This profile has been updated. Find the new profile here.
The fund seeks high current income and capital appreciation consistent with the preservation of capital, and is looking for yields that are better than those available via traditional money market and short term bond funds. They invest primarily in high yield bonds with an effective maturity of less than three years but can also have money in short term debt, preferred stock, convertible bonds, and fixed- or floating-rate bank loans.
RiverPark Advisors, LLC. Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009. RiverPark oversees the six RiverPark funds, though other firms manage three of them. RiverPark Capital Management runs separate accounts and partnerships. Collectively, they have $567 million in assets under management, as of July 31, 2012.
David Sherman, founder and owner of Cohanzick Management of Pleasantville (think Reader’s Digest), NY. Cohanzick manages separate accounts and partnerships. The firm has more than $320 million in assets under management. Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they’ll use with this fund. He currently invests about $100 million in this style, between the fund and his separate accounts. Before founding Cohanzick, Mr. Sherman worked for Leucadia National Corporation and its subsidiaries. From 1992 – 1996, he oversaw Leucadia’s insurance companies’ investment portfolios. All told, he has over 23 years of experience investing in high yield and distressed securities. He’s assisted by three other investment professionals.
Management’s Stake in the Fund
Mr. Sherman has over $1 million invested in the fund. At the time of our first profile (September 2011), folks associated with RiverPark or Cohanzick had nearly $10 million in the fund. In addition, 75% of Cohanzick is owned by its employees.
September 30, 2010.
1.25% after waivers on $197 million in assets (as of September 2012). The prospectus reports that the actual cost of operation is 2.65% with RiverPark underwriting everything above 1.25%. Mr. Schaja, RiverPark’s president, says that the fund is very near the break-even point.
There’s also a 2% redemption fee on shares held under one month.
Our original analysis, posted September, 2011, appears just below this update. Depending on your familiarity with the fund’s strategy and its relationship to other cash management vehicles, you might choose to read or review that analysis first.
|2011 returns: 3.86%2012 returns, through 9/28: 3.34%|
|Asset growth: about $180 million in 12 months, from $20 million|
|People are starting to catch on to RPHYX’s discrete and substantial charms. Both the fund’s name and Morningstar’s assignment of it to the “high yield” peer group threw off some potential investors. To be clear: this is nota high yield bond fund in any sense that you’d recognize. As I explain below in our original commentary, this is a conservative cash-management fund which is able to exploit pieces of the high yield market to generate substantial returns with minimal volatility.In a September 2012 conference call with Observer readers, Mr. Sherman made it clear that it’s “absolutely possible” for the fund to lose money in the very short term, but for folks with an investment time horizon of more than three months, the risks are very small.Beyond that, it’s worth noting that:
This continues to strike me as a compelling opportunity for conservative investors or those with short time horizons to earn returns well in excess of the rate of inflation with, so far as we can determine, minimal downside. I bought shares of RPHYX two weeks after publishing my original review of them in September 2011 and continue adding to that account.
The good folks at Cohanzick are looking to construct a profitable alternative to traditional money management funds. The case for seeking an alternative is compelling. Money market funds have negative real returns, and will continue to have them for years ahead. As of June 28 2011, Vanguard Prime Money Market Fund (VMMXX) has an annualized yield of 0.04%. Fidelity Money Market Fund (SPRXX) yields 0.01%. TIAA-CREF Money Market (TIRXX) yields 0.00%. If you had put $1 million in Vanguard a year ago, you’d have made $400 before taxes. You might be tempted to say “that’s better than nothing,” but it isn’t. The most recent estimate of year over year inflation (released by the Bureau of Labor Statistics, June 15 2011) is 3.6%, which means that your ultra-safe million dollar account lost $35,600 in purchasing power. The “rush to safety” has kept the yield on short term T-bills at (or, egads, below) zero. Unless the U.S. economy strengths enough to embolden the Fed to raise interest rates (likely by a quarter point at a time), those negative returns may last through the next presidential election.
That’s compounded by rising, largely undisclosed risks that those money market funds are taking. The problem for money market managers is that their expense ratios often exceed the available yield from their portfolios; that is, they’re charging more in fees than they can make for investors – at least when they rely on safe, predictable, boring investments. In consequence, money market managers are reaching (some say “groping”) for yield by buying unconventional debt. In 2007 they were buying weird asset-backed derivatives, which turned poisonous very quickly. In 2011 they’re buying the debt of European banks, banks which are often exposed to the risk of sovereign defaults from nations such as Portugal, Greece, Ireland and Spain. On whole, European banks outside of those four countries have over $2 trillion of exposure to their debt. James Grant observed in the June 3 2011 edition of Grant’s Interest Rate Observer, that the nation’s five largest money market funds (three Fidelity funds, Vanguard and BlackRock) hold an average of 41% of their assets in European debt securities.
Enter Cohanzick and the RiverPark Short Term High Yield fund. Cohanzick generally does not buy conventional short term, high yield bonds. They do something far more interesting. They buy several different types of orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers.
One type of investment is redeemed debt, or called bonds. A firm or government might have issued a high yielding ten-year bond. Now, after seven years, they’d like to buy those bonds back in order to escape the high interest payments they’ve had to make. That’s “calling” the bond, but the issuer must wait 30 days between announcing the call and actually buying back the bonds. Let’s say you’re a mutual fund manager holding a million dollars worth of a called bond that’s been yielding 5%. You’ve got a decision to make: hold on to the bond for the next 30 days – during which time it will earn you a whoppin’ $4166 – or try to sell the bond fast so you have the $1 million to redeploy. The $4166 feels like chump change, so you’d like to sell but to whom?
In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them. According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.” The buyers are a handful of hedge funds and this fund. If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another. The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility.
Redeemed debt (which represents 33% of the June 2011 portfolio) is one of five sorts of investments typical of the fund. The others include
- Corporate event driven (18% of the portfolio) purchases, the vast majority of which mature in under 60 days. This might be where an already-public corporate event will trigger an imminent call, but hasn’t yet. If, for example, one company is purchased by another, the acquired company’s bonds will all be called at the moment of the merger.
- Strategic recapitalization (10% of the portfolio), which describes a situation in which there’s the announced intention to call, but the firm has not yet undertaken the legal formalities. By way of example, Virgin Media has repeatedly announced its intention to call certain bonds in August 2011. Buying before call means that the fund has to post the original maturities (7 years) despite knowing the bond will cash out in (say) 90 days. This means that the portfolio will show some intermediate duration bonds.
- Cushion bonds (14%), a type of callable bond that sells at a premium because the issued coupon payments are above market interest rates.
- Short term maturities (25%), fixed and floating rate debt that the manager believes are “money good.”
What are the arguments in favor of RPHYX?
- It’s currently yielding 100-400 times more than a money market. While the disparity won’t always be that great, the manager believes that these sorts of assets might typically generate returns of 3.5 – 4.5% per year, which is exceedingly good.
- It features low share price volatility. The NAV is $10.01 (as of 6/29/11). It’s never been high than $10.03 or lower than $9.97. Their five separately managed accounts have almost never shown a monthly decline in value. The key risk in high-yield investing is the ability of the issuer to make payments for, say, the next decade. Do you really want to bet on Eastman Kodak’s ability to survive to 2021? With these securities, Mr. Sherman just needs to be sure that they’ll survive to next month. If he’s not sure, he doesn’t bite. And the odds are in his favor. In the case of redeemed debt, for instance, there’s been only one bankruptcy among such firms since 1985 and even then the bondholders are secured creditors in the bankruptcy proceedings.
- It offers protection against rising interest rates. Because most of the fund’s securities mature within 30-60 days, a rise in the Fed funds rate will have a negligible effect on the value of the portfolio.
- It offers experienced, shareholder-friendly management. The Cohanzick folks are deeply invested in the fund. They run $100 million in this style currently and estimate that they could run up to $1 billion. Because they’re one of the few large purchasers, they’re “a logical first call for sellers. We … know how to negotiate purchase terms.” They’ve committed to closing both their separate accounts and the fund to new investors before they reach their capacity limit.
This strikes me as a fascinating fund. It is, in the mutual fund world, utterly unique. It has competitive advantages (including “first mover” status) that later entrants won’t easily match. And it makes sense. That’s a rare and wonderful combination. Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options.
Several of us own shares in RPHYX, though the Observer has no financial stake in the fund or relationship with RiverPark. My investment in the fund, made after I read an awful lot and interviewed the manager, might well color my assessment. Caveat emptor.