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 into 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. In turn, Recommended List names are purchased in the portfolio when: a) we can clearly quantify a downside 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 value, and c) the investment augments the existing positions in the portfolio from both a risk and a return perspective. This process reflects our belief that risk is not defined as share price volatility but rather as 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 we may underperform our benchmark, but we 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 time horizon.