RESEARCH BRIEF

The Case for

High-Conviction Investing
Research supports the
premise that high-conviction
active management may have
the potential for higher longterm risk-adjusted returns1
H i g h - C o n v ictio n I n v esti n g
By the N u mbers

18%

The cumulative outperformance

of large cap high-conviction funds
vs. the S&P 500 Index2

20%

The percent of assets in

high-conviction strategies3

20

The number of holdings in a portfolio

beyond which diversification benefits
are significantly diminished4

The Case For True

Active Management

In an investment arena characterized

by declining holding periods and
the increased availability of passive
investment options, the foundations
for active, long-term investing continue
to be challenged. Many investors
have exhibited a significant lack of
conviction exemplified by frequent
trading and a focus on index or
index-like investment options.

In contrast, research supports the

premise that high-conviction active
management representing the other
20% of assets under management
may have the potential for higher
long-term, risk-adjusted returns
across multiple market environments.3
High-conviction strategies may be
favorable for the following reasons:

In fact, academic research has shown

that 80% of assets under management
in mutual funds can be considered to
rely on low-conviction investment
strategies,3 meaning that most
actively managed funds do not differ
significantly from their benchmarks.
As a result, most fail to outperform.

percentage decline of the

-72% The
average holding period of a stock

Returns May Suffer From

A Lack Of Conviction

over the last 30 years

Owning fewer holdings may result

in a deeper understanding of
underlying portfolio companies

Managers can build portfolios

around their most researched and

best-understood investment ideas

Longer holding periods may allow

sufficient time for a companys intrinsic

value to be fully reflected in its stock price

T he case for H i g h - C o n v ictio n i n v esti n g

Over the past decade the majority of high-conviction funds have consistently outperformed both their benchmarks and other actively-managed
funds across market caps and U.S./non-U.S. strategies.1,2
10-Year Annualized Returns
Large Cap

Mid Cap

Small Cap

International

4%

8%

8%

8%

3.56%
3%
2.88%

6.99%

6%

2.92%

4%

2%

6.03%
4.97%

Non-High-Conviction

5.62%

2%
Russell
Midcap

Index

6%

5.62%
4% 4.70%

4%

2%
S&P 500

7.02%

6%

Russell
2000

2%

High-Conviction

Average 10-Year annualized returns among actively managed funds (12/31/01-12/31/11, inclusive of fees).2
Source: Morningstar and RS Investments, based on a proprietary analysis of over 1,000 actively managed funds across market cap and geographic ranges.
Past performance is no guarantee of future results.

877-500-2388 | www.RSinvestments.com

5.91%
5.12%

MSCI
EAFE

T h e C a s e f o r H i g h - C o n v i ct i o n I n v e s t i n g

Measuring high-conviction investments

If you believe high-conviction investing is
appropriate for you, be sure to examine
metrics that can help determine how much
value an active manager may deliver.

Characteristics that may indicate a high-conviction investment

approach include:
A fewer number of portfolio holdings1
Lower portfolio turnover1
High Active Share, indicating that a portfolios holdings differ significantly from
its benchmark6

For more information, please visit www.RSinvestments.com or contact us at 877-500-2388.

High conviction investing does not guarantee that a Fund will outperform its benchmark or achieve positive investment results.
1 High-conviction Funds are those funds within the universe that contained the fewest holdings as defined by the lowest universe quartile, and lowest turnover as defined by the lowest half of
actively-managed funds for the 10-year period ended 12/31/2011 (79 funds for large cap that average 34 holdings and up to 44% turnover, 32 funds for mid cap that average 41 holdings
and up to 41% turnover, 31 funds for small cap that average 51 holdings and up to 60% turnover, and 20 funds for international that average 53 holdings and up to 44% turnover).
2 Actively Managed Universe Methodology: Fund performance in this paper reflects fees and is for the oldest share class available. Different share classes are subject to various fees. Data sourced from
Morningstar and RS Investments. The Large Cap Universe is a broad universe of 637 actively managed large cap funds. The Mid Cap Universe is a broad universe of 256 actively managed mid cap
funds. The Small Cap Universe is a broad universe of 252 actively managed small cap funds. The International Universe is a broad universe of 165 actively managed international funds. Funds were
selected for screening by eliminating all funds labeled index funds, enhanced index funds, and funds with an average number of holdings greater than 300 for small cap, mid cap, and international, and
greater than 200 for large cap over the 10 year period. The funds contain a blend of fund styles including Value, Growth, and Blend. Large Cap measured against S&P 500 Index, Mid Cap against
Russell Midcap Index, Small Cap against Russell 2000 Index, and International against MSCI EAFE Index.
2012 Morningstar, Inc. All rights reserved.
3 Antti Petajisto. Active Share and Mutual Fund Performance, December 2010.
4 Modern portfolio theory suggests that portfolio risk, as measured by standard deviation, may be minimized by investing in as few as 20 holdings; adding more stocks does not significantly
impact risk. Standard Deviation: A statistical measurement of dispersion about the mean return of a portfolio. Standard deviation shows how widely the portfolio return varied over a specific
period. Consequently, it is often used to describe the risk or volatility of a portfolio. A higher standard deviation implies higher volatility in historical returns.
5 The average holding period of an equity security on the New York Stock Exchange fell to a record-lowseven monthsin 2010, down from an average of 25 months in 1990 and a recorded
high of 97 months in 1953, according to SG Global Strategy Research.
6 Active Share quantifies the degree of active management by comparing a specific mutual funds holdings and weightings with those of its benchmark. The more the holdings differ from the
benchmark, the higher the Active Share score. Active Share statistics for RS equity funds are avaiable at www.rsinvestments.com.

Performance quoted represents past performance and does not guarantee future results.
The investment strategy discussed does not necessarily reflect that of any RS Fund.
Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary.
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.
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.
The S&P 500 Index is an unmanaged market capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the
index, and, unlike the Fund, the index does not incur fees and expenses.
The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which consists of the 1,000 largest U.S. companies based on total market
capitalization. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Fund, it does not incur fees and expenses.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which consists of the 3,000 largest U.S. companies based on total market
capitalization. Index results assume the reinvestment of dividends paid on the stocks constituting the index. Unlike the Fund, the index does not incur fees or expenses.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets,
excluding the US and Canada. Index results assume the reinvestment of dividends paid on the stocks constituting the index.

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 877-500-2388 or visit www.RSinvestments.com.
RS Funds are distributed by RS Funds Distributor LLC, member: FINRA, SIPC.
Not a Deposit | Not FDIC or NCUA Insured | May Lose Value | No Bank or Credit Union Guarantee
2012 RS Investment Management Co. LLC.
877-500-2388 | www.RSinvestments.com

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2012-04373