THE PARNASSUS Fund
Quarterly Report March 31, 2000
- --------------------------------------------------------------------------------
May 1, 2000
Dear Shareholder:
As of March 31, 2000, the net asset value per share (NAV) of The Parnassus
Fund was $64.13 so the overall return for the quarter was 26.56%. This compares
to a return of 2.29% for the Standard & Poor's 500 Index (S&P 500), 3.82% for
the Wilshire 5000 and 6.02% for the average mid-cap value fund followed by
Lipper Inc. We beat the S&P 500 by an astonishing 24% and the other indices by
similar margins. If you look at the table below, you'll also see that we have
outperformed the S&P 500 over the past ten years with an average annual overall
return of 19.84%. We're now running an ad that asks the question, "Which
Socially Responsible Mutual Fund Beat the S&P 500 over the Last 10 Years?" The
answer, of course, is The Parnassus Fund. I'm enclosing a copy of the ad along
with this quarterly report.
Our results also mean that we had the second best performance for the
quarter of all 188 mid-cap value funds followed by Lipper. For the past year, we
finished third out of 184 funds.* Our position at the top of the mid-cap value
charts isn't so surprising since we're one of the few value funds that has done
well lately, but what is surprising is that we beat the red-hot Nasdaq index for
both the quarter and the last 12 months. As most of you know, the Nasdaq index
is dominated by technology stocks and technology is the only sector that has had
big gains over the past year and a half. For the quarter, the Nasdaq gained
12.41% compared to 26.56% for Parnassus and for the year, the Nasdaq gained
86.24% compared to 86.27% for the Fund.
Below is a table comparing The Parnassus Fund with the Lipper Mid-Cap Value
Average, the Wilshire 5000 and the S&P 500 over the past 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. The performance figures for the average mid-cap value fund do not deduct
any sales charges that may apply.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Periods Ending Average Annual Average Annual Lipper Mid-Cap Wilshire 5000 S&P 500
March 31, 2000 Total Return Overall Return Value Average Index Index
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year 79.75% 86.27% 21.95% 23.61% 17.90%
Three Years 31.51% 33.08% 15.57% 27.35% 27.31%
Five Years 20.34% 21.20% 16.30% 25.82% 26.67%
Ten Years 19.41% 19.84% 13.90% 18.45% 18.77%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Past performance is no guarantee of future returns. Principal value will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost. The Wilshire 5000 and the S&P 500 are unmanaged
indices of common stocks and it is not possible to invest directly in an index.
* For the one, three, five and ten-year periods ending March 31, 2000, The
Parnassus Fund placed #3 of 184 mid-cap value funds, #4 of 122 funds, #16 of
80 funds and #3 of 34 funds, respectively.
</FN>
</TABLE>
HOW DID WE DO IT?
Most of you would probably answer that question by saying it was all
technology. Technology was certainly a big part of the performance, but it was
not the whole story. As of March 31, technology accounted for only 46% of our
portfolio which is down from over 70% during parts of 1999. When you consider
that technology now makes up about a third of the S&P 500, 46% does not seem
like a drastic overweighting. During the quarter, 15 stocks gained over 20%, but
only nine were technology while three each came from the retail and healthcare
sectors. Interestingly enough, the only two stocks that lost more than 20% for
the quarter were both technology companies. Here are the specifics.
The two technology losers during the quarter were Quantum and Adaptec.
Quantum has two classes of stock, one for the disk drive part of the business
and one for the tape data storage part of the business (DSS). DSS lost 25% as it
went from $15.13 on December 31 to $11.34 when we sold it during the quarter
because of poor execution in bringing its new tape storage products to market.
Silicon Valley-based Adaptec makes chips for use in connecting hard disk
drives and other peripheral equipment to the central processing unit of
computers. The stock lost 23% as it dropped to $38.63 a share. We could detect
no fundamental reason for the decline so we're holding onto the stock. The drop
was probably caused by a lot of insider selling making investors wary of the
stock. Insider selling is often a sign that there's something wrong with a
company, but in this case, we think the reaction to the selling was unjustified.
Far outweighing the two losers were the 15 companies that gained more than
20% during the quarter. Our biggest winner for the quarter was LSI Logic, a
maker of custom-designed integrated circuits. The stock shot up 114% as it
soared to $72.06 a share which made it the second best performer in the S&P 500.
LSI makes the chips that run everything from cell phones to DVD players to the
new Sony PlayStation II. Huge increases in orders, especially in the
communications sector, resulted in strong earnings gains.
<PAGE>
FEI, an Oregon-based company that makes focused ion beams for use in
manufacturing semiconductors and other electronic products, saw its stock rise
75% as it climbed to $27.07 a share. Strong order flow from companies like Intel
boosted the stock, but we sold it during the quarter because we thought it was
fully valued and we wanted to reduce our technology exposure.
Our largest holding, Intel, increased by 60% to $131.94 a share which made
it the best performing stock in the Dow Jones Industrial Average. Higher demand
for microprocessors, flash memory chips and communications semiconductors moved
the stock higher. Although Intel has reached our target price, we're holding
onto the stock because we think its intrinsic value is moving much higher
because of the enormous demand for electronic products.
Electro Scientific Industries, a manufacturer of capital equipment for use
in making electronic products, gained 59% as its stock moved up to $58 a share.
Strong demand for capacitors, memory chips and telecommunications equipment
meant higher orders for the capital goods needed to make these products.
The next best performance was turned in by a non-technology company called
Venator, the old Woolworth's whose largest business is now the Foot Locker
chain. The stock climbed 49%, going to $8.94, as the athletic footwear industry
starts its recovery.
Cognex, a Massachusetts-based provider of software that enables computers
to "see", posted a terrific quarter as its stock went to $57.69 for a gain of
48%. Strong demand from semiconductor manufacturers for vision equipment to
inspect their chips moved the stock higher.
Another non-technology company that helped our performance was AnnTaylor, a
retailer of women's apparel, whose stock climbed 36% to $23 a share. Both my
wife, Thao, and my daughter, Katrina, tell me that AnnTaylor has a terrific line
of spring clothes.
Another retailer that had a good quarter was Nordstrom which saw its stock
price go up 35% to hit $29.50 a share. Same store sales started growing again
because of a better selection of women's clothes and better marketing. Better
cost control also helped improve earnings.
Autodesk, one of the few technology companies headed by a woman, also had a
35% jump in its stock price as it went to $45.50 a share. The company makes
AutoCAD and other design software for architects and engineers. New internet
application products that can be used with AutoCAD helped the company increase
sales.
<PAGE>
I have a bittersweet feeling about AMD. As longtime shareholders know,
we've owned this stock for years and it's taken us on several roller coaster
rides over the years. The stock moved up 34% from the beginning of the quarter
until the time we sold it at $38.78. The sweet part of the story is that we made
34% on the stock, but the bitter part of it is that the stock is now trading
around $70 a share. I sold AMD because we were concerned that it might have
production problems again as it has had in the past. As it turns out, their
execution has been excellent and the company's making a nice profit from both
its microprocessors and its flash memory chips.
Symantec, the provider of Norton and other anti-virus software, had a 28%
increase in its stock price during the quarter as it went to $75.13. The
company's new chief executive officer, John Thompson, has improved marketing and
sharpened the company's focus. Sales also climbed during recent computer virus
scares. Thompson came from IBM and is one of the few African-Americans to head
up a Silicon Valley technology company.
Henry Schein, a distributor of dental products, gained 22% during the
quarter as the stock went to $16.19. Schein is another company about which I
have a bittersweet feeling. Although it moved up 22% during the quarter, we paid
$20.45 for the stock a year ago so we're still underwater. Recently, the
company's market share seems to be improving as the firm recovers from a merger
and a sales force re-organization.
Lam Research, a maker of equipment used in manufacturing semiconductor
equipment, had a 21% gain in stock price as it went to $45.06 after a 3-for-1
split. Strong sales of its etching equipment and excellent cost control resulted
in record earnings for the company.
Oxford Health Plans, a New York area HMO, had a 20% rise in its stock,
moving up to $15.25. DENTSPLY, a manufacturer and distributor of dental
products, also saw a 20% increase in its stock price to $28.38 because of
stronger sales in both Europe and the United States.
OUTLOOK AND STRATEGY
One of the things I like best about my job is communicating with
shareholders. I've discovered that Parnassus has a lot of intelligent and active
investors and most of the letters I receive ask very interesting questions.
Because of space limitations, I can only answer a small number of them in these
quarterly reports, but if I don't publish the letter, I do try to answer each
one directly. We received a number of letters of general interest this quarter
so I've decided to use the space in the "Outlook and Strategy" section to answer
a couple of them.
<PAGE>
Hello Mr. Dodson and other Parnassus Folks,
I wanted to write a quick note to praise your performance over the past
year or so, and in particular your YTD performance in 2000. I started to do some
investing of my own in late 1998 and can now more fully appreciate the
challenges you face trying to make your strategy work in the markets.
I've been meaning to write for some time but the event that finally got me
going was the "correction" in tech stocks over the past week, and how The
Parnassus Fund was so much less affected than I would have expected. I was
wondering if you could share your thoughts on why the Fund performed so well
through this volatile period. I also know that your strategy is essentially a
contrarian/value approach applied largely to the technology area, and supposedly
sentiment has come to favor value investing slightly more recently, especially
as compared to the focus on momentum/growth of the past year or so.
Any thoughts you have would be of great interest to me. Thanks again for
your work.
Tim Morrissey
Rochester, WA
P.S. Is it possible to get a current list of your holdings -- or at least
something more current than the quarterly updates shown on your website?
Dear Mr. Morrissey:
To answer the P.S. first, we have had monthly portfolio lists available in
the past, but the usual practice is to publish the portfolio holdings only on a
quarterly basis. The reason is that we don't want our trades known as we're
making them, but only after the fact. However, I think that we could safely put
monthly portfolio holdings on our website and perhaps delay them a few days
after the end of the month to protect any trading strategy that hasn't been
completed. Let me look into posting our portfolio on a monthly basis.
With regard to withstanding the downdraft in technology stocks,
shareholders who follow us in the newspaper everyday probably noticed that our
NAV went down less than the Nasdaq on those days when tech stocks were being
pummeled. There are three factors at work here. First, as I indicated earlier in
this report, we've been selling off our technology stocks as they've increased
in price so that now we have only 46% of the portfolio in technology. Second,
the technology companies we own tend to be strong companies with good earnings
so they tend to be less volatile than the internet stocks and those that are
selling for multiples like 100 or more times earnings. Third, as we sell off our
technology holdings, we've been investing in companies in undervalued sectors
such as retail, pharmaceuticals and finance. On days when technology stocks get
thrashed, these other sectors tend to move up which cushions the blow to our
portfolio.
<PAGE>
It's true that value stocks did a little better this quarter, but they
still aren't doing as well as the growth-oriented technology stocks. For
example, the mid-cap value index gained 6.02% for the quarter which actually
beat the S&P with 2.29% and the Wilshire 5000 with 3.82%. However, the Nasdaq
which was up 12.38% still did much better than the mid-cap value index.
Yours truly,
Jerome L. Dodson
Dear Mr. Dodson:
Over the past couple of years I have enjoyed reading your quarterly and
annual reports. They have always told the truth about your investment strategy.
Your latest was no exception.
It seems to me that although you still buy like a contrarian you are
selling like everyone else, that you have finally been dragged into the momentum
market. Since not selling a position is very much like buying a position, I
would say that you have joined the mainstream.
This has had a wonderful result for your investors over the last year, but
it makes your fund less effective as a counterweight for my other investments
such as S&P Index funds, Magellan and all the rest. I feel that you had to make
these adaptations to save your fund and its investors, but now that you have
succeeded, do you feel that your fund is still a good investment or has it
become "overvalued"? Should I buy more?
So, I would like to hear more details about your selling philosophy. Will
it cause your fund to fall when the momentum bubble bursts?
Thank you for your attention.
Stephen Buck
Roslindale, MA
<PAGE>
Dear Mr. Buck:
You weren't the only shareholder to write in asking if The Parnassus Fund
is still a value fund. One longtime shareholder wrote in to accuse me of "going
with the flow" without any analytical underpinning. The Fund's new attorney,
Paul Dykstra of Gardner, Carton & Douglas, asked at a recent Trustees' meeting
if we were still a value fund. Other shareholders wrote in with similar
questions. The answer is that we are still a value fund and we don't just "go
with the flow."
In your letter, you put your finger on one important aspect of our policy
- -- we still buy like contrarians. The key thing to understand about our
philosophy is that the same stock can be both a value stock and a growth stock
at different times. For example, when we bought Intel at $36 a share in early
1998, it was definitely a value stock since it was trading at a low price
compared to sales, earnings, cash flow and other measures. Two years later, it's
now selling for $130 a share and it's clearly not a value stock.
Why, then, is it still in the portfolio?
In our view, Intel is not overvalued. It may be fully valued, but as long
as its sales and earnings are growing at an increasing rate, the stock is
reasonably priced. Our policy is to hang onto a stock as long as it's reasonably
priced and its fundamentals are strong. While we wouldn't buy Intel at $130, we
think it makes sense for a value fund to hold the stock given the strength of
its business.
Now, why do we think Intel is not overvalued? I can't give you our complete
analysis here (some of which is proprietary), but I can give you a feel for our
thinking. In 1999, Intel earned $2.32 a share so it's selling for 56 times last
year's earnings which is a pretty rich price/earnings (P/E) multiple. Analysts
are predicting that Intel will earn about $3.00 a share in the current year
(2000) which means a P/E ratio of 43. However, we think that Intel will earn
more than that -- probably around $3.30 a share which means the P/E ratio is
only 39.
One rule of thumb is that a company growing at the same rate as its P/E
ratio is not overvalued. Since Intel earned $2.32 in 1999 and analysts expect it
to earn $3.00 in 2000, that implies a growth rate of 29%. However, our estimate
of $3.30 in 2000 implies a growth rate of 42%. Intel will not be able to grow at
42% per year indefinitely, but we think it can grow at a rate in the high 30's
for the next couple of years and that's what's most important for valuation.
Given this situation, a P/E ratio of 39 for Intel is not out of line.
To put some perspective on the matter, let's compare Intel to another
large, fast-growing technology company, Cisco Systems, a company that makes
networking equipment and plays a large role in the infrastructure of the
Internet. Cisco is now selling for $75 and it earned 44 cents a share in the
last 12 months so the P/E ratio is a very high 170. For the next 12 months,
analysts estimate that Cisco will earn around 60 cents a share so the P/E would
be 125 and the implied growth rate is 36%. Both Cisco and Intel are very large
companies so their growth rates are probably limited to the high 30's. There's
an enormous difference between a P/E ratio of 125 and a ratio of 39. Cisco is a
great company, but it's still overvalued while Intel is not.
<PAGE>
Finally, let's compare Cisco and Intel to Yahoo, the internet company.
Yahoo is trading around $150 per share and it earned 35 cents a share over the
last 12 months which gives it a P/E ratio of 429. Analysts estimate that Yahoo
will earn 43 cents over the next 12 months which gives a P/E ratio of 349 and an
implied growth rate of 23%. Some analysts, though, say that Yahoo will grow
around 50% per year, but even accepting the 50% growth figure, a P/E ratio of
349 is clearly astronomical.
In our view, then, holding Intel is not going with the flow, holding Cisco
is probably going with the flow while holding Yahoo is definitely going with the
flow. For the reasons outlined, we don't think The Parnassus Fund is overvalued.
Most of our stocks have multiples much less than that of Intel. As I indicated
in my reply to Mr. Morrissey's letter, we're selling off a lot of our highly
valued technology stocks and replacing them with issues priced at bargain
levels.
As to whether you should buy more Parnassus shares or not, only you can
answer that question. It's quite possible that the NAV could take a plunge
tomorrow or it could keep climbing higher as it has for the past 18 months. The
only advice I can give you is what I tell my friends and family and what I do
myself. I invest the same amount every month and have the money automatically
withdrawn from my bank account via the Parnassus Automatic Investment Plan
(PAIP). If you have a lump sum to invest, you may want to consider putting a
third of it into the Fund now and investing the other two-thirds over the next
year, putting the same amount of money into the Fund each month. This plan,
called dollar-cost averaging, will not guarantee you against losses, but in my
view, it's an intelligent way to go about the business of investing. The
important thing is to keep the plan going and not to stop if the NAV goes down.
To get the best results, you have to keep investing every month through thick
and thin.
Yours truly,
Jerome L. Dodson
COMPANY NOTES
Office Depot sponsored the "Taking Care of Atlanta" campaign at the Seventh
Annual Martin Luther King, Jr. Service Summit on January 16-17. The company
donated 3% of one day's sales from its Atlanta area stores ($100,000) to local
charities such as the King Center, Habitat for Humanity and the Atlanta Urban
League. The company also provided one of its trucks to collect donated food and
blankets at the Service Summit. Office Depot also sponsored the Working Woman
Entrepreneurial Excellence Awards 2000 organized by Working Woman magazine.
Hispanic Magazine and Nordstrom honored Dr. Ed Avila with the 1999 Teacher
of the Year Award for his work as director of the Endeavour Academy, an
engineering and applied science institute that is part of Arroyo Grande High
School in San Luis Obispo, California. The Academy offers students laboratory
science credits that satisfy University of California entrance requirements and
provides student internships at technology and engineering firms.
<PAGE>
Compaq Computer Corporation donated 85 computers to the Greater San
Francisco Bay Area Make-A-Wish Foundation for the year 2000. Of the 300 wishes
granted by the Foundation, 85 were for computers. Compaq also donated computers
for use in the Foundation's offices.
At a White House meeting on March 2, Raymond Gilmartin, Chairman of Merck &
Co., announced that the company will donate $100 million worth of vaccines to
inoculate some of the world's poorest children in Asia and Africa against
hepatitis B. Business Ethics magazine named Kroger as one of the "100 Best
Corporate Citizens."
Autodesk has donated software to Roots of Peace, a nonprofit organization
dedicated to removing land mines around the world. The pilot project will use
Autodesk software to map mined areas in Croatia and track de-mining efforts in a
centralized database to be shared by multiple agencies.
PERSONNEL MATTERS
We are proud to announce that Bryant Cherry will be the new chief financial
officer of Parnassus Investments and he will also serve as Vice President and
Treasurer of The Parnassus Fund. He will replace Howard Fong who is retiring
after having given us 11 years of distinguished service.
Bryant did an internship with us as a research analyst in 1997. Since that
time, he has worked as an independent financial analyst. Previously, he worked
for Stanford Business School, Frank, Rimerman & Co. Accountants and Merrill
Lynch & Co. He is a graduate of Stanford University and holds a Master's degree
in accounting from San Jose State University.
We are, indeed, fortunate to have someone with Bryant's qualifications join
us. He did great work for us as an intern and we also hired him for a couple of
projects subsequent to his internship. Not only does Bryant do top quality work,
but he is a real "people" person.
The Parnassus Fund has a new legal counsel, the firm of Gardner, Carton &
Douglas. The firm was featured in the book America's Greatest Places to Work
with a Law Degree because of its "people-friendly" culture. Paul Dykstra,
partner, and Paulita Pike-Bokhari, associate, are the two attorneys from
Gardner, Carton working with The Parnassus Fund. They're doing a great job and
we're happy to have them with us.
<PAGE>
Our intern for this semester is Jane Duong, a senior majoring in finance at
Santa Clara University. Jane has also studied at Durham University in England.
Her work experience includes stints with the de Saisset Museum in Santa Clara,
with Prints Plus in Concord and the Lake Del Valle Marina in Livermore. She also
received the 1996 Bank of America Award for Outstanding Business Student.
FUND EXPENSES
Enclosed you will find a copy of the new 2000 prospectus. One thing I'd
like to point out is that total fund expenses for 1999 amounted to 1.07% of
assets. By comparison, the median mid-cap value fund had 1.32% of assets as fund
expenses so we're 0.25% below the median. This may not mean much to you,
especially since returns have been high, but it could be a more significant
factor in the future if stock market returns diminish. The one-quarter of
one-percent savings will add up over the years and add to shareholders' returns.
The Parnassus team has worked hard to keep the expenses of the Fund down to a
low level.
Finally, I would like to thank all of you for investing with The Parnassus
Fund. I'm happy that we have been able to give shareholders such attractive
returns.
Yours truly,
Jerome L. Dodson
President
<PAGE>
<TABLE>
The Parnassus Fund Portfolio: March 31, 2000*
<CAPTION>
# of Shares Issuer Market Value Per Share
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
500,000 AnnTaylor Stores Corporation $ 11,500,000 $ 23.00
100,000 Adaptec, Inc. 3,862,500 38.63
500,000 Apex, Inc. 18,562,500 37.13
300,000 Autodesk, Inc. 13,650,000 45.50
100,000 Baldor Electric Company 1,806,250 18.06
400,000 Boston Scientific Corporation 8,525,000 21.31
125,000 Cardinal Health, Inc. 5,734,375 45.88
200,000 Clorox Company 6,600,000 33.00
268,000 Cognex Corporation 15,460,250 57.69
600,000 Compaq Computer Corp. 15,975,000 26.63
200,000 Delta Air Lines, Inc. 10,650,000 53.25
300,000 DENTSPLY International, Inc. 8,512,500 28.38
492,000 Electro Scientific Industries 28,536,000 58.00
340,000 Federal Home Loan Mortgage Corp. 15,023,750 44.19
170,000 Federal National Mortgage Association 9,594,375 56.44
700,000 Henry Schein, Inc. 11,331,250 16.19
400,000 Intel Corporation 52,775,000 131.94
10,000 Johnson & Johnson 700,625 70.06
300,000 Lam Research Corporation 13,518,750 45.06
400,000 LSI Logic Corporation 28,825,000 72.06
50,000 MedQuist, Inc. 1,359,375 27.19
500,000 Mentor Graphics Corporation 7,562,500 15.13
200,000 Merck & Co., Inc. 12,425,000 62.13
800,000 Nordstrom, Inc. 23,600,000 29.50
475,000 Office Depot, Inc. 5,492,188 11.56
150,000 Oxford Health Plans, Inc. 2,287,500 15.25
310,000 Schering-Plough Corporation 11,392,500 36.75
225,000 Steris Corporation 2,306,250 10.25
250,000 Symantec Corporation 18,781,250 75.13
200,000 Target Corporation 14,950,000 74.75
200,000 The Gap, Inc. 9,962,500 49.81
500,000 The Kroger Co. 8,781,250 17.56
550,000 UnumProvident Corporation 9,315,625 16.94
1,000,000 Venator Group, Inc. 8,937,500 8.94
100,000 Watson Pharmaceuticals, Inc. 3,968,750 39.69
290,000 Wellman, Inc. 5,745,625 19.81
300,000 Whole Foods Market, Inc. 12,431,250 41.44
--------------
Total Portfolio $440,442,188
Short Term Investments
and Other Assets $ 26,603,129
-------------
Total Net Assets $467,045,317
------------
The Net Asset Value
as of March 31, 2000 $ 64.13
<FN>
* Portfolio is current at time of printing, but composition is subject to change.
</FN>
</TABLE>
<PAGE>
THE PARNASSUS FUND
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
www.parnassus.com
Investment Adviser
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
Legal Counsel
Gardner, Carton & Douglas
321 N. Clark Street
Chicago, IL 60610
Independent 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
This report must be preceded or accompanied by
a current prospectus.
Recycled paper.
