The Parnassus Fund
Quarterly Report
September 30, 1999
October 25, 1999
Dear Shareholder:
As of September 30, 1999, the net asset value per share (NAV) of The
Parnassus Fund was $42.12 so the overall return for the third quarter was 0.67%.
Now I realize that a return of less than 1% might not sound great to most of
you, but when you compare it to a loss of 6.25% for the S&P 500 and a loss of
5.17% for the average growth fund followed by Lipper, one percent sounds pretty
good. The broadly-based Wilshire 5000 also posted a loss -- down 6.61% for the
quarter.
For the year-to-date, the Fund is up 16.23% compared to 5.36% for the S&P,
4.47% for the Wilshire 5000 and 5.97% for the average growth fund. Year-to-date
then, we're over 10% ahead of the average growth fund.
Below you will find a table summarizing our average annual returns as of
September 30, 1999 for the one, three, five and ten-year periods. The overall
return figures give investment performance only while the total return figures
are reduced by the amount of the maximum sales charge (3.5%).
<TABLE>
<CAPTION>
Average Average Lipper Lipper
Annual Annual Mid-Cap Growth
Total Return Overall Return Value Average Fund Average
<S> <C> <C> <C> <C>
One Year 62.19% 68.08% 14.10% 30.34%
Three Years 19.17% 20.60% 10.15% 19.82%
Five Years 11.42% 12.22% 13.16% 20.48%
Ten Years 12.58% 12.99% 10.44% 14.72%
<FN>
Past performance is no guarantee of future returns. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may be
worth more or less than their original cost.
</FN>
</TABLE>
As you look at the table, there is one number that may jump out at you and
that is the 68% return for the 12 months ending 9/30/99. The 68% is an amazing
return for one year, but modesty forbids me from trumpeting it too loudly.
Although accurate, the figure is somewhat misleading since the period began
right after the slump we had last year. Unfortunately, it's not indicative of
real results since it was created by the slump and bounce-back we had in the
fourth quarter of last year.
While the one-year figure is misleading, the three-year average gain of
20.60% per year is not. While our three-year figures last year looked terrible,
our recent strong performance has put us just above the average growth fund
which has been earning 19.82% per year over the past three years. As we've
discussed in previous reports, The Parnassus Fund invests primarily in
medium-sized stocks (mid-cap) and we buy stocks that are trading at bargain
levels ("value" investing as opposed to "growth" style investing). Over the past
three years, both mid-cap and value companies have drastically underperformed
the market. For example, Lipper says that the average mid-cap value fund gained
an average of 10.15% per year over the past three years. By comparison, the Fund
has gained an average of 20.60% per year or twice as much. I'm proud of the
record we've compiled over the past three years under difficult conditions.
ANALYSIS
Even though the S&P 500 is up 5.36% year-to-date, almost 70% of all stocks
in the S&P 500 are down for the year so large gains in 30% of the stocks are
holding up the averages. According to the Wall Street Journal, the average
mid-cap value fund (our category) lost 8.91% in the third quarter while we
actually gained 0.67%.
How were we able to avoid the downdraft in the third quarter? The short
answer is that we held onto our technology stocks longer than we normally would
have and technology was one of the few sectors that did well during the quarter.
Over the past year, we have made some changes to our investment strategy.
While our "buy" criteria have not changed, we have modified our "sell" criteria.
Previously, we would sell a stock after a big run-up and look for other stocks
that were more undervalued. Quite often, the stocks we sold would continue
climbing while the new undervalued companies would sometimes stay stuck in the
mud for long periods of time before they started to move.
An example of our new approach is Lam Research, a semiconductor capital
equipment company that is one of our largest holdings; it cost the Fund $23.63 a
share when we bought it last year. The stock traded at $61 on September 30 for a
gain of 158% over our average cost. A couple of years ago, we might have sold
the stock in the range of $45-$50 after it had doubled and invested in another
issue that was more undervalued. This year, though, we held onto the stock and
it has gone higher. In fact, we plan to hold onto Lam for the indefinite future
even though it's only modestly undervalued right now. Under our new policy,
we'll hold onto the company until the fundamentals change, i.e., until we see
business conditions deteriorate. This means we probably won't sell at the top,
but we will probably avoid selling too soon.
In the current market, this new "sell" strategy seems to work better. It
has the added advantage of deferring taxes and reducing trading costs.
WINNERS AND LOSERS
An analysis of how individual companies performed during the quarter
illustrates the dichotomy of the technology and the non-technology issues. Six
of the eight worst performers were non-technology stocks while eight of the ten
winners came from the technology sector.
Henry Schein, a dental supply company, lost 55% during the quarter as its
stock sank to $14.25 a share. The company has gone through two mergers and
turnover in the sales force caused a slump in revenue. Experience over the years
has taught us to avoid companies that have just gone through a merger until the
stock price has a big drop. Schein traded over $50 a share in July of 1998 and
sold for over $46 a share in January. The stock price collapsed this year and we
acquired our stake for a little over $25 a share which we considered a bargain
given its price history. Unfortunately, the stock came down even further and
traded at $14.25 at the end of the third quarter. We still think the company is
well-managed and is trading at bargain levels so we should do well as time goes
on. Nevertheless, I wish we had bought our shares at $14 instead of at $25.
The two technology stocks on our losers' list are both in the disk drive
industry. Unlike other technology companies, disk drive companies have not been
doing well because of overcapacity and a price war that has slashed profit
margins. Western Digital dropped 43.3% during the quarter as its stock went to
$3.69. Quantum's stock declined 41.7% to $14.06.
Whole Foods Market saw its stock decline 31.9% as it went to $32.72 a share
because of higher costs to develop its internet site. The company still has
strong growth, though, as comparable store sales increased 9% over the past
year. This strong growth should lead to higher stock prices over the next year.
Mattel's stock went down 28% to $19 a share because of weak earnings caused
by slow international sales and retailers' stocking less inventory. Oxford
Health Plans declined 19.7% to $12.50 because of rumored class action suits by
lawyers against HMOs.
Liz Claiborne dropped 15.1% to $31 a share because department stores are
losing market share in women's apparel due to the shift to casual clothing for
business. Although Liz makes both casual and dressier clothes, more of its
revenue comes from dressier clothes that are sold through department stores.
Dentsply, a manufacturer and wholesaler of dental supplies and equipment,
saw its stock decline by 18.8% as it went to $22.75 a share. Weakness in the
German market caused disappointing earnings.
Although there were business reasons for all these companies to decline in
value, the losses were greater than their business prospects would warrant. The
stock market's current dislike for mid-cap value stocks pushed these companies
down to points far below their intrinsic value.
Fortunately, we had more than enough winners to push the Fund into positive
territory for the quarter. In discussing the winners, we'll talk about each
company in terms of its effect on the NAV in cents per share as well as its
percentage gain. Since the size of our positions in these stocks varies greatly,
the percentage increase can have different impacts on the NAV depending on the
size of the position.
Eight of the ten biggest winners in the portfolio were technology stocks.
This sector keeps doing well from a business standpoint and the stock market has
rewarded these stocks with outsize gains.
Intel, the world's largest semiconductor company, gained 24.9% during the
quarter as its stock rose to $74.31 a share, pushing up the Fund's NAV by 84
cents. Strong sales of personal computers increased demand for its
microprocessors and the company is also gaining market share from AMD. We bought
Intel well over a year ago when it was trading around $35 a share -- a price
that made it a "value" stock. The price has more than doubled since then and is
now only modestly undervalued. We wouldn't buy Intel at its current price, but
we are holding onto the stock as long as the business fundamentals look good.
Intel has appreciated so much that it's now our largest holding.
Lam Research, the semiconductor capital equipment company we talked about
earlier, increased the Fund's NAV by 81 cents as its stock went up 30.7% to $61.
Demand for Lam's products continues to be strong. Another semiconductor capital
equipment company, Electro Scientific Industries, also had a positive impact of
81 cents on the NAV. Its stock climbed to $53.28 on a gain of 27.5% because of
strong demand for its equipment.
Helix, a maker of cryogenic pumps for use in semi-conductor production,
moved the NAV up 64 cents as its stock gained 38.9%, soaring to $35.25.
Symantec, a software company with a talented new chief executive officer, had a
positive impact of 37 cents on the Fund as its stock climbed 41.1% to $35.97 a
share. Sales of its anti-virus software boosted earnings.
Adobe Systems contributed 29 cents to the Fund's shares as its stock went
up 19.5% to $98.18 where we sold it during the quarter. As we said in our last
quarterly report, the company now has good cost control and sales of its
products like PageMaker and Acrobat are strong. We bought our shares well over a
year ago for $40 each so we've had a 140% gain in the stock. Amazingly enough,
the stock continued to climb after we sold it at $98 and it's now over $110 a
share. Unfortunately, we left some money on the table, but I can't complain too
much because we did very well with the stock. It does, however, deepen my
commitment to the new strategy of hanging onto companies that are doing well
even if we can find other stocks that are more undervalued.
LSI, the maker of specialized integrated circuits, gained 10.9% as its
stock climbed to $51.50 a share and contributed 16 cents to the NAV. Adaptec had
an increase of 12.4% in its stock price as it went to $39.69 and contributed 14
cents to the NAV. The company makes controllers that regulate the flow of data
between a computer's central processing unit and its peripherals.
Consolidated Stores, the owner of KB Toys and closeout stores, saw an
increase of 30% in its stock price as it went to $22.06 and contributed 14 cents
to the NAV. Comparable store sales for KB Toys were up 20% over last year
because of higher demand for video games. Comparable sales for its closeout
stores were up 11.4% because of better merchandising.
Finally, Wellman saw its stock price increase 13.3% to $18.06 which
contributed 11 cents to the NAV. The company is the nation's largest recycler of
plastic and it also produces fiber and PET resin for bottles that hold water,
soda and juice. Higher PET prices helped the company's earnings.
OUTLOOK AND STRATEGY
Present plans call for continuing our current strategy which has been
working well. We plan to hold our technology stocks at least through the end of
the year and into early next year since this is a seasonally strong time for
technology. If these shares continue to appreciate next year, we'll make
individual decisions on when to sell them according to the business prospects
for each company.
For four years now, value stocks and especially small and medium-sized
value stocks have been out of favor. At some point, things should change since
they are so undervalued now. Four years is a long time, but there's still no
certainty when they will do better. If things do change, though, and mid-cap
value comes back into favor, we should do very well. If things don't change soon
(and they may not), our technology stocks should carry us through and give us
decent performance. We're still in the early stages of the up-cycle for
semiconductors so their stock prices should continue higher although not at the
same rate that they've increased this past year.
COMPANY NOTES
Target Stores, the discount subsidiary of Dayton-Hudson, is sponsoring the
Second Annual Bill Cosby Cube Checkers Challenge. Cube checkers is like regular
checkers except that it's three-dimensional which dramatically increases the
strategic possibilities. Early rounds of the tournament will be played in Target
stores around the country before regional playoffs and the championship at the
Queens Target Store in New York. The tournament will benefit the Hello Friends/
Ennis William Cosby Foundation which assists young people with dyslexia.
Target is also donating almost $3 million for scholarships to students and
teachers. Of that amount, $1.9 million will be awarded to students who
demonstrate a commitment to community service, education and volunteerism.
Another $1 million will be donated to K-12 teachers for use in education.
Borders Bookstores in collaboration with Parenting magazine is sponsoring a
contest to promote children's writing skills. Children in grades 2-5 are invited
to write the opening scene for a mystery story that will appear in the popular A
to Z Mysteries series by author Ron Roy. Local winners will receive a Borders'
gift certificate while the national winner will have the story become the basis
for a new book in the A to Z series. On another front, Borders was named the
best bookstore in a reader poll by the San Francisco Chronicle.
Autodesk has a website called Design Your Future that encourages young
women to explore career opportunities in math, science and technology. The
website (www.autodesk.com/dyf) has won four awards for excellence including
those from the Tech Museum of Innovation in San Jose, the Best of the Web award
from Nielsen and Business Graphics, CyberTeddy Online Top 500 websites and the
Busy Educator's Guide. Autodesk was also named to the 1999 edition of the "100
Best Companies for Working Mothers."
Oxford Health Plans' New Jersey point-of-service (POS) plan ranked first
among POS plans in New Jersey for the second consecutive year according to an
in-dependent research firm, Caredata.com Consumer Research. The findings were
based on a survey of employer groups in New Jersey and included responses from
2,800 surveyed employees.
CIO Magazine named Quantum Corporation as one of the 100 international
companies most likely to succeed in the 21st century. The award spotlights
demonstrated innovation and policies enabling people to work in a creative way.
Intel Corporation increased its support to the annual Science Talent Search
to $1.2 million per year. The 60-year old high school science competition
encourages scientific study among young people. Five former Science Talent
Search finalists are Nobel Prize winners and two have earned the Fields Medal,
the highest mathematics award. About 70% of participants have gone on to earn
Ph.D. or M.D. degrees.
Liz Claiborne kept its factories open in Macedonia during the conflict in
neighboring Kosovo. This enabled people to keep their jobs and income during a
difficult time.
PERSONNEL MATTERS
Adam Aron is the Fund's fall intern. He is a graduate of Oberlin College
and has studied at the University of London and the National Outdoor Leadership
School. His work experience includes three years as a senior account executive
at Lippert/Heilshorn & Associates, an investor relations consulting firm. He has
also worked at Montgomery Securities and as an appropriations analyst at Friends
of the Earth. He also received the A.W. Mellon Grant Award in 1992-1993 which he
used to produce a film documentary and written thesis on American land use
policy.
Each quarter we talk about the interns at The Parnassus Fund. Starting with
this report, we will have a new feature. We'll give some information on a
permanent staff member. Parnassus Investments has been very fortunate in having
a great staff. They are extremely dedicated. Shareholders have complemented us
on the professional attitude that our staff displays. One of the reasons we have
such a well-trained staff is because of Susan Loughridge, Vice President and
Manager of Shareholder Services. Susan not only supervises all shareholder
service functions, but she handles our advertising and makes sure that we comply
with government regulations. She's a very important person in our operation.
Susan was born in Salt Lake City, Utah and was raised in New Orleans. She
graduated from the University of Arizona and went to work as an examiner for the
Federal Home Loan Bank of San Francisco where she conducted inspections of
savings and loan associations. She conducted an examination of Continental
Savings of America while I was President in 1979 and I hired her that year to be
in charge of savings and branch operations. After working for the Federal Home
Loan Bank from 1975-1979, she served as a Vice President at Continental from
1979 until 1989. From 1990 to 1993, she worked as a real estate agent and a loan
broker. She came to work at Parnassus in 1993 and she's been here for six years,
doing a great job.
Susan is married to Pat Holwagner, a financial executive working for an
internet company. Her favorite pastimes are golf and travel. She lives in the
hills of Oakland, California with her husband and two dogs.
DIVIDEND
Each year, The Parnassus Fund pays out a dividend in December consisting of
all the income and realized capital gains made during the year. This
distribution is paid out either in cash or in the form of new shares depending
on the method you chose when you opened your account. On the day the dividend is
paid, the NAV of the Fund will decrease by the amount of the distribution so
don't be alarmed if you see the NAV drop by a substantial amount when you look
at the business pages of the newspaper. For example, if the NAV is $43.00 and
the dividend is $2.00, then the NAV will drop by $2.00 to $41.00 on the
ex-dividend date. Although the NAV will drop, this is not an economic loss to
shareholders since you will either receive cash or new shares to make up the
$2.00.
You will, however, have to pay taxes on the distribution. For this reason,
I recommend you not make a substantial addition to your account from about
November 15 until the ex-dividend date (December 17). The reason is that if you
invest just before the distribution date, you will be taxed on the distribution
without having any real gain. The only exceptions to this advice are for IRAs
and tax-deferred accounts and for people using the Parnassus Automatic
Investment Plan (PAIP) where you have money automatically deducted from your
bank account and invested in the Fund. You can invest anytime with IRA accounts
since they are tax-deferred. A regular investment program with PAIP need not be
disturbed because the monthly investment amounts are not significant in the
overall scheme of things.
In the past, shareholders have asked for an estimate of the distribution.
We won't know the exact amount until December, but I can tell you what it would
be if the distribution were made today. The distribution comes in two parts: a
long-term capital gain dividend resulting from the sale of stocks we've held for
more than one year and an income dividend consisting of interest and dividends
we've accrued through the year combined with short-term capital gains. The
capital gain dividend is taxed at the capital gains rate while the income
dividend is taxed at the ordinary rate. As of late October, the capital gain
dividend would be $1.36 a share and the income dividend would be 40 cents a
share for a total distribution of $1.76. I don't think the dividends will be
much more than these amounts, but the figures could change depending on what
stocks we sell.
Each year, I try to minimize the amount of taxes we pay as shareholders and
this means reducing the dividend as much as possible. For example, this year the
overall return has been about 17% as of mid-October, but the dividend of $1.76
will amount to only 4.9% of the value of the shares at the beginning of the
year. The reason the dividend is less than the return is because we've held onto
stocks that have appreciated and we won't pay taxes on those unrealized gains
until we sell them. Also, I've tried to sell off some of the stocks where we've
had a loss so they will balance out some of the realized gains and reduce the
amount of the dividend which, in turn, reduces the taxable income.
If you need to know the exact amount of the distribution, you can give our
shareholder service department a call in early December. The record date for the
dividend will be December 16 (i.e., the date you have to own your shares to
receive the dividend), the payable date will be December 17 (i.e., the date you
receive the cash or the new shares) and December 17 will also be the ex-dividend
date (i.e., the date you can invest without receiving the distribution).
Yours truly,
Jerome L. Dodson
President
<PAGE>
<TABLE>
The Parnassus Fund Portfolio: September 30, 1999*
<CAPTION>
# OF SHARES ISSUER MARKET VALUE PER SHARE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
235,000 Adaptec, Inc. $ 9,326,562 $ 39.69
460,000 Advanced Micro Devices 7,906,250 17.19
5,000 Applied Materials, Inc. 389,375 77.88
80,000 Autodesk, Inc. 1,750,000 21.88
100,000 Baldor Electric Company 1,893,750 18.94
100,000 Becton Dickinson & Co. 2,806,250 28.06
150,000 Borders Group, Inc. 2,203,125 14.69
700,000 Cognex Corporation 21,131,250 30.19
500,000 Compaq Computer Corp. 11,437,500 22.88
200,000 Consolidated Stores Corp. 4,412,500 22.06
125,000 Dayton-Hudson Corporation 7,507,813 60.06
190,000 Delta Air Lines, Inc. 9,215,000 48.50
250,000 DENTSPLY International, Inc. 5,687,500 22.75
110,000 Department 56, Inc. 2,633,125 23.94
470,000 Electro Scientific Industries 25,042,187 53.28
625,000 FEI Company 4,726,563 7.56
377,500 Helix Technology Corporation 12,551,875 33.25
400,000 Henry Schein, Inc. 5,700,000 14.25
400,000 Intel Corporation 29,725,000 74.31
400,000 Lam Research Corporation 24,400,000 61.00
300,000 Liz Claiborne, Inc. 9,300,000 31.00
225,000 LSI Logic Corporation 11,587,500 51.50
500,000 Mattel 9,500,000 19.00
600,000 Mentor Graphics Corporation 5,137,500 8.56
10,000 Merck & Co. Inc. 648,125 64.81
550,000 Oxford Health Plans, Inc. 6,875,000 12.50
525,000 Quantum Corp. -
DLT & Storage Systems 7,382,813 14.06
262,500 Quantum Corp.-Hard Disk Drive 1,952,344 7.44
200,000 Reebok International Ltd. 2,137,500 10.69
400,000 Steris Corporation 5,500,000 13.75
250,000 Stride Rite 1,750,000 7.00
250,000 Symantec 8,992,187 35.97
360,000 Wellman, Inc. 6,502,500 18.06
1,200,000 Western Digital Corporation 4,425,000 3.69
300,000 WHOLE FOODS MARKET, INC. 9,815,625 32.72
- --------------------------------------------------------------------------------------------------------
Total Portfolio $281,951,719
Short Term Investments
and Other Assets 11,255,868
Total Net Assets $293,207,587
The Net Asset Value
as of September 30, 1999 $ 42.12
<FN>
* PORTFOLIO IS CURRENT AT TIME OF PRINTING, BUT COMPOSITION IS SUBJECT TO CHANGE.
</FN>
</TABLE>
<PAGE>
The Parnassus Fund
Distributed by Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
WWW.PARNASSUS.COM
THIS QUARTERLY REPORT MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
