Interview ith RiverPark Funds' Portfolio Manager Mitch Rubin

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RiverPark Funds

Q&As and Interviews

Interview ith RiverPark Funds' Portfolio Manager Mitch Rubin

Shauna O'Brien Jan 29, 2015

Insights from Mitch Rubin

Mitch Rubin: While we always add a few new stocks each year, we find that most of the opportunity for the Fund comes from within. We’ve been pleased with the fundamental performance of the vast majority of the businesses within our Fund: most posted double-digit earnings growth; many raised their dividend payouts, and accumulated more cash. Some of our holdings, like Apple, Visa, Equinix, SBA Communications, and American Tower (all long-term holdings) also posted significant gains for the year.

The opportunity we see is that many of our positions, despite excellent earnings years, simply did not advance as much as their earnings. You actually mentioned MasterCard as seeing decent gains. The company did have excellent earnings gains (EPS is expected to grow 18% this year, in-line with the past three years, and in-line with expectations for the next few years). Yet, its shares didn’t have a great year, up only 5% (as of December 11), so its shares are now cheaper than they were at the beginning of the year. In addition, our holdings in energy and in casino gaming have been under pressure this year. These were smaller holdings that we have taken advantage of the sell offs and have added to including Southwestern and Cabot in natural gas, EOG in oil and Schlumberger in energy services and Las Vegas Sands, Wynn and Melco Crown in casinos.

In addition, 10 of our larger positions (including such names as Google, Priceline and Monsanto), representing almost 35% of the portfolio, only advanced an average 3% for the year (as of December 11). This was despite average earnings growth of 17% for the year and a double digit market advance. Simply put, these stocks, which we have owned for years, did not perform as well as their earnings. As a result, while the market got more expensive, many of our holdings, which are growing their earnings 15%-20% per year, became cheaper and trade at about the market multiple. These are the opportunities we see. What areas of the market are you shying away from and what are the reasons for your concern?

Mitch Rubin: We are less focused on the traditional market sectors than we are on secular growth opportunities. The portfolio of companies in which we are invested is a select group across many of the market sectors whose growth is tied much more to a particular secular theme rather than the market as a whole or an industry sector. These included mobile computing, Internet and e-commerce, cloud computing, alternative asset management, US natural gas, electronic payments, the recovery of the US housing market, globally relevant consumer brands, global energy services, etc. These themes are where our fund is focused on investment, and then we focus on the sunrise businesses within them. The things that we avoid include such things as utilities, complex financial firms, highly levered companies and industries in which there is very little top line growth.

While we think the next few years are probably going to be a fine time to own equities, we do observe that, with the market multiple increasing from 10 times to 16 times, the market has been more multiple expansion-driven than earnings driven the past couple of years. Since it is less reasonable to expect multiple expansion going forward, the market will probably be more focused on individual company earnings. We believe that companies with double digit growth and reasonable valuations will have a great opportunity to outperform in the next few years. So we continue to focus on our sunrise businesses that are growing 15%-20% per year and trading at about the market multiple, avoiding low-growth companies that experienced significant multiple expansion and now have relatively high valuations. In taking a deeper look at the RiverPark Long/Short Opportunity Instl fund (RLSIX), can you explain the process and approach behind a long/short strategy?

Mitch Rubin: In finding the sunrise companies that are the most positively impacted from our long-term secular themes, we naturally find sunset companies that are the most negatively impacted as well. Within this universe of companies that we believe will struggle to adapt their businesses, we drill down to find the companies that have lost or are losing their competitive advantage and have management teams that whose strategic focus is misplaced. Simply, we short the Kodaks, Radio Shacks, and J.C. Pennys of the world.

So, with our secular-theme investing, we are investing in the sunrise companies with the tailwinds and against the old-line companies facing headwinds. As the secular trends unfold over the long-term, we would expect our results to benefit from both the positive and the negative trends. Being short most anything in the markets has been a recipe for disaster in years past. What are you seeing from the short side that you are betting on currently?

Mitch Rubin: The past couple of years have been difficult for shorting as the low interest rate environment and very strong equity markets have been rising tides that have lifted most boats. Many companies whose fundamentals have been struggling have nevertheless seen a good bit of multiple expansion in the “hope” that they can turn their businesses around through cost cutting or financial engineering. While it has often been painful, our strategy has been to maintain a diversified short book of companies with deteriorating fundamentals for whom the secular trends have worsened, especially if their stock prices have responded positively to cost cutting or other short term fixes.

For example, electronics retailer Best Buy trades at about the market multiple, yet its revenue and gross margins have shrunk. The company has recently offset these trends by massive cost cutting. Cost cutting is a short-term and temporary salve. Selling electronics has simply gotten more competitive and more price transparent thanks to the Internet. This massive headwind isn’t temporary.

Similarly, prepaid debit card issuer Green Dot’s business has struggled: its revenue growth has slowed and margins have declined. Yet, its shares trade at about the market multiple. While prepaid debit cards are a growing industry, the industry is becoming more competitive (particularly American Express moving in), moving towards lower fees (which have been quite high), and more transparency (which has been opaque), and sells to low-income consumers. These are difficult trends for any company, particularly one like Green Dot, whose major customer Wal-Mart (at half of revenue) is particularly tough on its vendors. What macro factors do you use in forming your investment strategy?

Mitch Rubin: We don’t focus much on macro factors as we are investing for 4-6 year time frames in secular growth businesses with the assumption of continued economic cyclicality. The portfolio of companies in which we are invested is a select group whose growth is tied much more to their particular industry tailwind than the market as a whole. That said, as we look at the future from here, we see a market that should expect higher interest rates, continued volatility in energy prices and a continued complex international landscape. Each of these is a factor in considering the earnings potential of our companies. What are the main themes investors should pay attention to as we head into 2015?

Mitch Rubin: We think the quality of a company’s earnings and balance sheet will be critical as we head into 2015. While many stocks have participated in the historic market increases of the last 3-4 years, it is hard to plan for continued multiple expansion or for interest rates that stay low forever. All but 40 stocks in the S&P 500 increased in 2013. While more stocks declined this year, 2014 is still shaping up to be an above average return year driven by greater stock price gains than earning growth. Since it is less reasonable to expect multiple expansion going forward and interest rates are probably biased higher, we believe that quality earnings and high free cash flow growth will be increasingly valuable.

The Bottom Line

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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