Monday, November 14, 2011

RS Capital Appreciation Fund - Q3 Commentary


We have come to a keen focus on high-quality growing and advantaged businesses with the benefit of years of visiting, analyzing, and investing in some of the world’s great companies. The structural, competitive, and economic “advantages” we seek in portfolio holdings are often most important during periods of economic dislocation and turmoil as they provide business owners and managers with flexibility when it is most critical. If we are correct in our assessment of these businesses and even close in our estimation of their underlying values, our long-term investment results have the opportunity to benefit from two sources of returns: growth in the value of the business and a closing of the valuation gap. We attempt to pay no more than $70 for businesses that we believe are worth $100 dollars today and are likely to be worth at least $110-$115 a year from now (and even more in subsequent years).

In our experience, “advantaged” businesses tend to benefit from…

Superior brands that allow them to protect and even expand their market positions relative to their competitors, both domestically and abroad, during tough economic times.

Scalable business models that generate high operating profit margins. This excess profitability can be used as a lever to adapt to changing market conditions across various businesses and markets.

Geographic diversity that allows them to be less dependent on the economy, politics, or currency of a single country or region.

Above average returns on the capital they employ; such businesses are generally less dependent on the capital markets to execute their businesses on a day-to-day basis.

Conservatively positioned balance sheets that allow them to be nimble when others are fearful by investing in their organic growth, making strategic and attractively-priced acquisitions, or repurchasing their own shares.

• The luxury of being able to focus more of their attention and resources on long-term opportunities while those around them are compelled to focus more on the short term.