RiverPark's founders apply the lessons they learned at Baron Capital to their own slate of funds.
To get back to your roots, sometimes you have to uproot yourself first.
That is what Morty Schaja and Mitch Rubin did. The Baron Capital expatriates founded RiverPark in 2006 believing that their longtime former employer had become too big for its breeches. By the time they left, Baron had amassed more than $15 billion in assets--a tremendous sum for the small-cap-focused firm.
Baron had become large for good reason. Flagship offering Baron Growth BGRFX boasted a sterling long-term record and sailed through the early-2000s bear market relatively unscathed. However, such success changed the firm. Unable to invest in smaller names as easily, its portfolios became less concentrated and increasingly reliant on mid-caps. The small-cap funds were already closed to new investors, but Schaja, then Baron's president and COO, says he urged firm founder Ron Baron to turn away money from existing shareholders as well. Baron refused, and assets swelled further.
"What had made Baron special no longer was the case," Schaja says.
In March 2006, both Schaja, now RiverPark's CEO, and Rubin jumped ship. (We asked Baron for a comment, but as of our publication deadline, we hadn't heard from the firm.) Between 2006 and the recent launch of their retail offerings, the pair operated a hedge fund, which they fortuitously shut down before 2008's autumn credit crisis.
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 exchange-traded funds. 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
This isn't to say Baron didn't leave a positive mark. Rubin joined the firm in 1995 after 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.