The Parnassus Fund
Annual Report
December 31, 1996
February 5, 1997
Dear Shareholder:
As of December 31, 1996, the net asset value per share (NAV) of the
Parnassus Fund was $34.39, so after reinvestment of the dividend of $1.09 paid
on December 20, the overall return for 1996 was 11.68%. This compares to a
return of 22.96% for the S&P 500 and 19.24% for the average growth fund
according to Lipper Analytical Services. For the year, then, our performance was
quite disappointing.
The annual performance figures, though, mask a strong fourth quarter
return. As of the end of the third quarter, the Fund was down 2.68% for the year
compared to strong gains for the market as a whole.
I'm happy to say that our fourth quarter return was excellent. The Fund was
up 14.75% compared to 8.33% for the S&P 500 and 5.14% for the average growth
fund. This performance means that the Parnassus Fund had the second-best fourth
quarter return of the 758 growth funds followed by Lipper Analytical Services.
At this point, it appears that we've broken out of our slump, but, of
course, there's no guarantee that we'll go back to having the consistently high
returns we did for the five years ending in mid-1995. Nevertheless, it was a
great quarter for us. Some of it was due to luck, some of it was due to changing
market conditions, some of it was because of improved performance by individual
companies and some of it was due to changes we made in portfolio strategy. To
give you a feel for the quarter, let's look at some of the individual companies.
WINNERS AND LOSERS
For the quarter, there were only three companies that lost more than 10% of
their value. The worst one was ATC Group Services, an environmental company that
lost 28.2%, going from $12.88 to $9.25 during the quarter. In our view, there is
nothing fundamentally wrong with the company and we think the market has sharply
undervalued this company. We'll continue to hold the position.
Merix, the Portland, Oregon-based producer of electronic circuit boards,
lost 20.8% of its value as its customers saw slowdowns in orders. The stock
dropped from $19.25 to $15.25. Fortunately, the decline did not have a major
impact on the Fund because of our relatively small position in the company.
Genus, the maker of semiconductor manufacturing equipment, lost 15.4%
during the quarter as it went from $6.50 to $5.50 per share. Sales declined as
overcapacity developed in the semiconductor industry.
Contrasted with the small number of losers, there were 13 companies that
gained over 10% during the period, some of them with extraordinary returns. Five
of the 13 were technology companies, but the other eight were spread throughout
the economy including two steel companies, a publisher, a dental products
concern, an office furniture manufacturer, a health maintenance organization, a
building products producer and a specialized chemical company.
Advanced Micro Devices (AMD) gained an incredible 74.6% during the quarter
as its stock soared from $14.75 to $25.75 a share. The company has just
introduced its sixth generation microprocessor called the K-6 and it looks as if
this product will be able to compete successfully with Intel's sixth generation
chip called the Pentium Pro.
AMD's stock did poorly during the Fund's 15-month slump and contributed to
our difficulties. In February of 1995, we had expected the company's fifth
generation chip (the K-5) to come out a few months later and be a strong
competitor to Intel's Pentium chip. As it turned out, the K-5 was 18 months late
as AMD's development team had difficulties in designing the chip. (It's only
recently been on the market.) The stock slumped as Intel dominated the fifth
generation market for microprocessors. As of this writing, it looks as if AMD
will have a competitive sixth generation chip and the stock has climbed as a
result. Just as the K-5 was almost 18 months late, our return on AMD is almost
18 months late as well.
Quantum Corporation gained an amazing 63.0% as the company saw its stock go
from $17.56 to $28.63. The Silicon Valley-based maker of disk drives for storage
of electronic data has overcome previous manufacturing and design problems.
Orders have increased and stronger earnings should follow.
Electro Scientific Industries had a 42.5% gain in its stock as it went from
$18.25 to $26.00 a share. The Portland-based company has developed new laser
technology that greatly enhances the production efficiency of memory chip
makers.
Herman Miller, the office furniture company, saw its stock increase 39.8%,
going from $40.50 to $56.63. A very socially responsible company with great
products, the company's stock had languished for years because of excessive
spending. With better cost controls and strong sales of its excellent furniture,
the company's earnings have soared.
Shares of Tandem Computers jumped 27.9%, going from $10.75 to $13.75. The
company is practicing better cost control and it has some interesting new
products including one that involves an alliance with Microsoft on the Windows
NT operating system.
T.J. International had a 23.3% increase as the stock climbed from $18.25 to
$22.50 a share. Based in Boise, Idaho, the maker of engineered lumber products
saw increased earnings as it finally corrected problems with two new factories.
Demand for the company's products has been excellent given the strong economy
and relatively low interest rates. If construction spending holds up, T.J.'s
stock should do even better.
H.B. Fuller, the specialized chemical company that makes industrial
adhesives, had a 20.3% increase in stock price, going from $38.25 to $46 a
share. The company has a great record for charitable contributions and treatment
of employees, but it has always had difficulty in establishing sustained
increases in earnings to go along with sales increases. At last, it looks as if
the company is concentrating on controlling costs and the stock price has
responded positively.
Houghton Mifflin's shares rose 20.2% as the stock went from $47.13 to
$56.63. Plagued by problems with outsourcing its distribution, the company is
now handling its distribution internally and this has worked much better. The
merger with D.C. Heath has gone smoothly and earnings have increased over last
year.
The stock of Sullivan Dental Products climbed 18.0% this quarter as
productivity increased among the sales force. The stock went from $11.13 to
$13.13 a share.
The value of Aetna's shares went up 13.7% as the stock climbed from $70.38
to $80. The company has sold off its original property/casualty business to
Travelers and it's now a medical insurer and a health maintenance organization.
Aetna provides high quality health care. In fact, San Francisco Symphony
musicians went on strike when management changed their health plan from Aetna to
Blue Cross.
Acme Metals gained 13.1% as its stock went from $17.13 to $19.38. The
company's new steel plant has greatly improved efficiency. Inland Steel went up
11.9% as its stock rose from $17.88 to $20.
Cypress Semiconductor's stock increased 13.0%, going from $12.50 to $14.13.
After suffering sharp declines, the company's niche of the semiconductor market
has stabilized and prospects are much improved.
<TABLE>
Below is a graph and table comparing the performance of the Parnassus Fund
with the S&P 500, the NASDAQ Composite Index and the average growth fund over
the past one, five and ten-year periods. The graph and the total return column
of the performance table as well as the "Value of $10,000" table assume that the
maximum sales charge of 3.5% was deducted from the initial investment in the
Parnassus Fund. The overall return column in the performance table shows
investment performance only and does not deduct the sales charge. The
performance figures for the average growth fund also do not deduct any sales
charges that may apply.
- --------------------------------------------------------------------------------
<CAPTION>
Average Annual Average Annual S&P 500 NASDAQ Average
Total Return Overall Return Index Index Growth Fund
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
One Year 7.77% 11.68% 22.96% 22.71% 19.24%
Five Years 14.27% 15.09% 15.22% 17.10% 12.69%
Ten Years 12.20% 12.60% 15.29% 13.98% 13.46%
- --------------------------------------------------------------------------------
<FN>
Returns for average growth fund supplied by Lipper Analytical Services.
</FN>
</TABLE>
SHAREHOLDER LETTERS
In the last quarterly report (September 30, 1996), there was a feature
called "Confessions of a Contrarian" where I talked about some of the changes we
were making in our stock selection process so as to improve our performance.
Essentially, I said that we would follow our contrarian standards for
determining if a stock is undervalued, but we would now be looking for a
catalyst that would have a positive impact on earnings within the following
twelve months. If we didn't see any catalyst for change in the next year, we
would no longer invest in that stock. We received a large number of letters
commenting on that new strategy. Since there were so many letters on that
subject, we can't print them all, but below you will find some representative
ones as well as some excerpts.
Dear Mr. Dodson:
I'd like to make two points. First: let the fickle investor go! A
contrarian fund is not for everyone. Let's face it. Why did so many
investors came on board recently? Because the fund enjoyed several
years of strong growth - not because of the fund's investment
philosophy. But slower, "dormant" times are also part of a
well-managed value-oriented fund. And it is just this period of time
when all the sightseers will "hop off the cable car." They don't care
about your philosophy. In their minds, all that matters are the
numbers.
My second point is this. I invested my money because I wanted to
improve my quality of life. From my consumer's point of view, this
means making enough money to afford the nicer things in life. But from
my producer's point of view, it also means I need to support companies
that will create products for this comfortable, healthy life I want. I
want to invest in firms inclined to respect the environment, so I can
live comfortably with my family. I want to invest in businesses ready
to provide equal employment opportunity for all. Obviously, the
greater the number of companies like this I invest in, the more the
world at large will approximate what I am hoping for. Parnassus
chooses these companies, which makes sense not only from my consumer's
point of view, but also from my producer's point of view. And my
question regarding the sightseers is "do they understand this bigger
picture?"
You get my vote of confidence. Even if the market is up, while
Parnassus is down. Even if Parnassus is down for several years because
the companies you choose remain flat for several years.The point is,
if YOU remain confident in the companies you choose, then so do I! Let
the sightseers go! Don't let theirpressure dictate your style in a way
that takes us all away from what our financial, social and consumer
intuition tells us is right.
Chris Ambrosini
New Paltz, New York
Dear Mr. Dodson:
I agree with the column written by Mr. James Glassman in the
Washington Post. I also was somewhat disappointed to read in your
third quarter report that you were changing your investment strategy.
I in-vested in Parnassus recently (February 1996), and so have not
benefitted from your earlier impressive returns. However, I have money
invested in other mutual funds that do a fair job of tracking the
market average. The reason I invested in your fund was to do something
different. I prefer your market strategy to the funds that play the
market, constantly changing holdings to try and follow every whim and
rumor. I like the idea of having some of my assets invested in
companies that actually have assets and products to back up their
stock (and I also like the fact that the companies get some ethical
screening).
I hope you will keep to your basic strategy of finding
undervalued, socially responsible companies and keeping their stock
for long periods of time. I waited to invest in Parnassus until I had
some funds that I was comfortable leaving alone for 10 years or so. I
was not pleased to see the value of what I had bought drop, but since
I was planning to stay in for the long haul, I am quite prepared to
see the value of my investment fluctuate. I hope you will find many of
your other investors have similar views and that you will keep to your
contrarian approach.
Martha K. Raynolds
Fairbanks, Alaska
Hello from a shareholder:
Thanks for the explanation of your new policy regarding not
investing in a company unless you see a catalyst that will improve
earnings in the next 12 months. Here's what I don't understand,
though, and what I wished you had discussed more. You (and others)
have convinced me through endless (and welcome) education that if I'm
investing in a growth fund, I should be in for the long haul, at least
3 to 5 years, and not be overly concerned with short-term performance.
How does the new policy fit in with the emphasis on a long-term view.
Perhaps you can discuss this in your next report. Thanks
Daniel Grobani
San Francisco, California
Dear Mr. Dodson:
I always appreciate the quarterly reports from The Parnassus
Fund. I never escape the feeling that it is you talking to me, via the
reports, and not some outside consultant who has been hired to prepare
palatable news for shareholders.
Whereas other funds I have invested in always put a positive
"spin" on any bad news (e.g. underper-formance), you never pull your
punches. You don't blame mistakes on others; you shoulder all the
blame. And of course, when the news is good, you deservedly take the
credit.
Because I appreciate the long-term view you take towards
investing, I am a bit disappointed by many of the comments you made in
the latest report. Some time ago you explained your reasoning for
keeping the front end 3.5% load. It made sense. The success of The
Parnassus Fund drew too many get-rich-quick people looking to turn a
fast profit. A front-end load discourages any but serious investors.
What upsets me about the current quarterly report is that you seem to
be caving in to the short-term view and I wonder if you are being
swayed by all the investors who have flocked to the Fund in recent
years in hopes of making a quick buck.
I like the idea of contrarian investing; that there are stocks
that are good values but underpriced. It seems to me that this
philosophy requires a long-term view and lots of incredible patience.
"Normal" mutual funds seem to follow trends and have incredible
turnover. I'm not convinced this works. Witness what all these funds
tell investors: dollar-cost averaging is the way to go and don't
partake in panic selling when prices plunge. Yet, this is exactly what
these funds do by taking the short-term view or turning over the
portfolio so much.
True, if there are losers in the portfolio, get rid of them.
Conversely, selling off the winners may be called for versus holding
on to them and waiting for them to achieve full value. However, I'm
concerned that you will soon pay more attention to the immediate
outlook of a stock and downplay the long-term outlook. And how are you
going to determine what a "catalyst" will be?
Somehow, the impression I get from reading the latest quarterly
report is that you are getting pressure to change what has been a
fairly successful investment strategy in exchange for short-term gain.
Since I am in The Parnassus Fund for the long-term (as an IRA
investor), I am willing to experience the ups and downs of the Fund
because I have faith in your demonstrated ability to provide adequate
returns while also maintaining excellent social criteria.
So, what am I asking of you? I want to emphasize that I am not
upset or discouraged with the Fund's performance during the last year.
After all, it wasn't that long ago that the Fund was the darling of
Wall Street and all the financial writers. Please don't bow to any
pressure to change the Fund's investment criteria in response to
pressure to make short-term gain.
As we used to say, "Keep the faith!"
Sincerely,
Peter Stekel
Seattle, Washington
I would like to thank all the shareholders who wrote in to give me their
thoughts -- both the four people whose letters we published and the others who
commented in a similar vein. Let me assure you that I have no intention of
changing our basic investment strategy. We'll continue to look for out-of-favor
stocks selling at bargain prices and invest in them if they are socially
responsible companies. We have no intention of becoming trend followers or
investors in "high-flying" growth stocks priced at enormous multiples.
Also, our portfolio turnover rate should remain well below the 100% average
annual rate for all growth funds. This year, the rate is up somewhat -- just
below 60% compared to our normal rate of just under 30% -- because we sold off a
lot of our mediocre performers. However, I would expect that the rate would move
back toward 30% in future years.
So if we're not going to chase "high-flyers" and we're not going to churn
our portfolio 300% per year, what are we going to do? We're going to take one
extra step: looking to see if there is a catalyst in the near future that will
have a positive impact on earnings in the next 12 months.
This "catalyst" will mean different things at different times for different
companies. It might be a new product, improving sales of existing products, more
effective marketing of a product or service or better cost control. It might not
even be company specific, but rather having to do with an industry or the whole
economy. It could be an expected drop in oil prices that would help the airline
industry or an expected drop in interest rates that would help the building
products industry. It could be increased production of a raw material that would
bring down prices that would help a manufacturer. The catalyst might also be
increased demand for a product that would eliminate overcapacity in an industry
and help individual companies. Catalysts might also be changes in foreign
exchange rates or changes in import and export patterns.
Clearly, we'll never know for sure if a catalyst will develop in the next
12 months. There's no doubt that we'll be wrong sometimes and sometimes the
positive change will take more than 12 months to occur. It's just that we think
we can improve our performance by looking for this catalyst. The reason is that
so many undervalued stocks stay undervalued for years at a time and we want to
make an effort to identify companies that will soon be reaping the benefits of a
positive change.
That doesn't mean that we'll take a short-term view or start trying to time
the market. We still plan to be long-term investors and hold our positions for
relatively long periods of time. We still plan to invest in undervalued stocks
that are out-of-favor and avoid the "go-go" issues. It's just that we want to
identify more precisely the factors that will make our companies come back into
favor with investors.
TAX QUESTION
Dear Mr. Dodson:
In managing the Parnassus Fund's portfolio, do you take a
shareholder's tax situation into account? If so, what do you do and
how does it affect shareholders?
Sincerely,
Nathaniel B. Smith
West Chester, Pennsylvania
Dear Mr. Smith:
We definitely do try to minimize taxes. Virtually all of my
liquid net worth (i.e. excluding only what's tied up in my house and
my business) is in the Parnassus Fund so I have a strong incentive to
minimize taxes. Here are the five most important things we do to
minimize shareholder taxes:
1. Remind people not to invest in late November or December just
before the distribution. If one invests just before a dividend is
paid, a shareholder has to pay taxes on a gain that is not a real one.
Shareholders should wait until after the dividend has been paid in
late December before they invest.
2. We remind shareholders to use the tax basis (not just the cost
of shares) in calculating capital gains. The tax basis of shares is
the cost of the shares plus the dividends paid out during the holding
period. For example, if you paid $25.00 for your Parnassus Fund shares
and you received dividends of $4.00 during the holding period, your
tax basis is $29.00 -- not the $25.00 cost. Some taxpayers overpay
capital gains by using the actual cost of shares instead of the tax
basis. This would make the capital gain appear larger than it actually
was.
3. We try to take a long-term view in investing. Since we hold
the vast majority of our stocks for more than a year, shareholders
qualify for capital gains treatment. For stocks sold in less than a
year from time of purchase, a shareholder must pay ordinary income tax
which usually means a higher rate than capital gains.
4. Towards the end of the year, we look at our portfolio to see
if there are a lot of realized capital gains. If there are, we try to
reduce the amount of the gain (and, thus, the amount of the taxes) by
selling some stocks where there will be a realized loss. We don't sell
any stocks with losses if we think they will make a comeback in the
near future, but we do try to time our sales so as to reduce
shareholders' taxes as much as possible.
5. If we have a stock with a large unrealized gain at the end of
the year and we're thinking about selling that stock, we might defer
the sale until the following year. This won't eliminate the tax, but
it will defer the tax so the shareholder can postpone the tax for
another year.
Yours truly,
Jerome L. Dodson
WOMEN INTERNS
Dear Mr. Dodson:
I enjoy reading the Parnassus Fund Quarterly Reports. One of the
main reasons I originally invested in Parnassus and continue to do so
is your commitment to social responsibility. I am glad to know that
companies which produce harmful products or which do not treat their
employees well, are not receiving my money. I am glad to know that it
is important to Parnassus to support workplaces which do not
discriminate on the basis of sex, race, sexual orientation, etc., and
which are actively engaged in maintaining a diversified workplace.
Imagine then, how disappointed (and surprised) I was to read in
the last Quarterly Report that all six of your summer interns are men.
Surely a commitment to social responsibility begins at home. The world
of financial investment as you must be aware, traditionally has been a
world of men. So many women who find themselves with income to invest
are at a disadvantage because they have not been brought up to take
care of the finances and have often been discouraged from learning how
to take an active role when it comes to money. This situation is only
compounded when they go to find a financial adviser and their choices
are largely limited to men.
I was fortunate to have found a wonderful financial adviser who
is not only a woman, but a woman who is sensitive to the needs of
women. It was she who led me to invest in Parnassus. I hope that in
the future you will make a concerted effort to recruit female summer
interns. These will be the future financial advisers for women like
me. These will be the future investors in companies that do not
discriminate.
Sincerely,
Laura Weinstock
San Francisco, California
Dear Ms. Weinstock:
Thank you for your letter. Last summer, only one woman applied
for our intern program and she was accepted. At the last minute,
though, she had to drop out of the program.
The breakdown of interns varies greatly from semester to
semester. While it was all men last summer, this fall it was
two-thirds women. I can remember several years ago when one summer
group had five women. Overall, women comprise 35-40% of all interns.
You are right when you say that women are not encouraged as much
as men to study finance. We try our best to train women and encourage
them to enter careers in finance. For example, two of our former
interns are now highly regarded analysts at other mutual fund
companies. Amy Fujii is with J. & W. Seligman in New York and Shan
Green is with Franklin/Templeton Funds in San Mateo, California.
We will continue actively recruiting as many women as we can into
our intern program. Perhaps your letter and this response will get
some attention and encourage more women to apply to our intern
program.
Yours truly,
Jerome L. Dodson
SPRING INTERNS
We have three highly-qualified individuals working as interns with us this
semester. Edward Harris is an engineering graduate of Stanford University and
also holds an MBA from Stanford. He previously worked as an engineer with
Hewlett-Packard and as an investment manager.
Kabir Misra is a second year student at Stanford Business School and is
also an economics graduate of Harvard University. His previous experience
includes work at CS First Boston, Booz, Allen & Hamilton and Morgan Stanley.
Anh Tran is a graduate of the University of California at Davis where she
majored in Sociology and German. Her previous experience includes work with ADAC
Labs in Milpitas, California, the California Council for International Trade in
San Francisco and being a founding member of the U.C. Davis California Public
Interest Research Group (CALPIRG).
COMPANY NOTES
Aetna's U.S. Healthcare HMO has been chosen as the 1996 Quality Leader in
the Atlanta metropolitan area by the National Research Corporation (NRC). Aetna
also ranks high in quality on a national basis.
Tandem Computers, as part of its One Step Beyond program, is sponsoring a
college student on an 18-day voyage through Antarctica. Sharon Ungersma, a
junior majoring in physics at Harvey Mudd College in Claremont, California, will
go on the voyage with seasoned Arctic explorer Robert Swan and an international
crew aboard the Russian icebreaker, Professor Khromov. The expedition is in
celebration of UNESCO's 50th anniversary and aims to foster global cooperation
and environmental awareness.
On October 19, Mentor Graphics hosted its second annual Computer and
Electrical Engineering College Fair for high school students in Oregon.
Representatives from 35 colleges and high-tech firms participated in the fair.
Corporate exhibitors in addition to Mentor included Hewlett-Packard, Electro
Scientific Industries and LSI Logic. Exhibiting colleges included the University
of Portland, MIT, Stanford and Notre Dame. Students had an opportunity to talk
with engineering professors and high-tech industry representatives about
internships, educational programs and employment opportunities.
Returning to news about the Parnassus Fund, we are now on the Internet. You
can reach our website at: http://networth.galt.com/parnassus.
Finally, I would like to thank all of you for sticking with the Fund during
a difficult period. All of us at Parnassus Investments will work hard to improve
the investment performance.
Yours truly,
Jerome L. Dodson
President
<TABLE>
UNREALIZED GAIN (LOSS) SUMMARY AS OF DECEMBER 31, 1996 (UNAUDITED)
<CAPTION>
Number of Per Per Unrealized
Shares Issuer Cost Share Market Value Share Gain (Loss)
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
595,000 ATC Group Services, Inc. $ 7,228,839 $12.15 $ 5,503,750 $ 9.25 $ (1,725,089)
80,000 Acme Meals, Inc. 1,299,624 16.25 1,550,000 19.38 250,376
160,000 Aetna, Inc. 10,363,638 64.77 12,800,000 80.00 2,436,362
750,000 Advanced Micro Devices, Inc. 16,531,008 22.04 19,312,500 25.75 2,781,492
340,000 Apple Computer, Inc. 12,680,625 37.30 7,097,500 20.88 (5,583,125)
10,000 Autodesk, Inc. 218,750 21.88 280,000 28.00 61,250
800,000 Cypress Semiconductor Corporation 11,085,038 13.86 11,300,000 14.13 214,962
100,000 Delta Air Lines, Inc. 7,141,559 71.42 7,087,500 70.88 (54,059)
600,000 Electro Scientific Industries, Inc. 12,881,344 21.47 15,600,000 26.00 2,718,656
250,000 FEI Company 2,457,500 9.83 2,343,750 9.38 (113,750)
654,000 Genus, Inc. 3,427,000 5.24 3,597,000 5.50 170,000
260,000 H.B. Fuller Company 8,390,105 32.27 11,960,000 46.00 3,569,895
60,000 Herman Miller, Inc. 1,246,750 20.78 3,397,500 56.63 2,150,750
80,000 Hewlett-Packard Company 3,167,800 39.60 4,020,000 50.25 852,200
80,000 Houghton Mifflin Company 3,258,000 40.73 4,530,000 56.63 1,272,000
400,000 Inland Steel Industries, Inc. 9,594,736 23.99 8,000,000 20.00 (1,594,736)
50,000 Lam Research Corporation 1,460,314 29.21 1,406,250 28.13 (54,064)
530,000 The Limited, Inc. 9,823,864 18.54 9,738,750 18.38 (85,114)
200,000 Liz Claiborne, Inc. 3,326,000 16.63 7,725,000 38.63 4,399,000
480,000 Mentor Graphics Corporation 5,485,625 11.43 4,680,000 9.75 (805,625)
97,500 Merix Corporation 2,014,688 20.66 1,486,875 15.25 (527,813)
1,000,000 Morgan Products, Ltd. 6,131,156 6.13 7,375,000 7.38 1,243,844
150,000 Mylan Laboratories 2,566,087 17.11 2,512,500 16.75 (53,587)
495,000 Quantum Corporation 8,831,563 17.84 14,169,375 28.63 5,337,812
200,000 Ryerson Tull, Inc. 3,106,625 15.53 2,700,000 13.50 (406,625)
160,000 Southwest Airlines 2,796,150 17.48 3,540,000 22.13 743,850
600,000 Sullivan Dental Products, Inc. 6,445,778 10.74 7,875,000 13.13 1,429,222
240,000 Sun Company, Inc. 6,476,075 26.98 5,850,000 24.38 (626,075)
500,000 T.J. International, Inc. 8,720,613 17.44 11,250,000 22.50 2,529,387
850,000 Tandem Computers, Inc. 10,191,773 11.99 11,687,500 13.75 1,495,727
500,000 Toys "R" Us, Inc. 12,751,767 25.50 15,000,000 30.00 2,248,233
320,000 United Healthcare Corporation 12,682,399 39.63 14,400,000 45.00 1,717,601
546,100 Wellman, Inc. 11,413,339 20.90 9,351,963 17.13 (2,061,376)
TOTAL $225,196,132 $249,127,713 $23,931,581
</TABLE>
<TABLE>
STOCKS SOLD JANUARY 1, 1996 THROUGH DECEMBER 31, 1996 (UNAUDITED)
<CAPTION>
Realized No. of Per Sale Per
Company Gain (loss) Shares Cost Share Proceeds Share
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
H.F. Ahmanson & Company$ 2,245,486 320,000 $ 5,851,073 $18.28 $ 8,096,559 $25.30
Advanced Technology Labs, Inc. 4,514,899 265,000 4,204,531 15.87 8,719,430 32.90
Calgon Carbon Corporation (347,327) 375,000 4,315,067 11.51 3,967,740 10.58
Chemed Corporation 1,046,360 100,000 2,682,788 26.83 3,729,148 37.29
CML Group, Inc. (4,537,355) 1,420,200 9,907,421 6.98 5,370,066 3.78
Cirrus Logic, Inc. (58,750) 200,000 3,752,500 18.76 3,693,750 18.47
Ethan Allen Interiors 3,704,061 320,000 6,841,270 21.38 10,545,331 32.95
Flour Daniel/ GTI, Inc. (116,442) 261,327 2,738,833 10.48 2,622,391 10.03
H.B. Fuller Company 1,098,506 121,000 4,153,475 34.33 5,251,981 43.40
Genus, Inc. 2,208,061 660,000 1,774,938 2.69 3,982,999 6.03
Groundwater Technology, Inc. (626,457) 520,000 5,219,792 10.04 4,593,335 8.83
Handleman Company (1,749,611) 320,000 3,567,275 11.15 1,817,664 5.68
Huffy Corporation (2,320,679) 700,000 10,001,769 14.29 7,681,090 10.97
Inland Steel Industries,Inc. (415,666) 150,000 3,292,570 21.95 2,876,904 19.18
Integrated Device Technology, Inc. (1,997,025) 825,000 10,753,275 13.03 8,756,250 10.61
Kenetech Corporation (1,922,317) 369,400 2,295,288 6.21 372,971 1.01
Lam Research Corporation 15,000 35,000 851,250 24.32 866,250 24.75
Longs Drug Stores, Inc. 1,403,931 122,600 4,117,315 33.58 5,521,246 45.03
The Limited, Inc. 292,321 273,661 4,907,238 17.93 5,199,559 19.00
Liz Clairborne, Inc. 6,711,520 330,000 6,522,938 19.77 13,234,458 40.10
Mentor Graphics Corporation (321,438) 140,000 1,511,438 10.80 1,190,000 8.50
Merix Corporation (140,438) 17,500 467,188 26.70 326,750 18.67
Herman Miller, Inc. 4,015,613 278,000 6,189,000 22.26 10,204,613 36.71
Phillips-Van Heusen (114,828) 190,000 2,086,587 10.98 1,971,759 10.38
Quantum Corporation 1,068,125 120,000 2,096,875 17.47 3,165,000 26.38
Radius, Inc (2,855,892) 320,000 3,202,933 10.01 347,041 1.08
Sequent Computer Systems, Inc. (2,945,315) 930,000 14,455,312 15.54 11,509,997 12.38
Student Loan Marketing Association 4,985,797 130,000 4,868,099 37.45 9,853,896 75.80
Sunrise Medical, Inc. (4,591,935) 770,000 17,909,576 23.26 13,317,641 17.30
Sun Company, Inc. (141,165) 48,200 1,395,624 28.95 1,254,459 26.03
T.J. International, Inc. (9,960) 40,000 769,960 19.25 760,000 19.00
Toys "R" Us, Inc. 28,429 20,000 605,150 30.26 633,579 31.68
Wellman, Inc. 108,345 39,700 714,787 18.00 823,132 20.73
Zurn Industries, Inc. 48,257 300,000 6,075,763 20.25 6,124,020 20.41
TOTAL $8,282,111 $160,098,898 $168,381,009
</TABLE>
<TABLE>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1996
<CAPTION>
Percent of
Shares Common Stocks Net Assets Market Value
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORT
100,000 Delta Air Lines, Inc. $ 7,087,500
160,000 Southwest Airlines 3,540,000
-----------
Total 4.0% 10,627,500
APPAREL
530,000 The Limited, Inc. 9,738,750
200,000 Liz Claiborne, Inc. 7,725,000
-----------
Total 6.5% 17,463,750
BUILDING MATERIALS
1,000,000 Morgan Products, Ltd.* 7,375,000
500,000 T.J. International, Inc. 11,250,000
-----------
Total 6.9% 18,625,000
-----------
CHEMICALS
260,000 H.B. Fuller Company 11,960,000
546,100 Wellman, Inc. 9,351,963
-----------
Total 7.9% 21,311,963
-----------
COMPUTER
PERIPHERALS
495,000 Quantum Corporation* 5.3% 14,169,375
-----------
COMPUTER SOFTWARE
10,000 Autodesk, Inc. 280,000
480,000 Mentor Graphics
Corporation* 4,680,000
-----------
Total 1.8% 4,960,000
-----------
COMPUTERS
340,000 Apple Computer, Inc.* 7,097,500
80,000 Hewlett-Packard Company 4,020,000
850,000 Tandem Computers, Inc.* 11,687,500
-----------
Total 8.5% 22,805,000
-----------
ELECTRONICS
97,500 Merix Corporation* 0.6% 1,486,875
-----------
ENVIRONMENTAL
SERVICES
595,000 ATC Group Services, Inc.* 2.1% 5,503,750
-----------
FURNITURE
60,000 Herman Miller, Inc. 1.3% 3,397,500
-----------
HEALTH CARE
160,000 Aetna, Inc. $ 12,800,000
320,000 United Healthcare
Corporation 14,400,000
-----------
Total 10.1% 27,200,000
-----------
MEDICAL PRODUCTS
600,000 Sullivan Dental Products, Inc. 2.9% 7,875,000
-----------
MICROELECTRONIC
PROCESSING EQUIPMENT
600,000 Electro Scientific
Industries, Inc.* 15,600,000
250,000 FEI Company* 2,343,750
654,000 Genus, Inc.* 3,597,000
50,000 Lam Research Corporation* 1,406,250
-----------
Total 8.6% 22,947,000
-----------
PETROLEUM REFINING
& MARKETING
240,000 Sun Company, Inc. 2.2% 5,850,000
-----------
PHARMACEUTICALS
150,000 Mylan Laboratories 0.9% 2,512,500
-----------
PUBLISHING
80,000 Houghton Mifflin Company 1.7% 4,530,000
-----------
RETAIL
500,000 Toys "R" Us, Inc.* 5.6% 15,000,000
-----------
SEMICONDUCTORS
750,000 Advanced Micro
Devices, Inc.* 19,312,500
800,000 Cypress Semiconductor
Corporation 11,300,000
-----------
Total 11.4% 30,612,500
-----------
STEEL
80,000 Acme Metals, Inc.* 1,550,000
400,000 Inland Steel Industries, Inc. 8,000,000
200,000 Ryerson Tull, Inc.* 2,700,000
-----------
Total 4.6% 12,250,000
-----------
Total Common Stocks
(Cost $225,196,132) 92.9% $ 249,127,713
<FN>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1996
<CAPTION>
Percent of
Short-Term Investments Net Assets Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Union Bank of California
Money Market Account
(variable rate-4.50% as of 12-31-96) $ 3,123,888
Goldman Sachs
Institutional Liquid Assets
(variable rate-5.20% as of 12-31-96) 13,000,488
South Shore Bank
Money Market Account
(variable rate-4.40% as of 12-31-96) 2,146,537
Albina Community Bank
(variable rate-4.95% as of 12-31-96) 100,000
Community Capital Bank
(variable rate-3.81% as of 12-31-96) 100,000
Community Bank of The Bay
(variable rate-5.50% as of 12-31-96) 100,000
Wainwright Bank & Trust Co.
(variable rate-5.40% as of 12-31-96) 100,000
Alternatives Federal Credit Union
(variable rate-3.00% as of 12-31-96) 25,400
Self Help Credit Union
(variable rate-5.12% as of 12-31-96) 27,334
Union Bank of California Account
(variable rate-2.50% as of 12-31-96) 18,642
------------
Total Short-Term Investments 7.0% 18,742,289
-------- ------------
TOTAL INVESTMENTS 99.9% 267,870,002
OTHER ASSETS AND LIABILITIES-Net 0.1% 364,714
-------- ------------
TOTAL NET ASSETS 100.0% $268,234,716
-------- ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $225,196,132) (Note 1) $ 249,127,713
Temporary investments in short term securities
(at cost, which approximates market) 18,742,289
Cash 810,170
Receivables:
Dividends and interest 162,917
Capital shares sold 112,622
Other assets 32,048
------------
Total assets 268,987,759
------------
Liabilities:
Accounts payable 523,200
Capital shares redeemed 229,843
------------
Total liabilities 753,043
------------
Net Assets (equivalent to $34.39
per share based on 7,799,480.853
shares of capital stock outstanding) $268,234,716
------------
Net assets consisting of:
Distributions in excess of net investment income$ (559,449)
Unrealized appreciation on investments 23,931,581
Undistributed net realized gain 92,141
Capital paid-in 244,770,443
------------
Total Net Assets $268,234,716
------------
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($268,234,716 divided by
7,799,480.853 shares) $ 34.39
------------
Offering price per share (100/96.5 of $34.39)* $ 35.64
------------
<FN>
* On investments of $15,000 or more, the sales charge is reduced as stated in
the Prospectus in the section entitled "How to Purchase Shares".
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<S> <C>
Investment Income:
Dividends $ 1,828,761
Interest 554,085
------------
Total investment income 2,382,846
------------
Expenses:
Investment advisory fees (Note 5) 1,736,345
Transfer agent fees (Note 5) 585,831
Reports to shareholders 142,758
Fund administration (Note 5) 65,000
Registration fees and expenses 87,209
Custody fees 55,338
Service provider fees (Note 5) 62,154
Professional fees 61,635
Trustee fees and expenses 9,105
Other expenses 16,258
------------
Total expense 2,821,633
------------
Net Investment Loss (438,787)
------------
Realized and Unrealized
Gain on Investments:
Realized gain from security transactions:
Proceeds from sales 168,381,009
Cost of securities sold (160,098,898)
------------
Net realized gain 8,282,111
------------
Unrealized appreciation of investments:
Beginning of year 3,332,381
End of year 23,931,581
------------
Unrealized appreciation during the year 20,599,200
------------
Net Realized and Unrealized
Gain on Investments 28,881,311
------------
Net Increase in Net Assets Resulting
from Operations $ 28,442,524
------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<S> <C> <C>
1996 1995
--------------- ------------
From Operations:
Net investment income (loss) $ (438,787) $ 1,277,122
Net realized gain from
security transactions 8,282,111 8,636,880
Net unrealized appreciation
(depreciation) during the year 20,599,200 (16,126,308)
------------- -------------
Increase (decrease) in
net assets resulting from
operations 28,442,524 (6,212,306)
Dividends to shareholders:
From net investment income -- (1,277,031)
From realized capital gains (8,282,081) (8,643,338)
Increase (Decrease) in
Net Assets from Capital
Share Transactions (11,058,284) 114,270,902
------------- -------------
Increase in Net Assets 9,102,159 98,138,227
Net Assets:
Beginning of year 259,132,557 160,994,330
------------- -------------
End of year
(including distributions in
excess of net investment
income of $559,449 in
1996 and $120,662 in 1995) $ 268,234,716 $ 259,132,557
------------- -------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Parnassus Fund (the Fund) is an open-end, diversified management
investment company (mutual fund), registered under the Investment Company
Act of 1940, as amended. The following is a summary of significant
accounting policies of the Fund.
Securities Valuations: Investment securities are stated at market value
based on recorded closing sales on a national securities exchange or on the
NASD's National Market System, or in the absence of a recorded sale, and
for over-the-counter securities, at the mean be tween the last recorded bid
and asked prices. Short-term securities are money market instruments and
are valued at cost, which approximates market value.
Federal Income Taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
Security Transactions: In accordance with industry practice, security
transactions are accounted for on the date the securities are purchased or
sold (trade date). Realized gains and losses on security transactions are
determined on the basis of first-in, first-out for both financial statement
and federal income tax purposes.
Investment Income, Expenses, and Distributions: Dividend income is recorded
on the ex-dividend date. Interest income and estimated expenses are accrued
daily. Distributions to shareholders are recorded on the record date.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Distributions
Net realized gains are distributed in the year in which the gains arise. On
December 20, 1996, a capital gains distribution of $8,282,081 ($1.0886 per
share) was paid to shareholders of record on December 19, 1996.
<TABLE>
3. Capital Stock
As of December 31, 1996, there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $244,770,443.
Transactions in capital stock (shares) were as follows:
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 1,403,618 $ 44,793,353 3,586,999 $126,741,948
Shares issued through dividend reinvestment 216,880 7,443,315 273,013 8,826,500
Shares repurchased (1,976,494) (63,294,952) (610,655) (21,297,546)
Net Increase (Decrease) ( 355,996) $(11,058,284) 3,249,357 $114,270,902
</TABLE>
4. Purchases of Securities
Purchases of securities for the year ended December 31, 1996 were
$145,805,023. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1996 are the same as
for financial statement purposes. Of the $23,931,581 of net unrealized
appreciation at December 31, 1996, $40,115,520 related to appreciation of
securities and $16,183,939 related to depreciation of securities.
5. Transactions with Affiliates and Related Parties
Under terms of an agreement which provides for furnishing investment
management and advice to the Fund, Parnassus Investments received fees
computed monthly, based on the Fund's average daily net assets for the
month, at an annualized rate of 1% of the first $10,000,000, 0.75% of the
next $20,000,000, 0.70% of the next $70,000,000, 0.65% of the next
$100,000,000 and 0.60% of the balance. Fees paid by the Fund to Parnassus
Investments under the agreement totaled $1,736,345 for the year ended
December 31, 1996.
Under terms of a separate agreement which provides for furnishing transfer
agent and fund administration services to the Fund, Parnassus Investments
received fees paid by the Fund totaling $650,831 for the year ended
December 31, 1996. The transfer agent fee is $2.30 per month per account
($2.10 prior to July, 1996), and the fund administration fee is $5,833 per
month ($5,000 prior to July, 1996).
Parnassus Investments may also arrange for third parties to provide certain
services, including account maintenance, recordkeeping and other personal
services to their clients who invest in the Fund. For these services, the
Fund may pay Parnassus Investments an aggregate service fee at a rate not
to exceed 0.25% per annum of the Fund's average daily net assets. Parnassus
Investments will not keep any of this fee for itself, but will instead use
the fee to pay the third party service providers. Service provider fees
paid by the Fund totaled $62,154 for the year ended December 31, 1996.
In its capacity as underwriter and general distributor of the shares of the
Fund, Parnassus Investments received commissions on sales of the Fund's
shares for the year ended December 31, 1996 totaling $663,213, of which
$220,044 was paid to other dealers. Commissions are deducted from the gross
proceeds received from the sale of the shares of the Fund and, as such, are
not expenses of the Fund.
Jerome L. Dodson is the President of the Fund and is the President and sole
shareholder of Parnassus Investments.
During 1996, the Fund incurred legal fees of $3,418 to Richard D.
Silberman, counsel for the Fund. Mr. Silberman is also the Secretary of the
Fund.
<TABLE>
6. Financial Highlights
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for each of the ten years in the period ended
December 31 are as follows:
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46 $16.16 $18.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.06) 0.15 2.73 0.27 0.01 0.06 0.16 0.27 (0.05) (0.04)
Net realized and unrealized
gain (loss) on securities 3.77 0.07 1.00 4.84 8.60 8.29 (4.52) 0.30 6.90 (1.19)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 3.71 0.22 3.73 5.11 8.61 8.35 (4.36) 0.57 6.85 (1.23)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Dividends from net investment
income .-- (0.16) (0.47) (0.25) (0.04) (0.06) (0.17) (0.18) .-- (0.03)
Distributions from net realized
gain on securities (1.09) (1.11) (2.25) (2.99) (2.16) (0.85) .-- (0.23) (2.55) (0.67)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (1.09) (1.27) (2.72) (3.24) (2.20) (0.91) (0.17) (0.41) (2.55) (0.70)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46 $16.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN* 11.68% 0.62% 11.98% 17.31% 36.80% 52.56% (21.16%) 2.85% 42.44% (7.95%)
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average
net assets 1.10% 1.02% 1.14% 1.26% 1.47% 1.51% 1.77% 1.65% 2.15% 2.13%
Ratio of net investment income (loss)
to average net assets (0.17%) 0.54% 0.43% 0.13% 0.02% 0.26% 0.87% 1.21% (0.49%)(0.24%)
Portfolio turnover rate 59.60% 29.10% 28.10% 21.00% 32.80% 24.61% 38.25% 11.45% 32.34% 31.69%
Average commission per share+ $0.033 .-- .-- .-- .-- .-- .-- .-- .-- .--
Net assets, end of period (000's) $268,235 $259,133 $160,994 $98,774 $56,237 $31,833 $20,738 $23,048 $10,863 $5,374
<FN>
* Total return figures do not adjust for the sales charge.
+ Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
</FN>
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of The Parnassus Fund:
We have audited the accompanying statement of assets and liabilities of The
Parnassus Fund (the "Fund"), including the portfolio of investments by industry
classification, as of December 31, 1996, and the related statement 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, and the financial highlights (Note 6) for
each of the ten years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's 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 generally accepted auditing
standards. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned at December 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fund as of December 31, 1996, the results of its operations, the changes in its
net assets and financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
January 17, 1997
The Parnassus Fund
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
http://networth.galt.com/parnassus
Investment Adviser
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
Legal Counsel
Richard D. Silberman, Esq.
465 California Street #1020
San Francisco, California 94104
Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
Custodian
Union Bank of California
475 Sansome Street
San Francisco, California 94111
Distributor
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
