June 2013
Untapped Opportunity in U.S. Mid-Caps
Stephen Kylander, Sr. Portfolio ManagerRBC Global Asset Management (U.S.) Inc.
Advisor Use Only
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Why Should Investors Look at U.S. Mid-Cap Equities? They’ve Been the Winning Bet Over the Last 20 Years ended Feb 2013
US Mid-Cap Value11.1%
US Mid-Cap10.7%
US Large-Cap8.5%
Growth of $10,000
US Mid-Cap Growth9.0%
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How Big is the Investable Pond Outside of the S&P 500 Index? There are 6x More Small and Mid-Cap Stocks
Source: Wilshire and Associates, Apr 2013
Approximately 3600 Investable U.S. Equities
S&P 500 Index14%
Small and Mid-Caps
86%
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How Big are Mid-Cap Equities? That Depends….
S&P 500 Index$13 Billion
Russell Mid-Cap Value Index$4 Billion
S&P/TSXComposite Index
$ 2 Billion
Dow Jones Industrial Average$114 Billion
Median Market Cap of Various Indices
Source: Bloomberg, Russell, Apr 2013
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Would My Clients Be Familiar with these Companies? Select Names in the U.S. Mid-Cap Benchmark
Russell Mid-Cap Value Index($1 billion to $20 billion)
RBC U.S. Mid-Cap Value Equity Fund
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Consistency and Longevity
Consistency in portfolio management team, philosophy and process that has produced a long and proven track record
Investment Team Experience
Highly experienced team with uniquely diverse backgrounds
High Conviction Efficient and repeatable stock selection based on high conviction identifies superior opportunities
Disciplined Approach Strong valuation discipline, combined with diversification and limits on individual stocks and sectors
Organizational Strength Partnership structure blends entrepreneurial culture and agility with the strength and resources of a large financial institution
Mid Cap Value EquityWhat Sets Us Apart
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Investment Team
Investment experience and number of professionals as of 3.31.13
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Investment Philosophy
Aim to achieve superior investment returns and risk control over the long-term through stock selection based on:
• Attractive business fundamentals• Opportunity for improvement• Strong finances• Strong management• Low valuation
Risk can be controlled by focusing on companies with low valuations, which also exhibit acceptable returns on capital free cash flow and financial strength
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Mid Cap Universe• More than 1,000 companies• New purchases are concentrated in companies with
market caps between $1 billion and $12 billion
Intelligence Pool• Team conducts extensive meetings with
company managements• Broad industry contacts including portfolio
holdings and their competitors
Quantitative Screens• Relative valuation multiples versus
universe, peers, and history• Characteristics: ROE, growth; debt/cap;
operating margins• Attribution analysis
Research Pool (200-250 Companies)• Fundamentals: industry dynamics, competitive advantage,
opportunity for improvement, downside scenario• Valuation: discounted cash flow and take out/liquidation
analysis• Management Updates: long-term goals and current
execution• Candidate Vetting: final evaluation of fundamental research,
valuation and risk
Investment Process
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Portfolio construction is primarily driven by stock selection
• Well-diversified portfolios holding 55-75 issues
• Majority of returns sought from stock selection with emphasis on Best Ideas
• Maximum in a single security: 5%
• Maximum in a single sector: 2x Benchmark Russell Midcap Value Index or 20%
• Initiate/add to positions on positive fundamentals and low valuation
• Exit/Reduce to Positions on Fundamental Deterioration and Full Valuation
• Exit Positions > $20 Billion in Capitalization
• Fully invested in equities – no market timing
Portfolio Construction
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RBC Mid-Cap Value
Equity Fund
Russell Mid-Cap Value Index
Profitability1-Year Return on Equity1-Year Return on Assets
12.3%5.1%
10.0%4.3%
FundamentalsEPS Growth (Trailing 5 Years)Long-Term Future EPS Growth RateEPS Growth (Forward 12 Months)
7.6%12.0%9.9%
3.1%9.4%6.3%
ValuationPrice/Earnings (Forward 12 Months)Price/Earnings to Growth Ratio (FY1)Price/Sales (Trailing 12 Months)
12.0x1.1x1.3x
14.7x1.5x1.6x
Other Weighted Average Market CapNumber of Holdings (Excluding Cash)
$5.8 Billion73
$9.7 Billion562
As of 3.31.13Source: FactSetSupplemental information on this page complements the Mid Cap Value Equity Composite presentation as provided in the “Performance Presentation & Disclosures” appendix to these materials.
Portfolio Characteristics
Characteristics relative to the benchmark have remained consistent over time
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19.4%
13.7% 13.8%
10.0%7.5%
10.1%
1.2%
4.2%
20.2%
11.3%
5.8%
9.4% 9.3%7.2%
10.2%
1.3%
4.9%
10.1%
30.4%
0%
5%
10%
15%
20%
25%
30%
35%
Industrials Materials Energy ConsumerDiscretionary
Health Care InformationTechnology
TelecomServices
ConsumerStaples
Utilities Financials
Mid Cap Value Equity Russell Midcap Value Index
Overweight Underweight
Portfolio Sector Weightings
As of 3.31.13Source: FactSet, Zephyr Supplemental information on this page complements the Mid Cap Value Equity Composite presentation as provided in the “Performance Presentation & Disclosures” appendix to these materials.
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Company Name% of Portfolio
(excluding cash) SectorSkyworks Solutions Inc. 4.8 Information Technology
Noble Corp. 3.5 Energy
ACCO Brands Corp. 3.3 Industrials
KKR Financial Holdings LLC 3.2 Financials
Reinsurance Group of America Inc. 2.7 Financials
Cameron International Corp. 2.5 Energy
Crown Holdings Inc. 2.5 Materials
Acacia Research Corp. 2.5 Industrials
Owens-Illinois Inc. 2.5 Materials
Unum Group 2.4 Financials
Total 29.9
As of 3.31.13 Supplemental information on this page complements the Mid Cap Value Equity Composite presentation as provided in the “Performance Presentation & Disclosures” appendix to these materials. There is no guarantee that the holdings of an actual account will always be identical to the holdings presented here. This presentation should not be construed as a recommendation to buy or sell any financial instruments. The information contained herein should not be relied upon as the sole investment-making decision.
Top Ten Holdings
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RBC GAM-US Mid-Cap Value Equity Composite Cumulative Returns
-100%
-50%
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Mid Cap Value Equity (Gross) Russell Midcap Value Index S&P 500 Index
Mid Cap Value Equity vs. Universe Since Inception through 3.31.13
Midcap Value Equity
Upside Capture 103%
Downside Capture 85%
As of 3.31.13The stated benchmark for the strategy is the Russell Midcap Value Index. The S&P 500, Russell 3000 and Russell Midcap indices are shown for illustrative purposes as representation of the broader market, but are not considered a benchmark for the strategy. Returns are presented gross of management fees and include the reinvestment of all income. All returns for periods greater than one year are shown on a cumulative basis. Inception of the performance record is 1.1.01. The Mid Cap Value Equity composite is presented as supplemental to the “Performance Presentation & Disclosures” appendix to these materials. The appendix contains additional GIPS®-required disclosures and important information regarding calculation of performance data and includes net of fees performance returns. Past performance is not a guarantee of future results.
Cumulative Return310%
190%
51%
Annualized Return
12%
9%
3%
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0.00
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Exce
ss R
etur
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)
Mid Cap Value Rolling 5 Year Excess Returns vs. Russell Midcap Value Index
0%
25%
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75%
100%
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Mid Cap Value - Gross Russell Midcap Value
Median
Perc
entil
e R
ank
RBC GAM-US Mid-Cap Value Equity Composite Rolling 5-Year Excess Returns
As of 3.31.13, unless otherwise notedSource: Zephyr StyleADVISOR, Peer group is comprised of the eVestment Alliance (eA) Mid Cap Value Equity Universe. Returns are presented gross of management fees and include the reinvestment of all income. All returns for periods greater than one year are shown on an annualized basis. Inception of the performance record is 1.1.01. The Mid Cap Value Equity composite is presented as supplemental to the “Performance Presentation & Disclosures” appendix to these materials. The appendix contains additional GIPS®-required disclosures and important information regarding calculation of performance data and includes net of fees performance returns. Past performance is not a guarantee of future results. The Russell Midcap Value Index measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values.
Rolling 5 Year Peer Group Ranking(as of 3.31.13)
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16.0
31.1
17.2
8.5
13.1
17.5
33.9
17.5
7.1
11.1
15.4
27.3
16.9
5.47.6
0
5
10
15
20
25
30
35
40
YTD 1 Year 3 Years 5 Years 10 Years
Per
cent
age
(%)
RBC GAM-US Mid-Cap Value Equity Composite Russell Midcap Value Index S&P 500
As of 5.31.13Returns are presented gross of management fees and include the reinvestment of all income. All returns for periods greater than one year are shown on an annualized basis and have been rounded up. Inception of the performance record is 1.1.01. The Mid Cap Value Equity composite is presented as supplemental to the “Performance Presentation & Disclosures” appendix to these materials. The appendix contains additional GIPS®- required disclosures and important information regarding calculation of performance data and includes net of fees performance returns. Past performance is not a guarantee of future results.
RBC GAM-US Mid-Cap Value Equity Composite Annualized Returns at May 31, 2013
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Performance Presentation & Disclosures AppendixRBC GAM-US Mid-Cap Value Equity Composite as of March 31, 2013
Effective January 1, 2012, RBC Global Asset management (U.S.) Inc. changed its firm definition for purposes of complying with the Global Investment Performance Standards (GIPS). These changes are reflected historically. Under the new definition, RBC GAM-US is consolidated under RBC Global Asset Management (RBC GAM).(Performance Presentation and Disclosures continued on the next page)
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Performance Presentation & Disclosures AppendixRBC GAM-US Mid-Cap Value Equity Composite as of March 31, 2013
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Fund Information
Fund Name ADMINISTRATIVE HIGHLIGHTS
SERIES Code Trailer % MER % Industry Average MER %
RBC U.S. Mid-Cap Value Equity Fund
Front-end RBF792 1.00 2.16 2.24
Low Load RBF092 1.00 2.16 2.24
F Series RBF692 n/a 1.02 1.27
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Disclosures
This document has been provided by RBC Global Asset Management (RBC GAM Inc.) for information purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM Inc. It is not intended to provide professional advice and should not be relied upon in that regard. Information provided by RBC GAM Inc. or obtained from third parties is believed to be reliable, but has not been independently verified. We do not guarantee its accuracy or completeness and we assume no responsibility or liability for any errors or omissions. The views and opinions expressed herein are those of RBC GAM Inc. as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail.
Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For money market funds, there can be no assurances that a fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past performance may not be repeated. The amount of risk associated with any particular investment depends largely on the investor’s own circumstances. Investors should consult their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation.
This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. Phillips, Hager & North Investment Management (PH&N IM) is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North (PH&N) investment funds. RBC GAM Inc. is registered with the various securities commissions of Canada as a portfolio manager, which permits it to provide discretionary investment management services to its clients, and as an exempt market dealer which permits it to act as a dealer for prospectus exempt trades in certain circumstances. RBC GAM Inc. is also approved in the Investment Fund Manager category in Ontario and is registered as a Commodity Trading Manager in Ontario. Sky Investment Counsel Inc. (Sky), in which RBC GAM Inc. holds a substantial non-controlling interest, is the sub-adviser with respect to non-North American equity assets managed by PH&N IM, including those held in all PH&N investment funds.
RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada which includes RBC GAM Inc., RBC Global Asset Management (U.S.) Inc., RBC Alternative Asset Management Inc., and BlueBay Asset Management LLP (BlueBay), each of which is a wholly-owned subsidiary of Royal Bank of Canada (RBC) and a separate but affiliated corporate entity.
®/™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc., 2013.