Fundamentals-Driven Value Team at RS Investments Comments on Quarter 2
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 towards 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. In turn, Recommended List names are purchased in the portfolio when we can: a) clearly quantify a downside or value for the company, b) the market provides us with an opportunity to purchase an interest in the company close to or, preferably, below that downside price, and c) the investment augments the existing positions in the portfolio from both a risk and return perspective. This process reflects our belief that risk is not defined as share price volatility but rather the permanent impairment of our client's capital. 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 philosophy, process and team structure will continue to provide us with the opportunity to generate excess risk-adjusted returns over a reasonable investment horizon.
Returns and Attribution Detail
During the second quarter of 2013, RS Value Fund (Class A Shares) generated a return of 2.48% versus 1.65% for the benchmark Russell Midcap®
. Importantly, the second quarter of 2013 marked the fourth consecutive quarter where the RS Value Fund outperformed its benchmark. Stock selection in Health Care and Financials were among the largest positive relative contributors during the quarter. Warner Chilcott (pharmaceuticals; 2.84% position) was the top performer within Health Care, while ING U.S. Inc. (insurance; 0.43% position) led Financials. Conversely, stock selection in Producer Durables and Technology were drags on results. Within Producer Durables, Iron Mountain (IRM) (records and information management services; 3.25% position) underperformed during the quarter, as did Symantec Corp. (SYMC) (provider of security, storage and systems management solutions; 2.97% position) within Technology.
For the year-to-date period, RS Value Fund (Class A Shares) generated a return of 17.93% versus 16.10% for the benchmark.Stock selection in Financial Services and Health Care drove positive relative results for the year. An underweight to REITs, combined with strong performance from the Fund's bank investments, including KeyCorp (2.83% position) led the solid performance within Financials, while Warner Chilcott was again the top performer within Health Care. Conversely, underperformance within Producer Durables partially offset otherwise positive returns for the year-to-date period. Iron Mountain led the underperformance within Producer Durables.
Continue reading the letter at RS Investments' website here.