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Former Baron Manager Shares Buys and Sells

Wedgewood's David Rolfe is new to mutual funds, but not investing.

Russel Kinnel, 02/15/2011

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We recently interviewed Mitch Rubin and Conrad van Tienhoven, who run RiverPark Small Cap Growth. Rubin also runs RiverPark Large Growth and the exchange-traded fund version of it--RP Growth RPX. You may recall Rubin from his days at Baron, where he ran Baron iOpportunity and comanaged Baron Growth BGRFX. He established a strong track record there, so you've got a little more to go on than with most new funds. Van Tienhoven is also a Baron alumnus, as he served as an analyst there.

Question: You have a fairly small team to run the funds. Why is that?
A: At RiverPark, we firmly believe that portfolio managers must also be the lead analysts on the stocks they own. At Baron, we believed our best years of performance were when we had a small team that constantly debated and visited our companies together. We have watched as many firms have grown large staffs of midlevel analysts and, in many cases, the portfolio managers have become managers of analysts instead of portfolio positions.

To enhance our research, we have created two new positions: one specifically around financial modeling and one for qualitative due diligence. We have a rigorous modeling process, and it is an imperative that we build our own models to study the companies we own as well as their customers and competitors to gain a full understanding of a company within an industry. We also believe that understanding the backgrounds of the key executives at our companies as well as how they and their firms are perceived by their customers, competitors, and communities is key to understanding the direction in which the firm is heading.

In addition, because RiverPark has three other portfolio-management teams that are subadvisors to our other funds--namely the Wedgewood team (that has a 19-plus-year record of researching and investing in a focused portfolio of large-cap growth stocks); the Cohanzick team (that has a 15-plus-year record of fixed-income/high-yield credit research); and the Gravity team (a value-focused investment firm whose principal worked as an analyst for us at Baron several years ago and then became a comanager at Davis Funds)--we believe that we have the infrastructure and support of a large, integrated firm while retaining the passion and attention to detail of a small, focused team.

Q: You have limited the small-cap fund to stocks with market caps below $2.5 billion. At what point does a stock's market cap become so large that you will sell it?
A: Our small-cap fund will always be a small-cap fund, and you will always find it in Morningstar's small-cap growth style box. We will only allow up to 10% of the portfolio to be invested in stocks with market caps above $2.5 billion, and stocks whose market cap appreciates to in excess of $5 billion will be sold, thus insuring that the fund will remain within the small-cap category regardless of market appreciation. We firmly believe that small-cap funds should own small-cap stocks, even if we believe that a stock whose market cap has grown beyond our range still represents a compelling investment. This is precisely why we have launched the RiverPark Large Growth Fund to be able to continue to invest in graduates of the small-cap fund.

Q: Are there other ways that your strategy today diverges from how you invested at Baron?
A: Our research process and investment strategy at RiverPark is, in many ways, a continuation of the process and strategy that Baron, with our assistance, developed in the 1990s. We continue to believe that Baron paved the way for an exciting new way to invest in small-cap growth stocks. We are, first and foremost, bottoms-up stock-pickers with a focus on companies with substantial, long-term growth opportunities. We pride ourselves on being long-term investors in these secular growth businesses and not short-term traders of stocks. As we did at Baron, we believe that one of our core strategic differences with other investors is that we study businesses with a time frame that is substantially longer than other investors as we focus on the company's prospects over the next three to five years rather than the company's stock's prospects over the next three to five days or weeks or months.

That being said, our strategy diverges from Baron in a number of key ways. First, we embrace technology companies and do not seek to limit our technology exposure only to the users and beneficiaries of technology as we did at Baron. As an emerging firm (albeit with an experienced portfolio-management team), we do not have the burden of investing many billions of dollars in small-cap stocks and therefore we have the luxury of : (a) committing to keep our fund within the small-cap style box as we will not allow the fund to experience market-cap creep; (b) limiting our ownership stake to under 5% of a firm's enterprise value, thus insuring ample liquidity to execute a rigid sell discipline; and (c) to closing our funds in order to preserve our ability to continue to invest in smaller market-cap firms (under $500 million of market cap).

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