SEC Info℠

Home

Search

My Interests

Help

Sign In

Please Sign In

Parnassus Funds, et al. – ‘N-30B-2’ for 9/30/14

On:  Friday, 10/31/14, at 11:45am ET   ·   Effective:  10/31/14   ·   For:  9/30/14   ·   Accession #:  1193125-14-391405   ·   File #s:  811-04044, 811-06673

Previous ‘N-30B-2’:  ‘N-30B-2’ on 5/2/14 for 3/31/14   ·   Next:  ‘N-30B-2’ on 4/28/15 for 3/31/15   ·   Latest:  ‘N-30B-2’ on 11/3/23 for 9/30/23

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

 Text Wildcards:  ? (any letter/digit),  * (many).  Search Logic:  for Documents:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).  Details... 

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

10/31/14  Parnassus Funds                   N-30B-2     9/30/14    1:1.4M                                   Donnelley … Solutions/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-30B-2     Periodic or Interim Report Mailed to Shareholders   HTML    660K 

Table of Contents

PARNASSUS FUNDS^®

QUARTERLY REPORT  ¡  SEPTEMBER 30, 2014

PARNASSUS FUNDS

Table of Contents

Table of Contents

Table of Contents

November 3, 2014

Dear Shareholder:

As this report is being written, there is a lot of confusion in the markets. There are a lot of trouble spots in the world right now, including Hong Kong, the Ukraine, Syria and Iraq, and this is reflected in the stock market. Also, the market has been climbing higher this year and last, so that stocks had relatively high valuations, which made them ripe for a correction. If you just look at the economic fundamentals in America, though, things look pretty good. The unemployment rate has dropped below 6% to 5.9%, and new jobs are being created at over 200,000 per month. Many stocks are moving sharply downward, but I think there may be some great buying opportunities presenting themselves.

New Team Member

Aida Diaz has joined us as a marketing associate. Prior to joining Parnassus, she worked for Apoyo Financiero as a customer service and loan executive, facilitating access to capital for the Latino community. She received her B.A. in business economics with a minor in Spanish and Spanish-American studies, and a master’s degree in business administration from Mills College.

Parnassus Survey

In the last two reports, I mentioned how 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 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.

Quarterly Reports

Enclosed you will find the quarterly reports for all our funds. I think you’ll find that they make for interesting and informative reading.

Finally, thank you for investing with us.

Yours truly,

Jerome L. Dodson

President

4

Table of Contents

PARNASSUS FUND

Ticker: PARNX

As of September 30, 2014, the net asset value (“NAV”) of the Parnassus Fund was $48.71, so the total return for the quarter was a loss of 1.74%. This compares to a gain of 1.13% for the S&P 500 Index (“S&P 500”) and a loss of 1.12% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper (“Lipper average”). For the quarter, we lagged both our benchmarks.

For the year-to-date, the Fund is up 6.22%, compared to 8.34% for the S&P 500 and 5.29% for the Lipper average. We’re behind the S&P 500, but we’re ahead of the Lipper average.

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. Although the Fund is behind the S&P 500 for the one-year period, we’re ahead of the Lipper average for that time span. Longer-term, the Fund is well ahead of both its benchmarks for all time periods.

5

Table of Contents

ceutical company, announced it would pay $8.3 billion to acquire InterMune for $74 per share. Roche paid a premium because of Esbriet, the company’s new blockbuster drug to treat idiopathic pulmonary fibrosis (IPF), a fatal lung disease. We sold our shares after the deal was announced, because the stock was fully-valued, and we did not think any higher bids would emerge.

Outlook and Strategy

(Note: This section represents the thoughts of Jerome L. Dodson and applies to the Parnassus Fund and the Parnassus Endeavor Fund. Other views appear with the reports on the other Funds.)

As this report is being written in October of 2014, the market looks weak. As I wrote in our last quarterly report, the market may have gotten ahead of itself, so the downward moves are probably a correction. Quite often, stock-market sell-offs come in September and October, so the current action seems to follow a typical pattern. Many years ago, I tried to take advantage of this seasonal pattern by selling a substantial part of the portfolio in late spring or early summer, then buying back stocks in late October. Unfortunately, it didn’t work as well as I had hoped. The market didn’t always follow a seasonal pattern, and too many random events confounded my strategy.

My results have been best if I focus on individual companies and buy them at prices well below what I calculate as their intrinsic value. In some ways, though, the seasonal pattern has an effect on what opportunities are in the market. If we

6

Table of Contents

sell stocks that are fully-valued, it tends to happen when the market is strongest, quite often in the late spring and summer. When stocks move lower and present bargains, it often happens in September and October. A couple of months ago, I was having difficulty finding undervalued stocks to buy. Right now, the correction has brought some interesting opportunities. If one has patience and waits for stocks to drop into “buying range,” it provides a lot of opportunities. I think this is what is happening right now.

Of course, there’s no guarantee that a stock that goes down will come back right away. It can keep going down even after you buy it. It can stay below your cost for many years. Chances are, though, that if you buy a share in a good business, it will come back before too long.

Besides the seasonal factor, there are also a lot of international problems right now. In Asia, the Chinese economy seems to be slowing down, and the protests in Hong Kong will certainly have an effect on the economy. Violence continues in the Ukraine, and the Middle East is even worse with the rise of the Islamic State in Syria and Iraq. Developments in any of these trouble spots could have negative consequences for the American economy.

If we just focus on the American economy, though, things look pretty good. So far this year, we have averaged a net of over 200,000 new jobs per month, a strong number, and the unemployment rate has dropped to 5.9%. Also, the number of new job openings is very high, so this should mean more people working and incomes should move higher. These figures bode well for future economic activity. At this stage, government policy is very important, because the recovery is slow, wages are not rising very quickly and the Federal Reserve could hurt the recovery by raising interest rates. Fortunately, Janet Yellen seems inclined to keep interest rates low, since she has indicated that the recovery is still a weak one and there is no sign of strong inflation.

Right now, we have some cash in both the Parnassus Fund and the Parnassus Endeavor Fund, because of both stock sales and inflows of new investments. We’re looking for bargains, and if the weakness continues, we’ll probably be able to buy some more stocks at bargain prices.

Yours truly,

7

Table of Contents

PARNASSUS CORE EQUITY FUND

Ticker: Investor Shares - PRBLX

Ticker: Institutional Shares - PRILX

As of September 30, 2014, the NAV of the Parnassus Core Equity Fund-Investor Shares was $39.10. After taking dividends into account, the total return for the third quarter was a loss of 0.55%. This compares to a 1.13% gain for the S&P 500 Index (“S&P 500”) and a loss of 1.08% for the Lipper Equity Income Fund Average, which represents the average return of the equity income funds followed by Lipper (“Lipper average”). For the first nine months of 2014, the Fund posted a return of 7.70%, which trails the 8.34% gain for the S&P 500, but exceeds the Lipper average’s 6.13% return.

Below is a table that summarizes the performance of the Fund, the S&P 500 and the Lipper average. The returns are for the one-, three-, five- and ten-year periods ended September 30, 2014.

8

Table of Contents

(West Texas Crude – WTI) fell 12% during the quarter from $106 to $94 per barrel. Despite the currently weak oil price environment, we are still optimistic about Energen’s long-term prospects. The company has a large, long-lived drilling inventory in the Texas Permian basin, which provides Energen a long runway to grow energy production.

Mondelez, a leading snacks company with iconic brands such as Oreo, Cadbury and Trident, shaved 11¢ off each Fund share, as its stock dropped 8.9% from $37.61 to $34.27. Management reduced its revenue guidance after the company made several execution mistakes that caused growth to slow overseas. We believe Mondelez is working through these issues and that sales will rebound, due to the company’s fast-growing product categories and end-markets. Meanwhile, the company is increasing its profit margin through overhead cost reductions and repurchasing more than $1 billion worth of its own shares.

Our three best stocks added at least 12¢ each to the NAV. Gilead Sciences was the Fund’s biggest winner. It climbed 28.4% during the quarter to $106.45 from $82.91 and boosted the NAV by 28¢. Gilead’s hepatitis C drug, Sovaldi, had revenues of $3.5 billion during the June quarter, increasing its record as the most successful drug launch in history, as measured by sales. In addition, Gilead’s next generation HIV therapy, TAF, showed promising results in two recent late-stage clinical studies. Specifically, TAF patients not only reported superior HIV viral suppression, but also experienced stronger kidney function and less bone density loss as compared to patients on existing therapies. We are optimistic that TAF will receive FDA approval in 2015, and be another growth driver for Gilead.

Apple had another strong quarter, as its stock rose 8.4% to $100.75 from $92.93 and increased the NAV by 16¢. The company sold more than 10 million iPhone 6 devices in the first weekend of the new product’s launch, which helped lift shares in the quarter. Apple is doing a fantastic job enhancing its device ecosystem, introducing new product categories and

building a large and loyal customer base. Based on these attributes, we think Apple can continue to generate high levels of cash flow for many years to come.

eBay, the leading e-commerce and online payments player, rose 12.0% from our average cost of $50.57 to $56.63, for a gain of 12¢ per fund share. We bought the stock in July after it dropped primarily due to investor concerns regarding sales growth at its core eBay.com business. Another overhang at the time was the unexpected departure of the head of PayPal, which is a valuable subsidiary of eBay. When we bought the stock, the risk-reward seemed favorable due to the company’s sustainable competitive advantages, exposure to fast growing end-markets and reasonable valuation.

The stock jumped in late September when eBay announced plans to make PayPal an independent company in the second half of 2015. The spin-off should make it easier for PayPal to extend its payments platform to other marketplaces, such as Amazon and Alibaba, and thereby boost its growth prospects. Meanwhile, eBay’s core business should continue to benefit from the overall growth in e-commerce spending.

Outlook and Strategy

After an unusually quiet first half of the year, during which we didn’t add a new holding to the Fund, we finally found two new businesses worth adding to the portfolio in the third quarter. The first new holding is the aforementioned eBay. The second is Perrigo, a leading producer of over-the-counter (OTC) and generic prescription drugs. Perrigo’s strategy is designed to benefit from two powerful long-term trends: 1) an aging population that will increase drug usage over time, and 2) pressure from governments and consumers to reduce overall healthcare spending. These secular tailwinds, coupled with the company’s durable competitive advantages, give us confidence in Perrigo’s long-term business prospects.

Portfolio characteristics and holdings are subject to change periodically.

9

Table of Contents

Owning shares of Perrigo fits into our overall investment strategy for the health care sector, which we consider to be a barbell approach. On one end of the barbell are Gilead and Allergan, two portfolio companies that market novel therapies for large patient populations. These companies invest heavily in scientific research, in an effort to develop highly-differentiated therapies. On the other end, we’re invested in companies that make healthcare more affordable, such as drugstore and pharmacy benefits manager (PBM) CVS Health. Perrigo fits into the second category, as its low-priced OTC and generic prescription drugs provide consumers with outcomes identical to those offered by expensive branded drugs.

We exited one holding during the quarter: C. H. Robinson, a logistics provider focused primarily on the North American trucking industry. This stock made a modest gain for the Fund in the two years that we owned it. We exited the position in September, due to concerns related to the long-term direction of the company’s competitive advantages. As a broker operating between shippers and freight carriers, Robinson has benefited for many years from its large network in North America and a superior technology platform. Our fear is that over time the company’s technology edge may erode, as other competitors invest heavily into their own capabilities. Of course, it’s possible that Robinson will maintain its dominance in the truck brokerage industry, but our conviction in this outcome is not high enough to justify owning the company’s shares.

At quarter-end, our portfolio is relatively defensively positioned. Compared to the S&P 500, the Fund is significantly underweighted in three highly cyclical sectors: financials, consumer discretionary and energy. Since these sectors tend to be especially weak in bear markets, these underweight positions should help protect your investment if stocks drop in the near-term. Given the duration and magnitude of the current bull market (the S&P 500 closed the quarter 191% above its March 2009 low), such a correction certainly wouldn’t surprise us.

Whether the stock market moves up or down for the remainder of 2014, we’re confident that our portfolio holdings will perform well over the long-term. Our companies have great business prospects, and we think they are trading at reasonable valuations. This is why we’re excited to be invested in the Parnassus Core Equity Fund along with you.

Thank you for your confidence in us,

10

Table of Contents

PARNASSUS ENDEAVOR FUND

Ticker: PARWX

As of September 30, 2014, the NAV of the Parnassus Endeavor Fund was $29.79, so the total return for the quarter was 1.36%. This compares to a gain of 1.13% for the S&P 500 Index (“S&P 500”) and a loss of 1.12% for the Lipper Multi-Cap Core Average, which represents the average return of the multi-cap core funds followed by Lipper (“Lipper average”). For the quarter, then, we edged out the S&P 500, and we were substantially ahead of the Lipper average.

For the year-to-date, the Parnassus Endeavor Fund is up 10.37% compared to 8.34% for the S&P 500 and 5.29% for the Lipper average. Below you will find a table that compares the Fund with the S&P 500 and the Lipper average for the past one-, three- and five-year periods and for the period since inception on April 29, 2005. The Fund has had remarkable performance, beating both its benchmarks for each time period by a wide margin. I think this performance shows that companies that build great workplaces do very well as businesses.

11

Table of Contents

Allergan is best known for developing Botox, but it also has a number of other pharmaceutical products. The stock rose 5.3% during the quarter from $169 to $178, and it added 12¢ to the NAV. The reason it made a nice contribution to the Fund on a relatively modest gain is that we added substantially to our position, when the stock dropped close to $150 during the period. Valeant, a rival pharmaceutical company, announced a hostile bid for Allergan with an offer price tied to the value of Valeant’s stock. Valeant missed earnings and its stock dropped, so Allergan’s shares also declined. Allergan’s shares rebounded later in the quarter, after the company agreed to set a date for a special shareholder meeting to consider Valeant’s offer and vote on replacing board members. We are holding onto our shares, because we believe Allergan will announce its

own plan to create additional shareholder value, or Valeant’s offer price will increase even further. Either way, the stock should react positively.

Target Corporation, the Minneapolis-based discount retailer, climbed 8.2% from $57.95 to $62.68 for a contribution of 10¢ to the NAV. The stock price dipped into the 50’s this year, after a series of negative events including a hacker attack on the company’s credit card information, poor results from an expansion into Canada and the dismissal of the chief executive officer, Greg Steinhafel. The stock 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. Despite all the difficulties, Target has a great franchise that sells innovative, quality products at bargain prices. We expect sales and earnings to improve under Mr. Cornell.

Lam Research is a global supplier of semiconductor-manufacturing equipment, and its stock rose 10.5% from $67.58 to $74.70 as it contributed 9¢ to each fund share. As the dimensions of semiconductors become smaller, they are much more difficult to manufacture, and this increases the demand for complex equipment to make the devices. Lam benefits from this trend, and it also is gaining market share as one of the two largest providers of manufacturing equipment.

Yours truly,

Jerome L. Dodson

Portfolio Manager

* For purposes of categorizing securities for diversification requirements under the Investment Company Act, the Fund uses industry classifications that are more specific than those used for the chart.

Portfolio characteristics and holdings are subject to change periodically.

12

Table of Contents

PARNASSUS MID CAP FUND

Ticker: PARMX

As of September 30, 2014, the net asset value per share (“NAV”) of the Parnassus Mid Cap Fund was $26.12, so the total return for the quarter was a loss of 2.57%. This compares to a loss of 1.66% for the Russell Midcap Index (“Russell”) and a loss of 1.12% for the Lipper Multi-Cap Core Average, which represents the average multi-cap core fund followed by Lipper (“Lipper average”).

For the year-to-date, we are behind both the Russell and the Lipper average, as we have gained 4.06%, compared to 6.87% for the Russell and 5.29% for the Lipper average. We’re disappointed that the Fund has lagged so far this year, but we’re confident that our portfolio of high-quality stocks is positioned to outperform its benchmarks over the long-run.

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. We are trailing our benchmarks over the one- and three-year periods, but in the longer-term periods, the Fund is ahead of its Lipper peers.

13

Table of Contents

the stock, as MRC benefits from the build-out of North American energy infrastructure, international expansion and further consolidation.

Our biggest winner was SEI Investments. Shares of this asset-manager and investment-technology solutions-provider jumped 10.3% from $32.77 to $36.16, increasing the Fund’s NAV by 9¢. The stock surged in late July after management reported improved margin results in its core Private Banking and Trust segment (PB&T). This business has been under pressure for years, as the company invested heavily in a new technology platform called the SEI Wealth Platform. Now that the investment period is nearing completion, and clients are signing up for the improved technology, earnings expectations are rising. We increased our position size during the quarter, because we believe margins in the PB&T segment can improve a lot more over the coming years.

Cardinal Health, a leading pharmaceutical distribution company, climbed 9.3% from $68.56 to $74.92, for an increase of 6¢ to the NAV. The company reported better than expected earnings, driven by robust pharmaceutical sales, due to increased volumes and pricing across branded and generic drugs. Investor sentiment rose further after the company formally announced a joint venture with CVS Health to form the largest generic drug sourcing entity in the United States. We believe the accretive CVS joint venture, robust demand for generic and pharmaceutical drugs and further margin expansion will boost earnings over the next several years.

Charles Schwab, the San Francisco-based bank and brokerage firm, rose 9.1% from $26.93 to $29.39, adding 5¢ to the NAV. The stock rallied on investor expectations that short-term interest rates may begin to rise as soon as 2015. Under a normalized rate environment, Schwab would earn a much better return on its banking assets, money market funds and margin loans to brokerage clients. These business lines are so important to Schwab, that their recovery to full strength would cause corporate earnings to more than double from current levels.

14

Table of Contents

Outlook and Strategy

The Russell is up an impressive 283.4% since its March of 2009 low and is only a few percentage points below its multi-year high made in September of 2014. Stocks are a lot more expensive than they were a few years ago, and investors are jittery given geopolitical tensions around the world and the threat of rising interest rates in the U.S. Given this backdrop, we remain cautious.

Compared to the Russell, the Fund is significantly underweighted relative to the index in the highly cyclical consumer discretionary and financials sectors. Our largest concentration of stocks at the end of the quarter was in the industrial and technology sectors. Although these sectors are also typically more economically sensitive, many of our portfolio companies have a high degree of recurring revenue, significant cash flow generation and low debt, which helps mitigate downside risks.

We’re excited about the health care sector, where we see major secular tailwinds due to an aging population and more affordable health care products and services. We initiated a new position in Perrigo, one of the world’s largest manufacturers of private label, over-the-counter drugs in categories such as cough/cold, analgesics and smoking cessation. The company has carved out a wide moat, due to its scale and deep customer relationships. Perrigo’s supply chain is tightly integrated with customers such as Rite Aid Pharmacy and CVS Pharmacy, making it difficult for them to switch to other suppliers. Stringent regulatory requirements for product performance and reliability also create significant barriers for new entrants into the market. The stock dropped over the summer after a weaker-than-expected cough, cold and flu season hurt the company’s earnings results. We viewed this as great buying opportunity to own a durable franchise with strong growth prospects, solid free cash flow generation and an attractive valuation.

We also added to our position in Motorola Solutions (MSI), a provider of communications equipment and software. MSI has a great business with a dominant position in the U.S. market for public safety radios. The company has built an excellent reputation over many years, and its position is difficult to replicate, given its quality research and development and customers’ high switching costs. We expect that LTE technology will enable a whole new generation of public safety devices over the next few years, which will create a new revenue stream for the company. We also expect the company’s returns on capital to improve once the pending divestiture of its commoditized Enterprise business is completed.

We continue to believe that our strategy of focusing on businesses that are increasingly relevant, competitively advantaged, well-managed and attractively valued will lead to outperformance in the long-run.

Thank you for your investment in the Parnassus Mid Cap Fund,

15

Table of Contents

PARNASSUS SMALL CAP FUND

Ticker: PARSX

As of September 30, 2014, the NAV of the Parnassus Small Cap Fund was $26.76, so the total return for the second quarter was a loss of 8.33%. By comparison, the Russell 2000 Index of smaller companies (“Russell 2000”) declined 7.36%, and the Lipper Small Cap Core Average, which represents the average return of the small cap core funds followed by Lipper (“Lipper average”), declined 6.73%. For the quarter, the Fund underperformed both the Russell 2000 and the Lipper average.

Year-to-date, the Fund is trailing both indices, down 6.83%, compared to down 4.41% for the Russell 2000 and down 3.05% for the Lipper average. 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 September 30, 2014 and the period since inception.

16

Table of Contents

customers to spend more over time, and we expect the air conditioner segment will benefit from stricter energy efficiency requirements.

Genmark Diagnostics, a molecular diagnostics company, fell 33.7% from $13.53 to $8.97, slicing 21¢ off the NAV. The stock declined because management delayed the launch of its 2^nd generation diagnostics equipment by six months. We are holding our position, because we believe Genmark’s superior technology and large addressable market should lead to many years of growth.

Shares of Air Lease, a company that purchases aircraft and leases them to airlines, fell 15.8% from $38.58 to $32.50, slicing 20¢ from each fund share. The stock dropped in September as interest rates rose on high-yield debt. Air Lease issues debt to finance its planes, and a rising cost of debt reduces the company’s profitability. However, we believe investors are over-reacting to the rise in interest rates, as 65% of Air Lease’s debt is fixed-rate, and new leases will be priced to reflect the higher cost of debt. We believe that the secular tailwind of increasing global air traffic, which is being driven by the expansion of the middle class in emerging markets, will outweigh the impacts of higher interest rates and propel earnings higher.

Thankfully, we had two stocks that added 11¢ or more to the Fund. For the second quarter in a row, Blount International, the largest manufacturer of saw chains, was a winner, increasing 7.2%, from $14.11 to 15.13, while adding 12¢ to the NAV. Customer demand is finally improving, which is leading to higher margins, as utilization at its manufacturing facilities improves. Additionally, investors applauded the company’s announcement of its first share repurchase program.

VCA, the largest veterinary clinic and diagnostic-testing company in the country, jumped 12.1%, from $35.09 to $39.33, contributing 11¢ to each fund share. Revenue growth accelerated during the quarter, as consumers are once again spending on pet health after pausing during the recession. Management also impressed shareholders with an aggressive share buyback. We trimmed our position size as the stock increased from $30 in May to $42 in September, but we continue to hold a core position, catching the tailwind of rising long-term pet spending.

Outlook and Strategy

Geopolitical uncertainty in Ukraine and the Middle East, an Ebola outbreak in Africa, and concerns that China’s economy is slowing, led to a 7% decline in the Russell 2000. However, the good news is that U.S. corporate earnings remain strong.

* For purposes of categorizing securities for diversification requirements under the Investment Company Act, the Fund uses industry classifications that are more specific than those used for the chart.

Portfolio characteristics and holdings are subject to change periodically.

The U.S. economy continues to gather steam, demonstrated by the fact that the unemployment rate fell below 6% for the first time since 2008. Automobile sales remain an area of strength, which helps our investments in Gentex, Group 1 Automotive and Harman International. However, the housing sector remains stubbornly weak, which is a headwind for our investments in First American Financial and Essent Group, and, to a lesser degree, our bank investments: First Horizon National and TCF Financial.

One question we have received since I took over the Fund is why do we have such a large overweight position in the industrials sector relative to the index? At the end of the quarter, our industrials exposure was 30%, versus the index at 14%. The answer is that the industrial sector, as categorized by GICS (Global Industry Classification Standard), is a bit of a catch-all sector for companies that don’t fit neatly into the other GICS sectors.

17

Table of Contents

When we look at our industrials exposure from a risk management standpoint, we view Blount International, Graco and Regal-Beloit as true industrials. Combined, they represented 9.7% of the Fund. We view MRC Global, a distributor of valves to the energy sector, and Thermon Group, a manufacturer of heat-tracing primarily for the energy sector, as energy investments; combined, they represented 7.9% of the Fund. We view Insperity, a service provider of payroll and human resources, Iron Mountain, a document storage provider, and UTi Worldwide, a supply chain services provider, as business services; combined they represent 10.4% of the Fund. Finally, we view Air Lease, an airplane leasing company which represents 4.1% of the Fund, as a financial. So, while we’re overweighted in industrials relative to the index, we believe that our holdings are diversified and not overly exposed to any one particular industry.

Another question we often get is why we have not increased the number of positions we hold—we’re still at 34 positions, as we were at the end of 2013. Two factors are driving this: the first is valuations have been stretched for most of 2014. This has reduced the number of holdings across multiple Parnassus Funds: our Parnassus Endeavor Fund only has 32 positions, while our Parnassus Mid Cap Fund only has 37 positions. The second factor is that several of our companies have been acquired: at the end of Q2, Micros announced it was being acquired by Oracle, and during Q3, Compuware announced it was being acquired by a private equity firm. So, although we’ve added new positions to the portfolio this year, the total hasn’t changed.

Thank you for your investment,

Ryan Wilsey

Portfolio Manager

18

Table of Contents

PARNASSUS ASIA FUND

Ticker: PAFSX

As of September 30, 2014, the NAV of the Parnassus Asia Fund was $16.75, so the total return for the quarter was a loss of 3.40%. This compares to a loss of 2.74% for the MSCI AC Asia Pacific Index (“MSCI Index”) and a loss of 1.35% for the Lipper Asia Pacific Region Average, which represents the average return of the Asia Pacific Region funds followed by Lipper (“Lipper average”). The primary reason for our underperformance was a short-seller’s attack on one of our portfolio companies, which we will discuss in the next section.

On a longer-term basis, the Parnassus Asia Fund is well ahead of both its benchmarks. For the year-to-date, the Fund is up 6.89%, compared to 1.81% for the MSCI Index and 3.00% for the Lipper average. Below, you will find a table that compares the Parnassus Asia Fund with the MSCI Index and the Lipper average for the one-year period and for the period since inception on April 30, 2013. You will notice that we are ahead of both benchmarks for both time periods. In fact, for the one-year period, the Fund finished third of 59 funds and first of the 58 Pacific Region funds followed by Lipper for the period since inception.

19

Table of Contents

substantial, the loss over our holding period was relatively modest (we paid an average of $18.97 a share and we sold at an average price of $18.96), so we only lost a penny a share.

Biostime International Holdings, a Chinese distributor of foreign-made infant formula, sank 39.9% from $5.54 to $3.33 where we sold it for a loss of 9¢ for each fund share. The company announced that it would stop selling in stores, and instead, pursue higher growth through e-commerce. This will erode the company’s margins, because of intense price competition online. Customer loyalty would also be challenged, since professional advice in stores was part of the

company’s unique shopping experience. Separately, the number of couples filing to have a second child in China came in below expectations, suggesting slower future growth in the market.

Samsung Electronics reduced the NAV by 8¢, as its stock dropped 14.4% from $1,306 to $1,118. The South Korean consumer electronics giant ranks first in sales of mobile phones worldwide and second (behind Intel) in semiconductors. Margins in Samsung’s mobile devices division have been declining due to the anticipated introduction of the iPhone 6 and intense competition with Chinese rivals in the low- and mid-priced smartphone markets. Despite these headwinds, Samsung maintains strong distribution in both developed and developing markets, leaving it well-positioned for new product launches. Samsung has healthy cash flow and a rock-solid balance sheet, so we think the stock price will recover.

TOTO, the Japanese maker of high-end plumbing fixtures, cut 6¢ off the value of each fund share, as its stock dropped 18.4% from $13.49 to $11.00 a share. For nearly 100 years, the company has produced toilets, faucets, and other sanitary earthenware that incorporate cutting edge technology. TOTO’s reputation for quality has translated into strong brand equity with over 70% market-share in Japan. The expected recovery in domestic remodeling has been slow to materialize, due to April’s consumption tax hike, stagnant wages and worker shortages in construction. Production trouble with a new kitchen product also led to a suspension of orders that weighed heavily on sales. Production has since resumed, however, and remodels should rebound, helping to stabilize the stock price.

Three companies each contributed 6¢ or more to the NAV of the Fund. SITC International Holdings added 7¢ to the Fund’s NAV, as its stock rose 19.4% from 41¢ to 49¢. The Hong Kong-based shipping and logistics company has 47 service routes, connecting 45 major ports across ten countries within the Asian region. Its logistics arm is also strategically diversified between sea-freight logistics and land-based logistics, which help to dampen its exposure to swings in any one country’s business cycle. SITC’s distinctive business model proved its resiliency in the current quarter. Although China’s economy continued to slow, SITC launched new vessels and opened new service lines to other parts of Asia, lifting volume, revenue and profit.

* For purposes of categorizing securities for diversification requirements under the Investment Company Act, the Fund uses industry classifications that are more specific than those used for the chart.

Portfolio characteristics and holdings are subject to change periodically.

Lenovo boosted the value of each fund share by 6¢, as its stock price moved 9% higher from $1.37 to $1.49. (We own the Hong Kong-listed shares, which are more liquid, as opposed to the U.S.-listed ADR’s.) The maker of personal computers (PC’s) and other technology products is the biggest brand in China, and last year surpassed Hewlett-Packard as the largest PC manufacturer in the world. Earlier this year, Lenovo purchased IBM’s low-end server business, as well as portions of Motorola Mobility from Google, so that it can begin selling smartphones in the United States. Investors liked both acquisitions and pushed the stock higher.

20

Table of Contents

Outlook and Strategy

There are many factors that affect the returns of an Asian investment fund: exchange rate movements, country exposure, sector allocation and individual stock performance. We can’t control exchange rate movements, but we can decide which stocks to buy in which industries and in which countries. In general, the individual stock is the most important factor, but even if you pick a stock that moves higher, currency movements can negate any gain. For example, last quarter, the Nikkei Index of Japanese stocks rose 7%, but the Japanese stocks in our portfolio were flat-to-down, because the yen weakened 8% against the dollar. In other words, the 7% gain in Japanese stocks was completely wiped out, because when you convert the yen into dollars, they’re worth 8% less. When we report our financial results to you, it’s all in U.S. dollars.

It’s also important for us to control country exposure. For example, if we have a high concentration of our stocks in one country, and that country has some negative political development, it will have a negative impact on the Fund. In such a situation, the Fund will perform below the MSCI Index. For this reason, it’s important to diversify across a number of Asian markets.

Sector exposure or industry groups are also important for us to consider. If we have a very high percentage of our companies in one industry, and that industry has trouble, the Fund will underperform based on a broad index.

We’re now in the midst of thinking through some of these issues. The Hong Kong unrest poses a problem as well as the disputes between China on the one hand and Vietnam, Japan and Philippines on the other. There is also the issue of China’s slowing growth.

21

Table of Contents

We don’t yet have answers to these questions, but we’ll be going to Asia in November for conferences in Singapore and Hong Kong, as well as for a visit to some new companies and some existing portfolio companies. We’ll tell you what we learned in Asia in the annual report due at the beginning of February.

Yours truly,

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

22

Table of Contents

PARNASSUS FIXED INCOME FUND

Ticker: PRFIX

As of September 30, 2014, the NAV of the Parnassus Fixed Income Fund was $16.72, producing a loss for the quarter of 0.11% (including dividends). This compares to a gain of 0.17% for the Barclays U.S. Aggregate Bond Index (“Barclays Aggregate Index”) and a gain of 0.03% for the Lipper A-Rated Bond Fund Average, which represents the average return of the A-rated bond funds followed by Lipper (“Lipper average”). Through the first three quarters of 2014, the Fund posted a gain of 3.31%, as compared to gains of 4.10% for the Barclays Aggregate Index and 5.52% for the 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. For September 30, the 30-day subsidized SEC yield was 1.53%, and the unsubsidized SEC yield was 1.43%.

Third Quarter Review

During the third quarter, positive economic data was balanced against a challenging geopolitical environment. These opposing forces offset each other, leaving interest rates generally unchanged from three months ago. On the positive side, the

economy continued to show good signs of growth. Perhaps most importantly, the economy continued to add jobs, and the unemployment rate fell below 6% in September. This is the lowest reading since 2008, and it’s much closer to what many economists consider to be full employment.

Despite this positive news at home, much of the world is struggling to find growth and is fighting deflation. Extremely low rates on sovereign debt in Europe, especially in safe-haven countries like Germany and Switzerland, kept demand for Treasuries healthy in the quarter, as investors opted to purchase higher-yielding U.S. debt. Ordinarily, Treasury yields increase on positive economic data, but this increased demand from investors switching from overseas bonds to Treasuries kept prices higher and yields lower.

Corporate bonds overall moved slightly lower in the quarter, returning -0.08%. Despite good economic data that should bode well for corporations, geopolitical risk caused investors to be wary. This caution translated to slightly wider credit spreads, which is the extra income demanded above Treasuries for taking corporate credit risk.

Corporate bonds are the Fund’s largest asset class at 43% of assets versus 23% for the Index. Winners included FedEx (+1.13%), whose bonds benefitted from improved package flow and promises from management to improve efficiency and margins. Agilent (+1.53%) was another top performer. The company is planning to spin off its highly cyclical electronic measurement company in November, leaving a more stable company dedicated to life sciences and diagnostics. Finally, JW Nordstrom (+1.34%) enjoyed strong outperformance in the quarter. The company is

23

Table of Contents

well-diversified in the retail market, earning substantial revenues from both its full-priced stores and its discount retailer, Nordstrom Rack.

The Fund’s holding in United Rentals resulted in a meaningful loss in the quarter, as it was down 2.31%. The bond’s performance was not company-specific, as the business performed relatively well in the quarter. The reason it was down was that investors sold positions in high-yield companies across the board, and United Rentals happens to be in that asset class. The Fund has one convertible bond investment, a holding in Exelixis, which removed 1.5¢ from the NAV. Exelixis is a biotechnology company with two drugs in phase 3 trials for multiple types of cancer. One of these drugs, Cabozantinib, proved unsuccessful in testing for prostate cancer, so the bonds substantially underperformed in the quarter. While I am disappointed by these results and the decline in value, I am comfortable holding this small position.

The Fund holds 21% of its assets in mortgage-backed securities. These securities are mostly pools of residential mortgages and are paid back over time, as homeowners make monthly principal and interest payments. The Fund’s mortgage pools were up slightly in the quarter. Mortgages provide valuable diversification for the Fund, because they behave differently than Treasuries and corporate bonds, which is a benefit in times of market volatility.

Portfolio characteristics and holdings are subject to change periodically.

Outlook and Strategy

The Fund has underperformed over the last nine months as a result of our relatively short duration. As a reminder, duration is a measure of interest rate sensitivity and indicates how much, in percentage terms, a bond price will move for a 1% change in interest rates. The duration of the Fund is 4.1 years versus the Index at 5.6 years. Despite this setback, I have not increased the Fund’s duration during the year, and I think it’s important to highlight my rationale for keeping the duration relatively short.

A longer duration makes the Fund more sensitive to interest rate movements. This is great during times when interest rates are, on average, declining or remaining stable. However, when interest rates rise, longer duration portfolios usually experience higher losses. This was the case last summer, when the bond market experienced the “taper tantrum” after Chairman Bernanke announced the Federal Reserve’s intention to curtail its quantitative easing (QE) program.

With 4.6% growth in the second quarter, an unemployment rate below 6%, consumer expectations improving and good manufacturing data, there is a strong bias for higher interest rates. Further, the Federal Reserve is set to end QE in October, which could also add volatility to the markets. As a result, chasing yield by increasing duration would add risk at a time when the data says to exercise caution. There are other ways to take advantage of the current interest rate environment, including being overweighted in asset classes that do best in a growing economy, like corporate bonds. Industrial corporate bonds are the largest sub-segment held in the portfolio, which will benefit the Fund if there is continued growth in manufacturing.

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

Yours truly,

Samantha D. Palm

Portfolio Manager

24

Table of Contents

Responsible Investing Notes

By Milton Moskowitz

IBM, short for International Business Machines, is a leader in the technology sector – and it has maintained that leadership for more than 100 years. Since it no longer sells products directly to consumers, people tend to forget that it is still around. That it is – and that it continues to be a model for social responsibility – is clear from the just released Working Mother magazine list of the 100 Best Companies for Working Mothers. This is a list that I had a hand in creating, and I remember IBM being there at the start in 1985. Also, it did more than just make the list, it became a crusader for work/life programs, going into cities across the country to urge other companies to follow its lead. This was in keeping with a long tradition at IBM. It hired its first professional women, 25 of them, in 1935. And today of course it has a female CEO: Ginni Rometty. Thirty percent of IBM’s global workforce of 430,000 are female.

Parnassus portfolio companies are prominent in this latest Working Mother list. They captured 14 of the 100 positions, to wit: Abbott Laboratories, Accenture, Capital One, Cardinal Health, Cisco, Discovery Communications, First Horizon, Genentech (Roche Holdings), IBM, Intel, MasterCard, Novartis, Procter & Gamble and Roche Diagnostics.

Companies on the 100 Best list shine when compared to other employers: 92% of them offer paid adoption leave (against 6% in the entire business community), all of them provide fully paid maternity leave (against 5%), 84% have on-site fitness centers (against 14%) and 18% offer on-site haircuts (against 2%).

Lenovo, a Chinese company and one of the holdings in the Parnassus Asia Fund, has been having spectacular success in the worldwide technology sector. Lenovo acquired IBM’s personal computer business in 2005 and last year it soared into first place in global standings, with a market share of 19%, ahead of Hewlett-Packard’s 17% share. It seems that Lenovo not only acquired the IBM brand name, ThinkPad, but some of the humanistic qualities of the American company as well. In 2012, CEO Yang Yuanqing was awarded a $3 million bonus, and he turned around and distributed the money to 10,000 employees. He repeated that give-away in 2013, distributing $3.5 million to staff and production people. Lenovo frowns on formal titles and Yang once required managers to stand outside their offices with signs bearing their names to greet employees coming to work. In 2013, Lenovo opened a PC plant in the North Carolina town of Whitsett, near Greensboro, creating 115 jobs. The irony wasn’t lost on observers: here was a Chinese company bringing back PC manufacturing jobs to the United States!

Another Chinese company you may have heard of is Alibaba, which recently pulled off the largest initial public offering in Wall Street’s history, raising $25 billion. The Parnassus Asia Fund managed to secure 1,000 shares of Alibaba in the IPO offering. Like Lenovo, Alibaba has a well-developed philosophy. In addition to selling more merchandise than any other company in the world, it has ethical motivations. When its founder, Jack Ma, was interviewed on the floor of the New York Stock Exchange, he said Alibaba considers customers first, then employees and then shareholders. “If you don’t like that, sell your stock,” he said.

Procter & Gamble, the consumer goods behemoth, announced a major strategic switch in its annual report. The company said it would get rid of 90 to 100 brands whose sales and profits have been slipping. This will leave it with 70 to 80 brands which are category leaders (think Tide, Head & Shoulders, Pampers and Gillette). Transparency is a hallmark of a P&G report, witness these tidbits: Of the 11 board members, four are women; North America accounts for only 39% of sales; advertising expenses last year: $9.2 billion; dividend payout has been increased for 58 consecutive years…Drug store chain CVS Caremark followed up on its recent move to discontinue the sale of tobacco products by changing its corporate name to CVS Health. At the same time it began to expand its MinuteClinics offering “affordable” urgent care. More than 500 CVS stores now have these clinics, and the company says that “in time, half of all Americans will have one within 10 miles of home”….First Horizon, the Tennessee bank and long-term holding of Parnassus, celebrated its 150^th birthday this year by giving away $5,000 to a different nonprofit every day for 150 days…Green America, partnering with China Labor Watch, succeeded in getting Apple to remove toxins such as benzene and hexane from its supplier factories in China…Discovery Communications, a media powerhouse supplying programs and networks like Discovery, Animal Planet, History Channel, TLC and the Oprah Winfrey Network to television systems in 223 countries, celebrates an annual Impact Day for volunteer work in local communities. This year’s celebration saw 4,000 employees in nearly 35 countries volunteer for projects to revitalize community gardens, homeless shelters, schools and hospitals.

25

Table of Contents

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.

26

Table of Contents

PARNASSUS FUND

Portfolio of Investments as of September 30, 2014 (unaudited)

27

Table of Contents

PARNASSUS CORE EQUITY FUND

Portfolio of Investments as of September 30, 2014 (unaudited)

28

Table of Contents