Third Quarter 2013 Mutual Fund Commentary RS Partners Fund

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1 Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 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. Returns and Attribution Detail During the third quarter of 2013, RS Partners Fund (Class A Shares) generated a return of 8.03% versus 7.59% for the benchmark Russell 2000 Value Index. 1 Stock selection in Financial Services and Energy provided the largest positive relative contributions during the quarter. An underweight to REITs, combined with strong performance from both ehealth Inc. (health insurance broker; 1.7% position at the end of the third quarter) and Euronet Worldwide, Inc. (electronic financial transaction services; 2.88% position) drove the solid outperformance in Financials. Meanwhile, Laredo Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The Fund s total gross annual operating expense ratio as of the most current prospectus for the Class A Shares is 1.49%. The performance quoted, unless otherwise indicated, does not reflect the current maximum sales charge of 4.75% that became effective on October 9, If the maximum sales charge were included, the performance stated above would be lower. Current performance may be lower or higher than performance data quoted. Performance current to the most recent month-end is available by contacting RS Investments at and is frequently updated on our website: Please refer to the most current Fund prospectus for complete details on expenses including fees and also for more information on sales charges as they do not apply in all cases and if applied are reduced for larger purchases. Performance results assume the reinvestment of dividends and capital gains. Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 1

2 Petroleum Holdings, Inc. (Permian oil producer; 2.68% position) led Energy during the quarter. Conversely, Materials & Processing and Utilities were drags on relative results. Within Materials & Processing, Compass Minerals (salt and potash producer; 2.47% position) underperformed during the quarter, as did Calpine Corporation (independent power producer; 2.75% position) within Utilities. For the year-to-date period, RS Partners Fund (Class A Shares) generated a return of 27.72% versus 23.07% for the benchmark. Stock selection in Financial Services and Producer Durables has driven positive results thus far for the year. An underweight to REITs, combined with strong performance from both Euronet Worldwide and StanCorp Financial Group (3.00% position at the end of the third quarter), led the solid performance within Financials. Meanwhile, Huntington Ingalls Industries, Inc. (ship builder; 2.64% position) and Electronics For Imaging, Inc. (printing and imaging; 2.07% position) were top performers within Producer Durables for the year. Conversely, performance within Consumer Discretionary and Materials & Processing partially offset otherwise positive relative returns for the year-to-date period. GameStop Corp. (sold during the first quarter) led the underperformance within Consumer Discretionary, while New Gold Inc. (precious metals; 0.98% position) and Compass Minerals underperformed within Materials & Processing. Select Position Review Below we review two investments, one that we fully exited during the third quarter (Covance Inc.) and another that struggled during the quarter but remains a core holding (Compass Minerals), in an effort to use tangible examples to highlight our investment process. Covance Inc. ( CVD ; 0.00% position) is one of the largest public clinical research organizations (CRO) in the world. It s a leader in providing drug development services to pharmaceutical, biotechnology and medical device companies. In short, Covance primarily furnishes outsourced R&D services to pharma and medical device companies. It also provides laboratory testing services to the chemical, agrochemical and food industries. Covance is the most diversified public CRO with roughly equal contributions to revenue coming from both early- and late-phase developments. Early-phase development includes preclinical services, toxicology, pharmaceutical chemistry and discovery services. Late-stage development includes a central laboratory service and Phase II IV clinical development. We were offered an opportunity to invest in this dominant franchise during the spring of 2012 when near-term earnings came under pressure after management decided to invest in building Covance s IT infrastructures, in an effort to drive long-term sustainable growth. Stocks often sell off when the market perceives a lack of either near-term earnings growth or catalysts. In our opinion, Wall Street underappreciated the solid fundamentals of the CRO industry and we believed Covance was going to benefit from the secular tailwind associated with increased outsourcing of R&D by pharma companies. At the time of our initiation, we estimated the CRO industry would grow at a high singledigit rate annually. Importantly, we believed Covance would grow more rapidly than the market because big pharma companies were changing their outsourcing strategy from having multiple functional service providers toward forming more strategic partnerships with top CROs that could offer a full suite of services and solutions on a global basis. We agreed with management s decision to invest in IT infrastructure to build scale for capturing future business. We believed that the IT investments would improve both efficiencies and productivity, while empowering Covance to provide differentiated offerings to its customers. Therefore, we saw an opportunity for Covance to accelerate its revenue from market growth as well as share gains, to increase operating leverage and to expand margins. We initiated a position in Covance and soon became a top shareholder. In following the company closely, we were one of the first investors to meet with the newly appointed CFO, Allison Cornell. Ultimately, management did an excellent job of executing on its business plans, and our investment thesis began playing out. Late-stage development revenue growth accelerated from 7% to 13% as Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 2

3 Covance won new businesses, while its backlog grew to an all-time high. The company's operating margin improved by over 100 basis points as revenue growth drove operating leverage. In addition, ROIC improved from 10% in 2011 to 12% in As investors took note of accelerating revenue and earnings growth and saw a more-defined path toward value creation, Covance s stock price nearly doubled in a year. With our price target having been achieved, we exited the position during the third quarter as we felt that the asymmetric risk reward relationship that once existed had diminished. In conclusion, Covance serves as an excellent example of an investment where our extended investment time horizon allowed us to focus on longterm value creation opportunities while the market was myopically focused on the short term. Compass Minerals International, Inc. ( CMP ; 2.47% position) was a negative contributor to returns during the quarter. Compass Minerals produces salt, utilized mainly for deicing roads during the winter, and sulfate of potash (SOP), used primarily as a fertilizer for high-value specialty crops (as opposed to muriate of potash [MOP] used primarily for row crops). The company is a low-cost producer of both salt and SOP due to the advantaged nature of its assets. Specifically, the company s Goderich salt mine in Ontario is one of the largest and lowest-cost salt mines in the world. The mine also benefits from being located on Lake Huron, which, given the low value-toweight ratio for salt, provides Compass with a significant advantage in terms of its cost to deliver salt to its customers in the region. In the SOP business, Compass is also a low-cost producer due to its solar evaporation ponds at the Great Salt Lake. On July 30 of this year, a Russian MOP potash producer, Uralkali, announced that it would exit the Belarussian Potash Company (BPC), a sales and marketing organization managed jointly by Uralkali and Belaruskali, and indicated that it would turn its focus to volume rather than price. For industry perspective, the specialty SOP market makes up approximately 10% of the total potash market. Following the Uralkali announcement, however, all potash-related stocks quickly moved to discount significantly lower commodity prices. Our investment in Compass is not based on a view regarding salt or potash price movements over short periods. Rather it is premised on the view that the company will be able to generate attractive rates of return by investing in expansions of its low-cost salt mine and solar evaporation ponds. While the near-term outlook for potash prices has deteriorated because of the events in Russia, the longer-term fundamentals, especially for the SOP market, have not been materially altered given that the cost of supply has not changed. Our view of the longer-term fundamentals is underpinned by our assessment of each of the company s assets and of the industry-wide cash cost of production. As a result, we took advantage of the near-term pullback in potash prices to increase our position in Compass during the quarter. Portfolio Positioning We are pleased to have outperformed our benchmark over the twelve months through September 30, We believe this has been driven by a decision to create a more balanced portfolio, thus allowing returns to be driven more consistently by stock selection, while mitigating potential macro and index risks at the portfolio level. We have used natural market volatility to establish this portfolio symmetry, finding business-specific investments in various sectors that have helped balance our overall cyclical exposure. That said, we remain underweight interest-rate-sensitive areas, such as REITs and regulated Utilities, as we see limited opportunity for further reductions in the discount rates and, as such, valuations in these sectors generally remain unattractive. From a sector perspective, we continue to believe that our Energy exposures, which have become increasingly more balanced between oil and natural gas, provide the basis for excess returns. We see changes in horizontal drilling technology, especially when combined with the existing energy infrastructure and geology in the U.S. and Canada, creating potentially significant value for cost- Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 3

4 advantaged and returns-focused companies in North America for years to come. Our efforts are focused on identifying the most capital-efficient oil and gas projects that will generate the most attractive returns longer-term, combined with management teams that are capable of managing the temporary dislocations in the market. Our intensive supply-side analysis leads us to focus our efforts on those advantaged producers with quality acreage in specific, high-quality basins namely, the Montney, Fayetteville, Marcellus and Canadian Deep basins for natural gas and the Permian and Eagle Ford for oil. In addition, we favor companies with low-cost enhanced oil recovery operations. Within the Consumer sector, we re finding interesting investment opportunities in companies that have more-defensive demand profiles (e.g., Tupperware Brands 1.70%) or those that in our view have meaningful company-specific opportunities for improvement and reinvestment that we believe are not being fully recognized by the market. Additionally, we believe there remains considerable pent-up demand in both the housing and auto sectors where aggregate spending remains well below historical averages. Within Financials, company stock prices continue to recover from the lows of the financial crisis, as capital levels have been more than replenished and businesses continue to rationalize their cost structures. However, after nearly two years of outperformance, bargains within the Financials sector are increasingly more difficult to find, owing to less-attractive valuations. We are still finding select opportunities where the recent volatility in the fixed income markets has created some price dislocation. Generally speaking, valuations for Financial stocks are approaching fair value, although they should continue to benefit from improving residential real estate fundamentals as well as a better overall economic environment. In addition, an increase in interest rates should improve net interest margins for the lenders, while also creating select opportunities in businesses that have recently come under pressure due to the perceived risks associated with higher rates. That said, we remain aware of the ongoing fiscal challenges that persist for many of the major developed nations and acknowledge the associated risks the said backdrop poses to the Financials sector. Outlook While the public sector struggles to balance budgets and deleverage, the private sector in the United States continues its slow and uneven emergence from the economic and financial imbalances of The housing market continues to recuperate, unemployment is improving and a modicum of certainty from the government could allow companies to commit to capital budgets and hiring plans that have been delayed for some time. Our financial institutions are much better capitalized and are essentially awaiting a recovery in demand. The benefits of low-cost energy provided to U.S. consumers and manufacturers as a function of low-cost natural gas reservoirs, and the ability to extend related technologies into oil and liquids, are in the early stages of being recognized and should positively impact the domestic economy over the intermediate- and longterm. From a valuation perspective, cyclical industries (where we tend to find more interesting company-specific opportunities) appear attractive relative to defensive sectors (e.g., Utilities, Staples and REITs). As contrarians, we like the fact that retail investors have fled the stock markets and large institutions have massive unfunded liabilities, which are unlikely to be met via the returns offered by the fixed income markets. There is ample data showing that holding periods of less than a year are capturing the majority of trade volumes among institutional money managers, yet it is those investments held from one to four years that are generating the most returns. Increasingly, shorter holding periods are consistent with our contention that most market participants are solving for shortterm returns, and in such an environment investors focused on long-term value creation and fundamental price/value disconnects should be able to generate reasonable risk-adjusted returns. We remain confident that our philosophy, structure and process will allow us to compete effectively in a market that we contend will be well suited to our private-equity-like approach to business analysis and valuation. We thank you, as always, for your patience and support. Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 4

5 Sincerely, RS Value Team As with all mutual funds, the value of an investment in the Fund could decline, so you could lose money. Investments in companies in natural resources industries may involve risks including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international political and economic developments. Investing in small and midsize companies can involve risks such as having less publicly available information, higher volatility, and less liquidity than in the case of larger companies. Investing in a more limited number of issuers and sectors can be subject to greater market fluctuation. 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 exchangerate 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. Any discussions of specific securities should not be considered a recommendation to buy or sell those securities. Fund holdings will vary. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, are as of September 30, 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 or visit Sector Allocation 2 Top Ten Holdings 3 (As of 9/30/13) (As of 9/30/13) Financial Services 30.66% Integrated Device Technology, Inc. 4.51% Technology 15.51% Acxiom Corp. 4.05% Producer Durables 13.95% AOL, Inc. 3.70% Materials and Processing 8.42% StanCorp Financial Group, Inc. 3.00% Energy 8.38% Torchmark Corp. 2.96% Consumer Discretionary 7.12% Peyto Exploration & Development Corp. 2.89% Utilities 5.57% Euronet Worldwide, Inc. 2.88% Health Care 3.87% Questar Corp. 2.81% Consumer Staples 1.39% Calpine Corp. 2.75% Other Securities 0.00% Laredo Petroleum Holdings, Inc. 2.68% Cash 5.14% Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 5

6 Performance (Average Annual Total Returns as of 9/30/13) Third Quarter Year 3-Year 5-Year 10-Year Since Inception 4 RS Partners Fund, Class A without sales charge 8.03% 35.04% 18.24% 12.89% 11.36% 12.49% with maximum sales charge 2.90% 28.62% 16.33% 11.80% 10.82% 12.19% Russell 2000 Value Index % 27.04% 16.57% 9.13% 9.29% 10.37% Performance returns for periods of less than one year are not annualized. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. The Fund s total gross annual operating expense ratio as of the most current prospectus for the Class A Shares is 1.49%. The performance quoted, unless otherwise indicated, does not reflect the current maximum sales charge of 4.75% that became effective on October 9, If the maximum sales charge were included, the performance stated above would be lower. Current performance may be lower or higher than performance data quoted. Performance current to the most recent month-end is available by contacting RS Investments at and is frequently updated on our website: Please refer to the most current Fund prospectus for complete details on expenses including fees and also for more information on sales charges as they do not apply in all cases and if applied are reduced for larger purchases. Performance results assume the reinvestment of dividends and capital gains. 1 The Russell 2000 Value Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 2000 Index with lower price-to-book ratios and lower forecasted growth values. (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 US 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. 2 The Fund s holdings are allocated to each sector based on their Russell classification. If a holding is not classified by Russell, it is assigned a Russell designation by RS Investments. Cash includes short-term investments and net other assets and liabilities. 3 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. 4 Class A shares inception date July 12, Distributed by: Guardian Investor Services LLC (GIS), 7 Hanover Square, New York, NY Not a Deposit Not FDIC or NCUA Insured May Lose Value No Bank or Credit Union Guarantee GIS is a member: FINRA, SIPC RS Investment Management Co. LLC R CO13Q2PF Third Quarter 2013 Mutual Fund Commentary RS Partners Fund 6