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RS Investments Q1 Investor Letter
Posted by: Holly LaFon (IP Logged)
Date: May 9, 2013 01:21PM
Philosophy and Process: We believe that company-specific value creation is frequently mispriced in the public markets. As a result, the RS Value Team employs an investment process that is driven by fundamental business analysis. Specifically, we are interested in understanding how companies create value, which by definition means dissecting businesses into their component parts to gain insights into how and where capital is being allocated, and the cash flows and returns associated with these capital decisions. When we have identified situations where there is a visible path toward future value creation, and a management team is in place that we believe is capable of executing the business plan, a company qualifies for our Recommended List. However, as value investors, we know that risk is not defined as share price volatility, but rather the permanent impairment of our clients' capital. As a result, Recommended List names only come into the portfolio when a) we can clearly quantify a downside or safety net value, b) the market provides us with an opportunity to purchase an interest in the company close to or, preferably, below that safety net price, and c) the investment augments the existing positions in the portfolio from both a risk and return perspective. While we expect, over time, that excess returns will be driven by superior stock selection, it is critical that we construct "all weather" portfolios—concentrated around our very best investment opportunities, but broadly diversified across the economy. We acknowledge that over short periods of time we may underperform our benchmark, but believe that our team structure, philosophy, and process will continue to provide us with the opportunity to generate excess risk-adjusted returns over a reasonable investment horizon.
Returns and Attribution Detail
For the first quarter of 2013, RS Value Fund (Class A Shares) generated a return of 15.08% versus 14.21% for the benchmark Russell Midcap® Value Index.
Stock selection in technology and financial services were the largest relative contributors during the quarter. Activision Blizzard (publisher of electronic entertainment software; 2.49% position as of the end of the quarter) and Symantec Corp. (SYMC) (provider of security, storage and systems management solutions; 3.20% position) were the top performers within technology, while CBRE Group (CBG) (the world's largest global real estate services business; 1.53% position) led Financial Services. Conversely, stock selection in producer durables discounted in valuations. As such, we have used the market's focus on near-term net interest margin (NIM) pressures as an opportunity to evaluate our regional bank exposure. In addition, we are focused on financials that are less capital intensive, provide consistent and predictable cash flow streams, and are not as likely to be influenced by global economic factors.
We entered 2012 cautiously optimistic and despite double-digit stock market returns, we remain incrementally more positive in 2013. Perhaps more accurately, we are incrementally more confident in our cautious optimism. While the public sector struggles to balance budgets and deleverage, the private sector in the United States continues its slow and uneven emergence from the economic and financial imbalances of 2007−2008. The housing market continues to improve, and more certainty from the government regarding tax policies will allow companies to commit to capital budgets and hiring plans that were delayed during 2012. Our financial institutions are much better capitalized and are essentially awaiting a recovery in demand. The benefits of low-cost energy provided to U.S. consumers and manufacturers as a function of low-cost natural gas reservoirs, and the ability to extend related technologies into oil and liquids, are in the early stages of being recognized and should positively impact the domestic economy over the intermediate and long term. From a valuation perspective, cyclical industries (where we tend to find more interesting company-specific opportunities) appear attractive relative to defensive sectors, while equity risk premia remain elevated relative to historical levels. As contrarians, we like the fact that retail investors have fled the stock markets and large institutions have massive unfunded liabilities, which are unlikely to be met via the returns offered by the fixed income markets. Increasingly shorter holding periods are consistent with our contention that most market participants are solving for short-term returns and that, in such an environment, investors focused on long-term value creation and fundamental price/value disconnects should be able to generate reasonable risk-adjusted returns.
We remain confident that our philosophy, structure and process will allow us to compete effectively in a market that we contend will be well suited to our private-equity-like approach to business analysis and valuation. We thank you, as always, for your patience and support.
RS Value Team
As with all mutual funds, the value of an investment in the Fund could decline, so you could lose money. Investing in small- and mid-size companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Investing in a more limited number of issuers and sectors can be subject to greater market fluctuation. Overweighting investments in certain sectors or industries increases the risk of loss due to general declines in the prices of stocks in those sectors or industries. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks not present in domestic investments. The value of a debt security is affected by changes in interest rates and is subject to any credit risk of the issuer or guarantor of the security. Investments in companies in natural resources industries may involve risks including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international political and economic developments.
Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary.
Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, are as of March 31, 2013.
RS Funds are sold by prospectus only. You should carefully consider the investment objectives, risks, charges and expenses of the RS Funds before making an investment decision. The prospectus contains this and other important information. Please read it carefully before investing or sending money. To obtain a copy, please call 800-766-3863 or visit www.RSinvestments.com.
Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The Fund's total gross annual operating expense ratio as of the most current prospectus for the Class A Shares is 1.33%. The performance quoted, unless otherwise indicated, does not reflect the current maximum sales charge of 4.75% that became effective on October 9, 2006. If the maximum sales charge were included, the performance stated above would be lower. Current performance may be lower or higher than performance data quoted. Performance current to the most recent month-end is available by contacting RS Investments at 800-766-3863 and is frequently updated on our website: www.RSinvestments.com.
Please refer to the most current Fund prospectus for complete details on expenses including fees and also for more information on sales charges as they do not apply in all cases and if applied are reduced for larger purchases. Performance results assume the reinvestment of dividends and capital gains.
Guru Discussed: RS Investments: Current Portfolio, Stock Picks
Stocks Discussed: SYMC, CBG,