Morningstar Advisor - August/September 2011 - (Page 55)

Keeping It Lean Not surprisingly, the pair at RiverPark will seek to avoid Baron’s mistakes. RiverPark launched two mutual funds in September 2010, with Rubin taking the lead manager role of RiverPark Large Growth RPXFX. While capacity issues are unlikely to afflict that fund, Rubin and Schaja pledge to close RiverPark Small Cap Growth RPSFX when assets reach between $1.5 billion and $2 billion. (With around $4 million in assets, the fund is a very long way from reaching this feat.) Instead of attempting to manage unwieldy amounts themselves, Schaja says that they’ll grow the firm by partnering with other asset managers, such as St. Louis-based Wedgewood Partners. RiverPark is also seeking SEC approval to launch actively managed ETFs. Schaja expects to do so through the partnership route initially, though the Large Growth strategy could be available in the ETF format as early as the second half of 2012 or in 2013. (RiverPark previously offered its funds as ETFs through Grail Advisors, but the agreement ended after Grail sold itself to Ameriprise in May 2010.) Baron hired a raft of analysts to accommodate growth, but Rubin emphatically says that he won’t ever build a large team of his own. “Baron was at its best when it was me and [firm founder] Ron Baron going out and visiting companies,” he says. At RiverPark, Rubin and cohort Conrad van Tienhoven, a former Baron analyst with whom he worked closely, meet with company managements and use a lean supporting cast to back them up. This group includes a former reporter, who provides on-the-ground research, and an accounting specialist, who helps build financial models. An army of analysts with industry specialties, Rubin argues, creates pressure to hold stocks across all sectors to justify its existence. Rubin says that he has the flexibility to direct his Spartan staff toward wherever he and van Tienhoven sniff out opportunities. Baron’s First Analyst a stint as a Smith Barney analyst covering emerging-growth stocks, where he grew disenchanted with the broker’s fixation on quarterly earnings. If a company fell short of its earnings expectations by a whisker, Rubin’s boss would press him to downgrade its stock, even if its long-term prospects remained strong. But these sorts of names were fodder for one client: Ron Baron, a small-cap growth investor with a long-term approach. Baron asked Rubin to join his firm as its first analyst. Early on, Rubin cut his teeth covering retail, gaming and lodging, and real estate stocks, areas that have long been the Baron firm’s bread and butter. He also built financial models and dug deep into companies’ accounting, nicely complementing Ron Baron’s softer expertise, which was to size up the quality of company managements. Baron strongly favored entrepreneurial CEOs, an affection Rubin embraced as well. “I don’t like professional managers, but I like entrepreneurs,” he says. Baron also helped solidify Rubin’s belief in “time-horizon arbitrage”—the idea that a long time horizon gives investors an edge. Much of Wall Street obsesses over near-term factors, enabling longer-term investors to profit from opportunities that the competition has yet to notice. Just as at Baron, Rubin and van Tienhoven build detailed financial models projecting companies’ revenues and earnings five years into the future. Such perspective enables the managers to stick with stocks when they fall from favor. Take the top holding of the Large Growth fund, Equinix EQIX, which operates data centers for companies around the globe. Last October, the company announced its revenues would slightly fall short of Wall Street expectations in the coming quarter, leading to a big drop in its share price. Yet earnings still topped investor estimates, and the revenue shortfall stemmed from one-time items. Rubin and van Tienhoven still believed that the company’s long-term prospects remained strong, citing data indicating that demand for data centers was twice as high as supply in the United States and even higher abroad. They pointed out that two competitors sold at a substantial premium to Equinix’s valuation, validating their conviction the stock was mispriced. Big Themes Top-down considerations also drove the managers to Equinix. They don’t attempt to predict macroeconomic factors like interest rates and GDP growth. But they identify “megatrends,” (such as the explosion of data and Internet use) translate these trends into investment themes, and look for companies poised to benefit. With data-storage needs increasing rapidly, users increasingly find it cheaper and more convenient to store data in centralized warehouses, accessible anywhere there’s an Internet connection, than on their own hardware—a heady tailwind for data-storage providers like Equinix. The managers don’t bet big on any one stock. Rubin expects Large Growth to hold between 40 and 60 stocks, making it relatively compact but not extremely concentrated. (The average large-growth fund has about 100 positions.) No single position soaks up more than 5% of assets. Rubin doesn’t formally bind the fund’s sector exposure, though he won’t invest more than 15% of the portfolio in any one theme. These constraints are loose enough to give Rubin plenty of room to distinguish Large Growth from the competition. While top-10 holdings Apple AAPL and Google GOOG are commonplace in large-growth portfolios, others, such as Equinix and Dollar Tree Stores DLTR, aren’t. In fact, no other fund in the category has higher stakes in the stocks. These aren’t isolated examples, either. In fact, Rubin’s portfolio is notably different than those of his rivals or major growth benchmarks. Large Growth’s active share, a measure of portfolio overlap, versus the Russell 1000 Growth Index clocked in at 81%, meaning just 19% of its holdings matched the bogy’s. There’s no doubting Rubin’s predilection for This isn’t to say Baron didn’t leave a positive mark. Rubin joined the firm in 1995 after MorningstarAdvisor.com 55 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011