Objective and strategy
The fund is seeking high current income and capital appreciation consistent with the preservation of capital. The managers invest in “money good” securities; that is, in securities where the underlying strength of the issuer is great enough that “the risk of loss of principal due to permanent impairment is minimal.” It can invest in both investment grade and non-investment grade securities depending on market conditions and opportunities. They can also invest in non-US debt and in equities. The manager does not seek the highest available return; he will not “reach for returns” at the risk of loss of capital.
Cohanzick Management will succeed RiverPark Advisors, LLC as the fund’s adviser, likely in late April 2023. RiverPark was formed in 2009 by former executives of Baron Asset Management. They advise, directly or through the selection of sub-advisers, the six RiverPark funds. Cohanzick Management, LLC was established in August 1996 by David Sherman and focuses on high yield, investment grade, and opportunistic corporate credit, as well as event-driven and value equities. Mr. Sherman founded the CrossingBridge affiliate in 2016. The firm advises the four CrossingBridge funds, with RSIVX slated to become their fifth. As of 2/28/23, assets under management for Cohanzick and affiliates were in excess of $2.5 billion.
David K. Sherman.
Mr. Sherman is the Founder, President, and Senior Portfolio Manager of Cohanzick Management, LLC. Mr. Sherman has 30+ years of investment management experience. Prior to establishing Cohanzick, Mr. Sherman was actively involved as a senior executive in Leucadia National Corporation’s corporate investments and acquisitions and was Treasurer of the holding company’s insurance operations. Mr. Sherman holds a B.S. from Washington University. He reports “an odd affection” for the Philadelphia Eagles. (More properly known as “the Iggles.”)
Strategy capacity and closure
The strategy has a capacity of about $2 billion, but its execution requires that the fund remain “nimble and small.” As a result, management will consider asset levels and fund flows carefully as they move in the vicinity of their cap.
Management’s stake in the fund
Mr. Sherman has invested between $10,000 – $50,000 in the fund, but he’s also the principal owner of Cohanzick and has invested over $100,000 in his other RiverPark charge, Short Term High Yield (RPHYX / RPHIX).
October 1, 2013
$1,000 minimum initial investment for retail shares.
1.34% for Investor shares, on assets of $243 million (as of March 2023). The Institutional shares charge 1.09%, and the strategy overall, including accounts separate from the fund, holds $596 million.
RiverPark Strategic Income has a simple philosophy, an understandable strategy, and a hard-to-explain portfolio. And it meets a need. The combination is pretty compelling.
The philosophy: don’t get greedy. After a quarter century of researching and investing in distressed, high-yield, and special situations fixed income securities, Mr. Sherman has concluded that he can either aspire to make 7% with minimal risk of permanent loss, or he could shoot for substantially higher returns at the risk of losing your money. He has consistently and adamantly chosen the former.
The strategy: invest in “money good” fixed-income securities. “Money good” securities are where the manager is very sure (very, very sure) that he’s going to get 100% of his principal and interest back, no matter what happens. That means 100% if the market tanks. And it means a bit more than 100% if the issuer goes bankrupt since he’ll invest in companies whose assets are sufficient that, even in bankruptcy, creditors will eventually receive their principal plus their interest, plus their interest on their interest.
Such securities take a fair amount of time to ferret out and might occur in relatively limited quantities so that some of the biggest funds simply cannot pursue them. But, once found, they generate an annuity-like stream of income for the fund regardless of market conditions.
The portfolio: in general, the fund is apt to dwell somewhere near the border of short- and intermediate-term bonds. When other investors flock toward short-term bonds, they might find greater value in slightly longer durations. That was the case in 2013 when Mr. Sherman found greater value in 3- to 5-year issues. In general, though, the portfolio has a short duration which reflects his insistence on money-good investments.
The manager has a great deal of flexibility in investing the fund’s assets and often finds “orphaned” issues or other special situations which are difficult to classify. In general, there are six broad categories that capture the fund’s investments. They are:
- Short Term High Yield overlap – securities that are also holdings in the ultra-conservative RiverPark Short Term High Yield Fund. That stock of “dry powder” sits at around 30% of the portfolio.
- Buy and hold – securities that hold limited credit risk, provide above-market yields, and might reasonably be held to redemption.
- Priority-based – securities from issuers who are in distress but which would be paid off in full even if the issue were to go bankrupt. Most investors would instinctively avoid such issues, but Mr. Sherman argues that they’re often priced at a discount and are sufficiently senior in the capital structure that they’re safe so long as an investor is willing to wait out the bankruptcy process in exchange for receiving full recompense. An investor can, he says, “get paid a lot of money for your willingness to go through the process.” Cohanzick calls these investments “above-the-fray securities of dented credits.”
- Off the beaten path – securities that are not widely followed and/or are less liquid. These might well be issues too small or too inconvenient for a manager responsible for billions or tens of billions of assets but attractive to a smaller fund.
- Rate expectations – securities that present opportunities because of rising or falling interest rates. This category would include traditional floating rate securities and opportunities that present themselves because of a difference between a security’s yield to maturity and yield to worst.
- Other – which is all of the … other stuff. Leveraged loans, highlighted in his March 2023 investor call, might represent this group.
Over the past 40 years, a vanilla “core bond” portfolio generated 6.1% annually and a standard deviation of 4.8%. In the same period, inflation was a meek 2.8%. As a result, you could pretty much bet the farm on inflation-topping gains. Interest rates were dropping steadily and almost relentlessly from their highs around 1980. Inflation was tame and occasionally negative.
Those days are gone. While nostalgia is understandable, it’s a poor basis for portfolio construction. Over the past decade, as markets became turbulent, the hundreds of funds in Morningstar’s “core bond” category returned only 1.2% annually. In 2022, they lost 13.3%. With a Fed mantra of “higher for longer,” asset allocators such as GMO and Research Associates project real returns well under 2% over the remainder of this decade. That’s a problem.
Fortunately, RiverPark does not rely on the health of the investment-grade bond market for its returns.
Risk characteristics since April 2014 (a near-inception date)
|Correlation to bonds||Downside capture||Correlation to SP500||Downside capture||Sharpe ratio RSIIX||Bond market Sharpe||High yield Sharpe|
The low correlation tells you that returns are not being driven by the same forces that drive the investment-grade bond universe (which is a good thing) or the stock universe. The fund is making its money issue by issue, driven by the manager’s ability to identify and acquire mispriced securities and hold them to maturity. His skill at doing so is reflected in a Sharpe ratio – a measure of risk-adjusted returns -that’s more than four times higher than the broad bond market’s and more than 50% higher than the high yield market’s.
Morningstar recognizes Strategic Income as a five-star fund. Many funds use the name “strategic income” to signal their independence and flexibility, which led us to benchmark RSIIX against them. Over the three dozen Strategic Income funds with a nine-year record, RiverPark finishes in the top five for top returns and risk-adjusted returns.
In all honesty, about 80% of all mutual funds could shut their doors today and not be missed. They thrive by never being bad enough to dump nominally active funds, whose strategy and portfolio are barely distinguishable from an index. The mission of the Observer is to help identify the small, thoughtful, disciplined, active funds whose existence actually matters.
David Sherman runs a half dozen such funds. His strategies are labor-intensive, consistent, thoughtful, disciplined, and profitable. He has a clear commitment to performance over asset gathering and to caution over impulse. His view of the immediate future is balanced.
Although the market is not necessarily cheap, it is also not expensive. Opportunities will arise from uncertainty, volatility, the flow of funds, and a “day of reckoning” among borrowers. We continue to subscribe to many of the themes we have communicated over the past year. We are optimistic with respect to future absolute performance. That said, we have our work cut out for us in 2023.
Folks navigating the question “what makes sense in fixed-income investing these days?” owe it to themselves to learn more about RSIVX.
While the Observer has neither a stake in nor a business relationship with either RiverPark or Cohanzick, both individual members of the Observer staff and the Observer collectively have invested in RPHYX and/or RSIVX.