance, including information regarding the Fund’s Lipper rankings, and the risks associated with investing in the Funds.

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PARNASSUS FUND

Ticker: PARNX

As of December 31, 2014, the net asset value per share (“NAV”) of the Parnassus Fund was $48.09, so after taking dividends into account, the total return for the year was 14.68%, the second-best performance of the Parnassus Funds behind the Parnassus Endeavor Fund, and edging out the Parnassus Core Equity Fund for second place. This compares to 13.68% for the S&P 500 Index (“S&P 500”) and only 9.98% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper (“Lipper average”). It was a great year for the Parnassus Fund. We beat the S&P 500 in a year when, according to Bloomberg, 90% of the actively-managed equity mutual funds available in the United States lagged the index^*. While we beat the S&P 500 by one percentage point, we beat the Lipper average by more than 4.5 percentage points, because most funds did so poorly compared to the index.

Below is a table comparing the Parnassus Fund with the S&P 500 and the Lipper average over the past one-, three-, five- and ten-year periods. You will notice that we’re ahead of both benchmarks for all time periods. Most striking is the three-year number, where we have gained an average of 24.72% per year, which is more than four percentage points per year ahead of the S&P 500 and more than five percentage points per year ahead of the Lipper average.

On page 8, you will find a graph that shows the growth of a hypothetical $10,000 investment in the Fund over the past ten years. The graph shows that the Fund has grown much more than the same amount invested in either the S&P 500 or the Lipper average.

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of the new NPS chip, which has more flexibility and could find a big market with all the data-center operators that want to design their own systems.

International Business Machines (IBM) dropped 14.5% from $187.57 to $160.44 for a loss of 24¢ for each fund share. The stock rose in early 2014, after the company announced its decision to divest its lower-margin server business, and it raised the dividend. The stock reversed its earlier gains in the fall, as demand for its software and consulting services declined. We originally became interested in this stock when we saw that Warren Buffett had a big position in his Berkshire-Hathaway portfolio. IBM’s performance shows that even great stock-pickers can be wrong – at least during certain periods. We’re holding onto the stock, because we think it’s undervalued and there’s not much downside risk. We think the restructuring initiatives and the investment in new software and services will eventually move the stock higher.

did well for us, as its stock climbed 45.7% from $54.45 to $79.34, contributing 40¢ to the NAV. The company had a strong start in 2014, as robust demand from semiconductor foundries and memory-chip makers drove earnings higher. Lam benefits from the same trends as Applied Materials, with strong demand for equipment to make increasingly sophisticated semiconductors.

Whole Foods, the world’s largest retailer of organic food, added 66¢ to the value of each fund share, even though the stock dropped 12.8% during the year from $57.83 to $50.42. At this point, you may be wondering what kind of magic we can work at Parnassus, if we can make money when a stock goes down, and we don’t do it by short-selling. Actually, there was no magic involved, since we bought 700,000 shares during the third quarter, when the stock dropped to our average cost of $38.36, because of negative investor sentiment. Shares slumped because revenue growth started to slow down, and investors were concerned about competition from grocery chains such as Wal-Mart, Kroger and Costco. The stock jumped in November, after Whole Foods reported better-than-expected earnings. As we indicated earlier in this report in our discussion

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of Ciena, investors have very short time-horizons; they tend to sell first and ask questions later, if the least bit of bad news surfaces. When we saw the stock sink so rapidly from the $50’s to the $30’s, we knew it was overdone. It was hard for us to believe that the people who shop at Whole Foods were going to make a sudden change and start shopping at Wal-Mart, even if Wal-Mart started carrying a few lines of organic food. Fortunately, we were right and, in just a few months, Whole Foods climbed an amazing 31.4% from our cost of $38.36 to $50.42 by year-end.

C.H. Robinson Worldwide, a logistics company with an emphasis on serving as a broker between shippers and truckers, added 59¢ to each fund share, as its stock rose 28.4% from $58.34 to $74.89. From 2010 through 2013, profits were squeezed, because truckers would not lower their rates and shippers would not pay higher prices, so the falling stock price reflected that squeeze. We invested in Robinson, because we thought that demand would eventually outstrip carrier supply, and the company would be able to raise prices to shippers. As the economy has improved, freight volumes have increased and Robinson can get higher margins so the stock price has moved higher.

Equinix provides data-centers and Internet-connection services to corporations, content-providers and Internet-service providers. Strong demand to move data around the Internet increased revenue and earnings, which boosted the stock by 27.8% from $177.45 to $226.73, increasing the value of each Parnassus share by 44¢.

Outlook and Strategy

(This section applies to the Parnassus Fund and the Parnassus Endeavor Fund.)

It was a good year for the stock market with the S&P 500 up 13.68%. (It was an even better year for the Parnassus Fund and the Endeavor Fund.) Some market-commentators are saying that things will be difficult this year. Here are some of the concerns they have expressed:

All four of these concerns are legitimate, and these factors might pull the American economy into a recession in the near-term, and the stock market would fall quite a bit. Given this situation, a prudent investor might want to pull out of the market right now and wait for a better time to return.

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Although we acknowledge the validity of the four points, our view is somewhat different. First, while we agree that the market is fully-valued, that doesn’t mean that it will automatically go down. It can stay fully-valued for years without moving sharply lower. In fact, the market can become less than fully-valued without dropping at all, if companies grow their earnings. (If the “E” in the P/E ratio goes up, that means the ratio goes down and the market becomes less than fully-valued or even undervalued.) In the current environment, businesses should be able to grow their earnings.

Second, there is no doubt that the Federal Reserve will increase interest rates sometime this year, but this doesn’t mean that stocks will go down. If the Fed increases interest rates, that means the economy is getting better, and the stock market should go higher. Right now, it seems that the U.S. economy is on the mend and is getting stronger by the day. Most encouraging is the increase in jobs, which has been running over 200,000 per month for a long time. A sharp spike in interest rates would probably move the market lower, but a gradual increase probably would not. It’s unlikely that Janet Yellen would engineer a big hike in rates.

Third, the sharp drop in oil prices is good for the economy. While it’s true that lower oil prices mean less investment and fewer jobs in the oil industry, most of the other industries should benefit. Operating costs for businesses will be lower, and people will have more money to spend on things other than gasoline. Other parts of the economy will grow to make up for declines in the oil patch.

Fourth, we’re concerned about the slowdown in Europe and Asia – especially Europe, since the Asian economies are more dynamic and will start growing again on their own. In the short-term, there’s not a lot of hope for Europe, but at some point, their economies will improve. The euro is now down to $1.18, so that should help their export industries. Also, Mario Draghi, head of the European Central Bank, has finally started to pump a lot of money into the system, so that should help Europe the same way the Fed’s quantitative easing helped us.

Finally, even though the market as a whole is fully-valued and may not go up much in 2015, our funds can still do well. It’s harder to find bargains now, but they do exist. For example, in this report, we talked about how Whole Foods and Target dropped down to very low levels, because of temporary conditions or over misunderstandings. There may be more opportunities like these, and we’ll work hard to find them.

Yours truly,

Jerome L. Dodson		Ian Sexsmith
Lead Portfolio Manager		Portfolio Manager

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PARNASSUS CORE EQUITY FUND

Ticker: Investor Shares - PRBLX

Ticker: Institutional Shares - PRILX

As of December 31, 2014, the net asset value (NAV) of the Parnassus Core Equity Fund-Investor Shares was $40.69. After taking dividends into account, the total return for the fourth quarter was 6.30%. This compares to increases of 4.93% for the S&P 500 Index (“S&P 500”) and 3.37% for the Lipper Equity Income Fund Average, which represents the average equity income fund followed by Lipper (“Lipper average”). For the year, the Fund generated a return of 14.48%, which compares favorably to gains of 13.68% for the S&P 500 and 9.77% for the Lipper average.

Below is a table that summarizes the performances of the Fund, the S&P 500 and the Lipper average. The returns are for the one-, three-, five- and ten-year periods. On page 12, you will find a graph that shows the growth of a hypothetical $10,000 investment in the Fund over the past ten years.

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strategy to evaluate a divestiture, because its E&P segment is capital intensive and has generated low and volatile returns. We still like MDU’s remaining businesses, which are unique assets with good growth potential. One project we’re especially excited about is a $200 million wind farm investment recently proposed by MDU’s utility division.

National Oilwell Varco (NOV), a leading provider of oil and gas services, fell 17.6% during 2014 to $65.53 from $79.53 and reduced the NAV by 18¢. The stock fell as the price of a barrel of oil plunged 46.0% during 2014 from $99 to $53. This precipitous drop means that E&P companies will have less money to drill wells in 2015. Despite this short-term move down in oil prices, we are still bullish about NOV’s long-term outlook. We expect the capital intensity of the E&P industry (i.e., the dollars required to drill new wells) to increase long-term, which benefits equipment-providers like NOV. Furthermore, we think the company has the best suite of products and services to help companies drill wells safely in complex geological formations.

the Actavis offer is in cash, we trimmed our Allergan position and bought shares of Actavis. The result of these transactions will be a position just over 3% in the combined company once the deal closes.

Apple had a strong year: its shares rose 37.7% to $110.38 from $80.16 and boosted the NAV by 62¢. Apple continues to demonstrate the benefit of owning the most valuable brand in the world, as evidenced by its successful iPhone 6 launch during the third quarter. We think the company can generate massive cash flows for many years to come based on its device ecosystem, innovative culture, potential new product categories and loyal user base. We sold about 40% of our Apple position during the second half of 2014 in response to the increased price, but still held some stock at year-end.

Applied Materials, the semiconductor-manufacturing equipment giant, soared 40.9% during 2014 from $17.69 to $24.92 and increased the NAV by 56¢. The company had a strong year as chip manufacturing required more expensive equipment due to strong smartphone demand. Amazingly, while chips built in the 1980’s had transistor gates with 10,000 atoms, the most advanced chips have transistor gates with as few as 50 atoms. These chips are very costly to manufacture, which represents a great long-term opportunity for Applied Materials.

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Outlook and Strategy

The Fund enters 2015 with 41 portfolio companies in a variety of industries. The biggest concentrations in the portfolio are in the technology, industrial and consumer staples sectors. Relative to the index, the portfolio has very few holdings in the financial and consumer discretionary sectors. Our underweight allocations in these two highly cyclical areas add an element of defensiveness to the Fund’s overall positioning.

During the fourth quarter, we took advantage of the dramatic plunge in crude oil prices to increase our exposure to stocks that should benefit from a recovery in that commodity. In addition to having 6% of the Fund invested in pure-play energy stocks, we also own industrial and utility companies with business segments directly tied to the oil and gas sector. We expect oil prices to recover within our three-year investment horizon. The reason is that reinvesting in new wells at current prices is simply not profitable for most E&Ps. This means that supply should go down as existing wells deplete. As supply gradually winds down, prices should go up.

Actavis, the pharmaceutical company that agreed to buy Allergan, is the only new portfolio company in the Fund since our last quarterly report. In combination with Allergan, we expect about two-thirds of Actavis’ pro-forma revenue to come from branded pharmaceutical products, and almost 30% of sales to come from generics. This company has a terrific executive team and great assets, so we’re excited about the long-term prospects of the business.

Each of our holdings has a risk-reward profile that is beneficially asymmetric. This means that our optimistic investment scenarios are far more positive than our bearish scenarios are negative. Given this favorable ratio, we expect our portfolio to outperform modestly if the market rallies for a seventh year in a row. At the same time, we would expect our stocks to experience less severe losses than the index, if 2015 marks the end of the bull market. So while we hope for the good times to continue for stocks, we’ve positioned the Fund to outperform in a wide range of potential outcomes.

Thank you for trusting us to manage your money,

Todd C. Ahlsten		Ben E. Allen
Lead Portfolio Manager		Portfolio Manager

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PARNASSUS ENDEAVOR FUND

Ticker: PARWX

As of December 31, 2014, the NAV of the Parnassus Endeavor Fund was $29.95, so after taking dividends into account, the total return for the year was 18.51%, the best performance of the Parnassus Funds. This compares to a return of 13.68% for the S&P 500 Index (“S&P 500”) and 9.98% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper (“Lipper average”). It was a great year for the Parnassus Endeavor Fund: it beat the S&P 500 by almost five percentage points, and the Lipper average by 8.5 percentage points. According to Lipper, the average diversified U.S. stock fund gained 7.60% in 2014, so the Endeavor Fund returned well over twice what the average fund earned.

For the year, the Parnassus Endeavor Fund was the fourth-best performer of the 770 multi-cap core funds followed by Lipper, and since inception on April 29, 2005, the Fund was the third-best performer of 388 funds. (For the three- and five-year periods, the Fund was #24 out of 685 funds and #73 out of 581 funds, respectively.)

Below is a table comparing the Parnassus Endeavor Fund with the S&P 500 and the Lipper average over the past one-, three- and five-year periods and the period since inception on April 29, 2005. We’re ahead of both benchmarks for all time periods. Most striking is the fact that since inception, we’ve earned more than four percentage points per year over the Lipper average.

On page 15, you will find a graph that shows the growth of a hypothetical $10,000 investment in the Fund since inception. It shows that the growth of that hypothetical $10,000 would have been much greater in the Endeavor Fund than in either benchmark.

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Allergan repeatedly rejected Valeant’s offers, Actavis, another pharmaceutical company, emerged as a white knight, making a cash and stock-offer valued at more than $219 per share. We view the Allergan-Actavis combination as a better outcome for Allergan and its employees.

Whole Foods, the world’s largest retailer of organic foods, added 48¢ to the value of each fund share, even though the stock dropped 12.8% during the year from $57.83 to $50.42. At this point, you may be wondering what kind of magic we can work at Parnassus, if we can make money when a stock goes down, and we don’t do it by short-selling. Actually, there was no

serving as a broker between shippers and truckers, added 42¢ to the NAV, as its stock rose 28.4% from $58.34 to $74.89. From 2010 through 2013, profits were squeezed, because truckers would not lower their rates and shippers would not pay higher prices, so the falling stock price reflected that squeeze. We invested in Robinson, because we thought that demand would eventually outstrip carrier supply, and the company would be able to raise prices to shippers. As the economy has improved, freight volumes have increased, Robinson can get higher margins and the stock price has moved higher.

Riverbed Technology makes software used in optimizing wide-area networks, which speed the flow of information within an organization from site-to-remote-site. We started buying the stock in 2012 and 2013 at an average cost of $15.57 a share. On November 8, 2013, Elliott Management, an activist investment firm, announced that it owned a 9% stake in Riverbed. The stock immediately shot up to $17.54 from $15.11 the previous day, then climbed to $19.04 on November 13. In the Parnassus quarterly report of March 31, 2014, I described the battle between Riverbed and Elliott, with Elliott trying to get the company sold at $25 a share to another firm, and Riverbed resisting any takeover. Finally, Elliott made an offer of $21 a share, but Riverbed would not budge. I tried unsuccessfully to set up a meeting with Riverbed’s President, Jerry Kennelly, to urge him to consider outside offers. I considered the company undervalued, but thought that Kennelly’s poor management would keep the company undervalued indefinitely. By June of 2014, we had sold all of our shares at an average price of $20.25. In the end, we

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did very well on the stock. With an average cost of $15.57 per share and a sale price of $20.25, we had a 30% gain in the stock and profits of $6.5 million for the Parnassus Endeavor Fund.

By October of 2014, other investors started to sell, and Riverbed’s stock dropped below $18 a share. I knew at that point it was quite undervalued, and Elliott had already made an offer of $21 a share. The Fund purchased 1.6 million shares at an average cost of $17.79. It now looks as if Riverbed will be sold for $21 a share. The stock closed at $20.41 a share at year-end, so it’s gone up 14.7% since our most recent purchase. Considering all our transactions in Riverbed’s stock for the year, the Fund has increased the value of the NAV by 37¢.

Target, the Minneapolis-based discount-retailer, climbed 20.0% from $63.27 to $75.91 for a gain of 37¢ for each fund share. The stock price dipped into the $50’s early in the year, after a series of negative events including a hacker attack on the company’s customer credit card information, poor results from an expansion into Canada and the dismissal of chief executive officer Greg Steinhafel. We took advantage of the drop in the stock price to increase our position from 150,000 shares to 450,000 shares. The share price began to recover in August, after the board hired Brian Cornell, the respected former head of Pepsi’s Americas business, as the new chief executive officer. The stock moved even higher in November, when management reported improved sales and profitability in the United States and stabilization in Canada.

Yours truly,

Jerome L. Dodson

Portfolio Manager

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PARNASSUS MID CAP FUND

Ticker: PARMX

As of December 31, 2014, the NAV of the Parnassus Mid Cap Fund was $27.40, so after taking dividends into account, the total return for 2014 was 11.24%. This compares to 13.22% for the Russell Midcap Index (“Russell”) and 9.98% for the Lipper Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper (“Lipper average”). For the quarter, the Fund was up 6.89%, ahead of the Russell’s 5.94% return and the Lipper average’s 4.38% gain.

Below is a table comparing the Parnassus Mid Cap Fund with the Russell and the Lipper average for the one-, three- and five-year periods and for the period since inception on April 29, 2005. On page 18 is a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception.

2014 Review

The Russell jumped 13.22% in 2014, extending a rally that has driven mid-cap stocks up 268.7% since their low point in March of 2009. Improving economic growth and better job creation in the U.S. pushed stocks higher throughout the year. Despite political, sectarian and economic troubles around the globe, a crash in oil prices and the end of the Federal Reserve’s bond-buying program, stocks closed at an all-time high.

The Fund gained 11.24% for the year, beating the Lipper average’s 9.98% return but falling short of the Russell’s 13.22% jump. It’s never fun to trail the market, but we’re glad that we beat our Lipper peer-group so handily. Our most positive

allocation effect came from having a large exposure to one of the Russell’s best-performing sectors, healthcare. This contributed 53 basis points (a basis point is 1/100th of 1%) to our relative performance. On the flip-side, industrials underperformed the Russell this year, so our overweight position in that group relative to the index hurt the Fund by 51 basis points. Our slight overweight position in energy, the Russell’s worst-performing sector, impacted the Fund by 47 basis points.

Poor stock picks in the utility, industrial and energy sectors hurt us the most this year. Our worst performer was MRC Global, the largest global distributor of pipes, valves and fittings to oil and gas companies. The stock plummeted 35.9% from $32.26 to $20.67, where we sold it, taking 21¢ from each fund share. The stock fell early in the year, after its midstream customers experienced project delays and subsequently cut spending on MRC’s products. Although demand from these customers eventually improved, the stock continued to fall as investors worried that sinking oil prices would hurt demand by larger upstream customers. We sold our position, because we believed that MRC’s earnings would go down dramatically as a result of lower oil prices. The stock ended the year at $15.15, 26.7% below where we sold it.

MDU Resources slid 19.7% from $30.55 to $23.50, reducing the NAV by 20¢. The stock rallied in early 2014, after management reported

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solid results in its construction and utility segments. However, the shares fell in the summer, after the company’s exploration and production (E&P) segment, fell short of expectations. Investor confidence eroded further in late 2014 as oil prices collapsed by 45%, from $99 to $53 per barrel, to a five-year low. MDU is currently exploring the divestiture of its capital intensive E&P business. While the timing is not great with oil prices so cheap, we believe that the company is taking the right steps to create shareholder value. We also expect its construction and utilities segments to grow well over the long-term, because of a substantial project backlog and a growing utility customer base.

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inflation is low. Analyst consensus is that the Russell will grow earnings by a double digit percentage rate in each of the next three years.

We’re not sure if the pundits’ predictions will hold, because we’re more focused on what individual companies will do over three-year periods. We’re more confident that it will be hard to keep up the performance of the past few years, because stocks are relatively expensive, trading close to 20 times earnings, which is just shy of a ten-year high.

We also think that volatility is likely, because the Fed is turning away from its accommodating monetary policy, and most investors tend to flinch when political and economic issues abroad flare-up. The good news is that quick market moves create opportunities for us to buy or sell stocks that have gotten too cheap or too expensive.

Toward the end of the year, we increased our position in Tennessee-based bank, First Horizon National Corporation. We started buying the stock at a low price back in 2011, after the company botched its expansion into the national-lending market, and a new management team recommitted the bank to its profitable, core Tennessee franchise. We especially like the stock here, because the bank has a transparent balance sheet, is well-capitalized and management is close to settling the last of a series of legal issues related to its national lending platform. Loan growth is also good, and given the bank’s low-cost borrowing base and variable-rate mortgage assets, earnings and equity returns should rise if interest rates increase. Finally, the stock trades at a discount to its peers.

We initiated a position last quarter in Genesee & Wyoming, a leading operator of short-line railroads mainly in the U.S., Canada and Australia. Genesee has carved out a wide competitive moat by owning difficult-to-replicate, strategically-placed assets that offer cost advantages over trucking and pricing power over clients. We bought the stock, after management reported weaker earnings due to sluggish demand from Australian mining customers, and investors became concerned that cheap oil would draw customers to trucking options. We viewed this as a fantastic opportunity to buy a durable franchise with continued relevance, predictable free cash flow and reasonable valuation.

As oil prices collapsed toward the end of the year, driven by the surge in oil production in North America and OPEC’s decision not to curb its own production, we added capital to existing energy holdings Energen and Cameron and conglomerate MDU. While we don’t know when oil prices will recover, we think they will go up over our three-year investment horizon, and we believe that these companies, with their unique assets, will do very well.

At year’s end, the biggest concentrations in the portfolio were in the industrials, information technology and health care sectors. Relative to the Russell, the portfolio has fewer holdings in the highly cyclical consumer discretionary, financials and materials sectors.

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We strive to outperform our indices over the long-term by capturing the majority of the Russell’s upside in bull markets and losing a lot less than the market and our peers in bear markets. We remain committed to doing this by investing in well-priced businesses with increasing relevance, material and sustainable competitive advantages and properly incentivized managers.

Thank you for your investment.

Yours truly,

Matthew D. Gershuny		Lori A. Keith
Lead Portfolio Manager		Portfolio Manager

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PARNASSUS SMALL CAP FUND

Ticker: PARSX

As of December 31, 2014, the NAV of the Parnassus Small Cap Fund was $23.77, so after taking dividends into account, the total return for the year was 0.98%. This compares to a return of 4.89% for the Russell 2000 Index (“Russell 2000”) of smaller companies and 3.85% for the Lipper Small-Cap Core Average, which represents the average return of the small-cap core funds followed by Lipper (“Lipper average”). The Fund underperformed both benchmarks for the full year.

Below is a table comparing the Parnassus Small Cap Fund with the Russell 2000 and the Lipper average over the past one-, three- and five-year periods ended December 31, 2014 and the period since inception on April 30, 2005. Although our more recent performance has been disappointing, we remain ahead of the Russell 2000 and Lipper average since inception. On page 22 is a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception.

Company Analysis

By far, our worst performers last year were two energy companies, which each cost the Fund 89¢ or more. The one that hurt us the most was Energy XXI, an oil and gas producer in the Gulf of Mexico, which plunged 58.7% from our average cost of $18.27 to $7.55, where we sold our shares, slashing $1.70 from each fund share. The stock initially dropped in the summer,

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local government to let it use an insurance product to cover its reclamation bond liability, and its joint-venture partner, Rio Tinto, announced they will develop a new, profitable diamond reserve called A-21. Finally, management indicated it will likely initiate a dividend in 2015, which should attract new, income-oriented investors.

$95 per barrel to $53 per barrel. Although this dramatic decline hurt our energy investments, it provides a further stimulus to the economy because transportation costs for individuals, as well as goods, will decline.

We did take advantage of the significant decline of small-cap oil stocks to upgrade the quality of our holdings. We sold our Energy XXI position and redeployed capital into W&T Offshore and Denbury Resources. Like Energy XXI, W&T Offshore also participates in the Gulf of Mexico, but it has lower financial leverage and a CEO who owns a significant stake in the company, which directly aligns our interests. Denbury Resources, on the other hand, has a competitively-advantaged business model that should allow it to earn excess returns over time. The company owns a one-of-a-kind, naturally occurring carbon-dioxide reserve that it injects into abandoned oil wells in order to extract additional oil. Given the predictability of its business, the company recently increased its dividend by 60%.

In my first quarter 2014 report, I wrote that only one of three stock price drivers (revenue growth) remained strong, while the other two (multiple expansion and profit margin expansion) were likely near peaks. My outlook has proven accurate. The forward price-to-earnings multiple for the Russell 2000 remains near a ten-year high at 22, but did not increase during the year. Profit margins also remain near a record high, and also did not increase in 2014. Ultimately, this translated into the Russell 2000 only increasing 5% in 2014, about the same rate as revenue growth.

My outlook remains the same for 2015. I expect the U.S. economy will continue to improve, which should fuel further revenue growth, but I suspect valuation multiples and profit margins will not move meaningfully higher. The real risk, which no one can predict, is when there will be an unexpected shock to the system, and what that shock will be. When a shock inevitably occurs, valuation multiples will contract and, if the shock is prolonged, revenue growth will slow and profit margins will contract. If this triple-whammy occurs, stock prices will decline significantly. It’s impossible to construct a

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portfolio of stocks that are immune to this decline; the best we can do is invest in competitively advantaged businesses, which will survive the initial shock, and then can take advantage of the challenging period to improve their competitive position.

Thank you for your investment,

Ryan Wilsey

Portfolio Manager

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PARNASSUS ASIA FUND

Ticker: PAFSX

As of December 31, 2014, the NAV of the Parnassus Asia Fund was $16.72, so after taking dividends into account, the Fund was up 7.84% for the year. This compares to a gain of 0.39% for the MSCI AC Asia Pacific Index (“MSCI Index”) and 0.60% for the Lipper Asia Pacific Region Average, which represents the average return of the Asia Pacific Region funds followed by Lipper (“Lipper average”). Below, you will find a table comparing the Parnassus Asia Fund with the MSCI Index and the Lipper average for one year period and for the period since inception on April 30, 2013. On page 26 is a graph showing the growth of a hypothetical $10,000 investment in the Fund since inception.

As you can see, the Fund is substantially ahead of both benchmarks for both time periods. For the one-year period, the Fund is more than seven percentage points ahead of both benchmarks, and our performance makes us the seventh-best performing fund out of the 58 Asia Pacific funds followed by Lipper. For the period since inception, the Fund is #1 out of the 57 funds followed by Lipper.

Company Analysis

Despite the Asia Fund’s good performance, there were five companies that each accounted for losses of 10¢ or more to the value of each fund share. Although the weak Asian economies provided a backdrop for the poor performance of these stocks,

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St. Shine Optical sliced 14¢ off the Fund’s NAV, as its stock sank 25.9% from our cost of $21.98 to $16.28. This Taiwanese maker of contact lenses provides contract-manufacturing services for local and international brands. Japan is the company’s most important international market, and growth slowed down as customers hesitated to launch new products given cost pressures from the weaker yen and the uncertainty in the Japanese economy. The company’s smaller, but higher margin branded business in Taiwan also declined significantly in the latter half of the year, as new entrants to the Taiwanese market tried to increase market share through aggressive pricing.

30%, the highest among its peers. We like the bank, because it has been consistently among the most profitable banks in the country for the last decade, and we like its social role as a microfinance lender to small businesses, where it has made a third of its total loans.

Hermes Microvision, a Taiwan-based maker of semiconductor-manufacturing equipment, increased the value of each fund share by 21¢, as its stock price rocketed up 53.6% from $32.49 to $49.89. Hermes develops and markets electron beam inspection tools for semiconductor-manufacturers for use in testing for defects in silicon wafers. Strong order flow moved the stock higher. More complex semiconductor-manufacturing processes and more exacting specifications will mean more chip-makers should shift away from older optical-inspection technology in favor of Hermes’ more advanced products.

Sino-Thai Engineering, a leading engineering and construction company in Thailand, added 16¢ to the NAV, as its stock increased from our cost of 39¢ to 58¢, where we sold it for an increase of 48.7%. The company manages industrial projects for private firms and infrastructure products for the government including Bangkok’s subway and Skytrain. The stock was very volatile last year, because of the military coup in Thailand and its sensitivity to government-related business, but the stock moved higher after Thailand’s army chief announced a commitment to push through long-stalled infrastructure projects. Although Sino-Thai is a well-run business, we decided to sell the stock because of political uncertainty in Thailand.

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region. While China has a bigger economy, most of its large enterprises are state-owned, so they are not publicly traded and don’t have any market capitalizations like the large Japanese companies. The Japanese market was up 9.8% last year, but the Japanese yen fell 12% against the dollar, so in dollar terms, the Japanese market lost 3.7%. (The return of the MSCI Index is quoted in dollars.) While Japan has a 40% weighting in the MSCI Index, Japanese companies comprise only 18% of the Parnassus Asia Fund, so being underweight in Japan helped the Fund. At the beginning of the year, we had no idea that the Japanese market would do poorly in dollar terms, so the fact that we were underweight was definitely a stroke of luck.

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The final piece of luck was overweighting Thailand and Indonesia; Thailand went up 16.8%, and Indonesia went up 27.2% in dollar terms. However, we were also skillful in picking good companies in those two countries. Our Thai companies went up 25.5%, while our Indonesian companies went up 29.4% in dollar terms.

In summary, then, we have a good record of picking companies that increase in value, but we have no ability to accurately forecast currency movements or predict which company’s corresponding stock market will do the best. Our strategy, then, should be to focus on picking good companies and not to worry about currency fluctuations or stock market movements in individual countries. When it comes to the latter two, we’ll have some good luck and some bad luck, and over the long-run, the two should balance each other out. That doesn’t mean we won’t take country-wide conditions into account. We’ll look at how our portfolio compares to the MSCI Index, and we’ll assess economic opportunities in various countries, but we won’t try to pick countries based on an annual forecast of stock market returns.

Yours truly,

Jerome L. Dodson		Billy J. Hwan
Lead Portfolio Manager		Portfolio Manager

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PARNASSUS FIXED INCOME FUND

Ticker: PRFIX

As of December 31, 2014, the NAV of the Parnassus Fixed Income Fund was $16.66, producing a gain for the year of 4.49% (including dividends). This compares to a gain of 5.97% for the Barclays U.S. Aggregate Bond Index (“Barclays Aggregate Index”) and a gain of 7.66% for the Lipper A-Rated Bond Fund Average, which represents the average return of the A-rated bond funds followed by Lipper (“Lipper average”).

Below is a table comparing the performance of the Fund with that of the Barclays Aggregate Index and the Lipper average. Average annual total returns are for the one-, three-, five- and ten-year periods. On page 28, you will find a graph that shows the growth of a hypothetical $10,000 investment in the Fund over the past ten years. For December 2014, the 30-day subsidized SEC yield was 1.59%, and the unsubsidized SEC yield was 1.53%.

2014 Review

Interest rates continued to deviate from their normal relationship to the economy in the fourth quarter, topping off an odd year for the bond market overall. Looking at domestic data alone, interest rates should have risen in 2014. The U.S. economy grew at a robust rate in the last three quarters of the year after recovering from a first quarter contraction caused by the Polar Vortex. Typically, a growing economy causes interest rates to rise, as inflation picks up and investors demand higher rates of return.

Instead, geopolitical events overwhelmed the positive economic data and ultimately determined the direction of this year’s interest rate movement. The 10-year Treasury bond yielded approximately 3.00% on January 1, 2014, but subsequently dropped to 2.17% by the end of the year.

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global growth rates and very low yields on foreign sovereign debt will continue to make U.S. debt attractive by comparison, likely keeping the 10-year Treasury rate somewhat depressed.

Asset classes that historically outperform in a growing economy include corporate bonds, convertible bonds and high yield bonds. As a result, the Fund continues to be overweight corporate bonds and will opportunistically add high yield bonds that fit its long-term objectives.

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Similar to 2014, I believe it is important to be conservative in this environment and not chase yield. With the economy growing well, the natural bias is for higher interest rates. As a result, the Fund continues to be conservatively positioned to protect against the impact of volatility, with a focus on principal preservation.

Thank you for your investment in the Parnassus Fixed Income Fund.

Yours truly,

Samantha D. Palm

Portfolio Manager

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Responsible Investing Notes

By Milton Moskowitz

While 2014 started out with some turmoil, the stock market blasted its way to record highs by year end. Women advanced to C-suites and boards of directors. In Germany, the government followed the lead of Norway by mandating that corporate boards of directors allocate at least 30% of their seats to women. Jeans-maker Levi Strauss, a privately-owned company, cut back its orders from Cambodian factories after a strike by garment workers over low wages. The minimum wage in Cambodian factories is $128 a month.

It was a banner year for proxy resolutions asking corporations to address environmental, social and governance issues. A total of 454 resolutions were filed, well above previous years. And the average shareholder vote supporting these resolutions was 21.7%. Five resolutions received majority support, 22 garnered 40%. Needless to say, these resolutions are strictly advisory. A resolution could attract 99% support – and the company could simply ignore it.

I have a thing about corporate histories and so, for me, 2014 was notable for the publishing by HarperCollins of The Intel Trinity, a 541-page book written by Michael S. Malone, a veteran observer of Silicon Valley. His subtitle is: “How Robert Noyce, Gordon Moore, and Andy Grove Built the World’s Most Important Company.” There will be arguments over whether Intel Corporation deserves this rating, but there is no question that it plays a key role in the technology that runs the world today. It has 107,000 employees and annual revenue of $55 billion. Its semiconductors power most of the world’s computers.

Malone traces the rise of Intel in a conversational tone. He does not shy away from setbacks and conflicts. This is not hagiography. He relates the story of Intel from the standpoints of three leaders quite different in their personalities, capabilities and philosophies. Noyce, co-founder of the integrated circuit, was the charismatic entrepreneur, sometimes called “The Mayor of Silicon Valley.” Moore was the soft-spoken intellectual physicist, best known for “Moore’s Law,” which stated that computer power doubles every two years. Andy Grove was the feisty “take no prisoners” Jewish refugee from Hungary, responsible for the day-to-day running of Intel; his philosophy was best expressed in the title of his 1996 book, Only the Paranoid Survive.

The trio came together in the 1960s at Fairchild Camera and were part of the eight engineers who left to found Intel in 1968. “At the heart of this story,” says Malone, “is the message that the company succeeded and reached the pinnacle of the modern economy not because its leadership was so brilliant (though it was) nor because its employees were so bright (though they were), nor that it had the best products (sometimes yes, most times no), nor that it made fewer mistakes than its competitors (completely wrong), but because Intel, more than any company America has ever known, had the ability to learn – from its successes and even more from its failures.”

I first came across Intel in 1983 when I interviewed there for the 1984 book, The 100 Best Companies to Work for in America, which I co-authored with Robert Levering. Intel then had 12,500 employees. Parnassus Investments was founded in 1984, and it had an early affinity for technology stocks. The Parnassus Fund made its first investment in Intel on June 9, 1986, paying $25 per shares. That initial lot was sold four years later at $43.50 per share.

Over the past 25 years Intel has remained one of the core holdings of three Parnassus Funds – the Parnassus Fund, Parnassus Core Equity Fund and Parnassus Endeavor Fund. Key inflection points were 1998, when the 100 Best list began appearing in Fortune magazine, and 2005 when the Parnassus Endeavor Fund was launched. Capital gains on the Intel holdings have totaled more than $9 million.

At the present time, only one fund – the Parnassus Endeavor Fund – owns Intel stock, to the tune of 400,000 shares. Intel has been a holding since inception of the Parnassus Endeavor Fund.

Milton Moskowitz is the co-author of the Fortune magazine survey, “The 100 Best Companies to Work For,” and the co-originator of the annual Working Mother magazine survey, “The 100 Best Companies for Working Mothers.” Mr. Moskowitz serves as a consultant to Parnassus Investments in evaluating companies for workplace issues and responsible investing. Neither Fortune magazine nor Working Mother magazine has any role in the management of the Parnassus Funds, and there is no affiliation between Parnassus Investments and either publication.

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Fund Expenses (unaudited)

As a shareholder of the Funds, you incur ongoing costs, which include portfolio management fees, administrative fees, shareholder reports, and other fund expenses. The Funds do not charge transaction fees, so you do not incur transaction costs such as sales charges (loads) on purchase payments, reinvested dividends, or other distributions, redemption fees, and exchange fees. The information on this page is intended to help you understand your ongoing costs of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.

The following example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the period of July 1, 2014 through December 31, 2014.

Actual Expenses

In the example below, the first line for each Fund provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of each Fund provides information about hypothetical account values and hypothetical expenses based on the Fund’s expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. You may compare the ongoing costs of investing in the Fund with other mutual funds by comparing this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in the table are meant to highlight only your ongoing costs in these Funds. Therefore, the second line of each Fund is useful in comparing only ongoing costs and will not help you determine the relative total costs of owning other mutual funds, which may include transactional costs such as loads.

* Expenses are equal to the Fund’s annualized expense ratio of 0.86%, 0.87%, 0.69%, 0.95%, 1.14%, 1.20%, 1.25% and 0.68% for the Parnassus Fund, Parnassus Core Equity Fund – Investor Shares, Parnassus Core Equity Fund – Institutional Shares, Parnassus Endeavor Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Asia Fund and Parnassus Fixed Income Fund, respectively, multiplied by the average account value over the period, multiplied by the ratio of days in the period. The ratio of days in the period is 184/365 (to reflect the one-half year period).

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Trustees of the Parnassus Funds and the Parnassus Income Funds

San Francisco, California

We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Parnassus Funds (comprised of Parnassus Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Endeavor Fund, and Parnassus Asia Fund) and the Parnassus Income Funds (comprised of Parnassus Core Equity Fund and Parnassus Fixed Income Fund) (collectively, the “Trusts”) as of December 31, 2014, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended for Parnassus Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Endeavor Fund, Parnassus Core Equity Fund, and Parnassus Fixed Income Fund, and for period April 30, 2013 (inception date) through December 31, 2014 for Parnassus Asia Fund, and the financial highlights for each of the five years in the period then ended for Parnassus Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Endeavor Fund, Parnassus Core Equity Fund, and Parnassus Fixed Income Fund and for period April 30, 2013 (inception date) through December 31, 2014 for Parnassus Asia Fund. These financial statements and financial highlights are the responsibility of the Trusts’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trusts are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trusts’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2014, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds constituting the Parnassus Funds and the Parnassus Income Funds as of December 31, 2014, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended for Parnassus Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Endeavor Fund, Parnassus Core Equity Fund, and Parnassus Fixed Income Fund and for the period April 30, 2013 (inception date) through December 31, 2014 for Parnassus Asia Fund, and the financial highlights for each of the five years in the period then ended for Parnassus Fund, Parnassus Mid Cap Fund, Parnassus Small Cap Fund, Parnassus Endeavor Fund, Parnassus Core Equity Fund, and Parnassus Fixed Income Fund and for the period April 30, 2013 (inception date) through December 31, 2014 for Parnassus Asia Fund, in conformity with accounting principles generally accepted in the United States of America.

San Francisco, California

February 3, 2015

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PARNASSUS FUND

Portfolio of Investments as of December 31, 2014