Members of the RS Hard Assets team discuss RS' approach to extracting value from natural resource equities.

November 2011

Topics included the current state of natural resource equities, specifically focusing on the three sources of returns, and insights from the investment team's recent research trips around
the globe.

This White Paper presents the academic and empirical evidence in support of a high-conviction, low-turnover investment approach to managing equities in an increasingly short-term oriented market. 

Advantages of a high-conviction, low-turnover approach cited in this paper include:

• Fewer holdings support deep understanding of portfolio companies and factors that influence their long-term business values
• Longer holding periods allow ample time for its intrinsic value to be fully reflected in company's
  underlying stock price
• Evidence of historical risk-adjusted return benefits

Recent academic studies support the case for active management by introducing the concept of active share. A high active share indicates that a fund's investments significantly differ from its benchmark, while a low active share, or "closet index" fund's investments largely mirror the benchmark index. In this primer, RS Investments explains how active share can serve as a useful measure for understanding the extent to which a manager is deviating from an index, and potentially outperforming it.

Innovative products and services are addressing healthcare's woes head-on and creating investment opportunities in the process. In this Q&A, RS Growth co-portfolio manager Melissa Chadwick-Dunn and analyst Chris Clark discuss their views on the long-term growth potential for these innovating companies and explain their Team's process for uncovering them.

In part one of this two part series exploring investing in real asset strategies, co-authors MacKenzie Davis and Ken Settles examine how changing global economic fundamentals have altered the following key drivers of return in passive commodity strategies: spot price, roll yield, and collateral. The paper covers the historical rationale for an investment in commodities and how an investment in natural resources could be equally complementary in providing:

• Diversification
• Inflation protection
• Potential for improved returns

In part two of this two part series exploring investing in real asset strategies, co-authors MacKenzie Davis and Ken Settles examine an investor's options for investing in real assets through Private Equity and Public Equity strategies. The paper particularly focuses on the characteristics that differentiate private equity investors and public equity investors in natural resource companies and what the benefits to be derived from a private equity investment approach in the public markets are. Key points addressed are:

• The advantages of an equities approach to investing in real assets
• How investors can access unique sources of returns
• How public equity strategies and private equity strategies can prove to be complementary

In this paper, co-authors MacKenzie Davis and Ken Settles examine different forms of commodity price-driven inflation. Investors have allocated over $350B to commodities in part to help protect against inflation. But what types of inflation are investors trying to hedge against and are direct investments in commodities the most effective way to protect investors from inflation? In this paper we examine different forms of commodity price-driven inflation as well as some ways which institutional investors can potentially help protect their portfolios from longer-term increases in commodity prices.

In this Research Paper, Steve Bishop, portfolio manager of the RS Technology Fund, highlights why he believes the current environment may provide a historic opportunity to allocate to innovative technology companies across the market cap spectrum. 

The Research Paper reviews:

• The Investment Case for Technology: Finding well-capitalized and less-volatile technology companies trading at historically low valuations
• Themes: Key Technology Innovations Altering the Global Landscape – Virtualization and cloud computing,
  security and storage, emerging market consumer, and social media
• RS Technology Fund: Seeking a return on innovation across the market cap spectrum

In this Q&A, the RS Value Team's Financials Pod discusses its views on opportunities within banking following the financials crisis. They identify what they believe to be an exceptional opportunity to invest in high-quality banking franchises at or below their downside estimation of these firms' warranted value. The Team also reveals how the RS Value Team's Return on Invested Capital (ROIC)-based philosophy translates into their work within financials, walking through the steps by which they identified an investment opportunity within regional banks.

In this Research Paper, Alex Grant, portfolio manager of the RS Tax-Exempt Fund and RS High Yield Municipal Bond Fund, discusses the state of the municipal bond market. The municipal bond market is explored from a historical and current perspective, and aims to provide an insight into how municipal bonds can offer compelling investment potential for investors.
The paper covers the following topics:

• An explanation of the municipal bond hierarchy
• The growth of the municipal bond market; the effect of the global recession, and the introduction of Build America Bonds (BABs)
• Measuring the value of municipals
• Credit spreads, with comparisons made between municipals and treasury bonds
• Municipal bankruptcies and defaults
• The benefits that municipal bonds can potentially offer investors

Spring 2009

Authored by MacKenzie Davis and Ken Settles, co-portfolio managers of RS Global Natural Resources Fund, RS Global Natural Resources Long/Short Equity Strategy, and related institutional composites, this White Paper discusses the value in resource-related stocks and their role over the next decade. This paper will address the following questions:

• Where are we in commodity price cycles?
• What is the outlook for natural resources?
• Why invest in natural resources?
• What are the potential benefits of investing in actively managed, value-oriented fundamental
  equity strategy versus other natural resource investment vehicles?

Authored by the RS Value Team, this White Paper discusses the key tenet of the Team's investment philosophy - the significant correlation between a company's improving returns on invested capital and its stock performance over longer periods of time. The paper covers the following topics:

• The correlation between improving ROIC and company performance
• Calculating ROIC and understanding its value
• Management mind-set and capital allocation decisions 
• Finding companies with improving ROIC 
• Putting theory into practice: RS Investments' Value Process
• ROIC in action: how a change in leadership can signal ROIC improvements