May 2017 IssueLong scroll reading

RiverPark Short Term High Yield Fund (RPHYX/RPHIX)

By David Snowball

This is an update of a profile first published in July 2011.

Objective

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 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. 

Adviser

RiverPark Advisers. Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009. RiverPark oversees the eight RiverPark funds, a number of which are designed to bring an affordable version of successful hedge fund strategies to “the mass affluent.” A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships. 

Manager

David Sherman, founder and owner of Cohanzick Management of Pleasantville, NY. Cohanzick manages separate accounts and partnerships including Cohanzick Nexus, LP. The firm has more than $1.8 billion in assets under management. Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they use with this fund. 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 25 years of experience investing in high yield and distressed securities. He’s assisted by six other investment professionals.

Management’s Stake in the Fund

Mr. Sherman and the Cohanzick entities have invested over $5 million in the fund. The fund’s directors and officers have invested in excess of $2 million in the fund.

Opening date

September 30, 2010.

Minimum investment

$1,000, though the fund is only available for purchase by existing shareholders or through direct purchases from RiverPark.

Expense ratio

1.08% (0.84% for the institutional class) after waivers on $815 million in assets.

Comments

We have written extensively, in 2011 and 2012, about the portfolio strategy behind RiverPark Short-Term High Yield. We were impressed and, eventually, so too were other investors. As a result, the fund, which has a distinctly capacity-constrained strategy, closed to new investors in 2013. In 2017, the managers reached agreement with large investors to transfer over $100 million into a slightly-different strategy managed by Cohanzick, which gave them room to re-open the fund. The reopening occurred on April 17, 2017, is limited to individuals willing to invest directly through RiverPark, and it is not likely to remain reopen for all that long.

We believe you should act now to determine whether the fund is appropriate to your investment needs. Rather than recap the entire strategy (see our original profile for that information), we will offer six quick observations.

The strategy is designed to generate 200-400 bps more than a one-year US Treasury. That implies returns clustered in the range of 3.05 – 4.05% annually. Actual returns have been between 3.0 – 4.5% in five of the fund’s six full calendar years.

The strategy focuses on a unique set of orphan securities, exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers. A hallmark investment class 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. High yield bond managers then have to decide whether to hold the bond for those last 30 days and receive one last payout, or sell their shares and redeploy the money. Most  prefer the latter course and therefore these bonds have few available buyers: a handful of hedge funds and RiverPark. 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 with negligible share price volatility. Redeemed debt, which represents over 40% of the portfolio, is one of five sorts of investments Mr. Sherman pursues.

The strategy is exceedingly conservative. Mr. Sherman has always stressed the “sleep well at night” aspect of the portfolio; indeed, if he were to be hit by a bus (which, frankly, is unlikely in his corporate hometown, Pleasantville NY), 53% of the portfolio would simply rollover to cash in the following 30 days, 65% would go to cash within 90 days and more than 80% would be there within six months. The fund’s maximum one-month drawdown has been 0.55% (one-tenth of what its benchmark suffered), its worst quarter was a loss of 0.29% and its worst year saw a gain of 1.22%.

The fund has grown increasingly conservative since the election. Mr. Sherman’s latest shareholder letter notes:

Over the last twelve months, the strong performance of the equity and corporate bond markets has reflected either investors’ increased appetite to take on risk or their misperception that risk has diminished … We think this misguided complacency underestimates the potential for future volatility. The “Trump Rally”, fueled by pro-business optimism, has caused the U.S. stock market to break out to all-time highs since November. In addition, high yield credit spreads have narrowed … This complacency sets the stage for sharp “knee-jerk” reactions in the markets when the unexpected happens. Call us skeptical.

That skepticism has led to a more conservative positioning, with over half the portfolio scheduled to rollover to cash within 30%.

The fund has an amazing risk-return profile. Morningstar rates it as a one-star fund because they are (inappropriately) benchmarking it against a high-yield peer group that has little in common with the fund or its strategy. Here’s a quick recap of findings that give you a better sense of its profile. RPHYX has the highest five-year Sharpe ratio (4.53, per Lipper) of any mutual fund or ETF in existence. No other conventional fund or ETF is even above 4. It has a beta of 0.14 against its benchmark BofA Merrill Lynch 0-3 Year U.S. High Yield Index, Excluding Financials index and it has a negative downside capture ratio. That is, when its benchmark falls, the fund tends to rise. In the months when the index falls, RiverPark averages a gain of 0.03%.

Bottom Line

We repeat our original conclusion from 2011: “this strikes us 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.” Mr. Sherman even makes a special offer for the intrigued: “Feel free to call me or Morty Schaja at RiverPark should you wish to discuss the matter further.” Several of our readers have done just that and have reported that they were speaking to RiverPark’s CEO within a minute of calling.

Financial disclosure: Several of us have invested in that fund in our personal portfolios, in my case since 2011, though the Observer has no financial stake in the fund or relationship with RiverPark. That commitment, made after I read an awful lot and interviewed Mr. Sherman, might well color my assessment. Caveat emptor.

Fund website

RiverPark Short Term High Yield

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.