Morningstar Advisor - August/September 2011 - (Page 56)

Undiscovered Manager Mitch Rubin customers, creating steadier, more-predictable earnings streams. Tech can pose a challenge to Rubin’s valuation discipline. He looks for stocks trading at reasonable price multiples, but the sector has historically traded at lofty valuations. Rubin will invest where prices appear high based on Wall Street expectations as long as they look a lot cheaper when he plugs in his own earnings estimates. For his numbers to work, he has to rightly identify companies with misunderstood growth prospects. That’s the case, Rubin says, with Apple, Large Growth’s third-largest holding. Rubin says that even with a market cap second only to Exxon Mobil XOM, Apple has room for rapid growth, explaining that its share in most of the end markets it serves remains small, especially overseas. Investors continue to underestimate the iPhone’s potential in developing markets, he argues, and he expects the iPad to dominate tablet sales. Given these prospects, he says Apple is a bargain. Rubin will have to get calls like those consistently right, as his portfolio’s valuations give him little margin of safety. Large Growth’s median holding trades at 19.4 times next year’s earnings estimates, well above 15.7 for the Russell 1000 Growth Index and 16.7 for the large-growth average. Even where Rubin correctly gauges companies’ long-term prospects, his reliance on relatively pricey stocks will likely bite in volatile markets. To be sure, Rubin’s short manager tenure says nothing about whether he can make such volatility worthwhile. His success at Baron inspires confidence, though. His first solo assignment, Baron iOpportunity BIOPX, the firm’s more-cautious answer to a tech fund, launched in March 2000. Despite the highly inauspicious launch date, Rubin acquitted himself well: Between March 2000 and February 2006, the fund returned 0.4% per year, nothing to write home about in absolute terms but a lot better than the 5.3% slide RiverPark Large Growth RPXFX $16K S&P 500 TR 13 10 7 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 suffered by the typical large-growth fund and far superior to the typical tech fund’s 15.6% plunge during the period. Rubin also led Baron’s first foray into large caps at Baron Fifth Avenue Growth BFTHX in May 2004. Between then and his March 2006 departure, Rubin returned 15.2% annually, beating the largegrowth average by 3.4%. Tiny-Asset-Base Dilemma Category Large Growth Morningstar Rating — Expense Ratio (%) 1.25* 6-Mo Anl Total Rtn (%) 4.89 Minimum Investment 6-Mo Anl TR % Rank Cat $1,000 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 64 Oct-10 *Prospectus Data as of June 30, 2011 Despite those numbers, Rubin’s young fund has evaded notice, with a minuscule $3.2 million in assets. Some advisors see this as an advantage. “Sometimes there’s a gap between investing expertise and marketing expertise,” says Jim Lebenthal of Alexander & James, a New York-based wealth-management firm. “It’s a good situation to find yourself in.” Lebenthal likes Rubin’s willingness to go off the beaten path. “With Mitch and his team, you get new, innovative ideas,” he says. The fund’s diminutive size presents a chickenand-egg dilemma, though. Joel Isaacson, founder of planning firm Joel Isaacson & Co., has known Schaja and Rubin since their days at Baron, and he’s confident in their abilities. But Issaacson says that he can’t establish a meaningful position for his clients—he says he has about $4 billion under management—without swamping the fund with money. So, Isaacson wants RiverPark to get more traction before fully diving in. (For now, he’s invested a slice of his employee profit-sharing plan in RiverPark funds.) Lebenthal shares this concern. He’s happy to be an early investor but says that he’s been putting client dollars to work slowly. Schaja and Rubin acknowledge the difficulty of attracting investors to their shop. But the pair appears passionate and happy to be rooted in their new soil. It just may take time to show that their firm’s funds can bear fruit. K Christopher Davis is a senior mutual fund analyst with Morningstar. growth stocks. More than 80% of Large Growth’s holdings land in the growth column of the Morningstar Style Box. Even so, the financial sector, typically a favorite area for value hounds, accounts for 25% of assets, far more than the 7% large-growth average and 4% for the Russell 1000 Growth Index. Rubin’s holdings are driven by big-picture trends, such as growing use of electronic payments—explaining the fund’s investments in credit and debit card issuers Visa V, MasterCard MA, and American Express AXP. Little Room for Error Meanwhile, technology also soaks up one fourth of the Large Growth fund, though that’s about 5 percentage points less than the Russell 1000 Growth Index’s weighting and the large-growth norm. Rubin steers clear of highly cyclical, commoditylike semiconductor producers, preferring service and software providers like Cognizant Technology Solutions CTSH and Salesforce.com CRM. These firms tend to sign long-term contracts with 56 Morningstar Advisor August/September 2011 http://www.Salesforce.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011