The Masters' Select Funds Overview

Investment Philosophy

The Masters’ Select Funds’ are based on two fundamental beliefs:

First, as the Advisor, Litman/Gregory Fund Advisors believes it is possible to identify investment managers who can deliver superior long-term performance relative to their passive benchmarks and peer groups. This belief is based on Litman/Gregory’s extensive experience evaluating stock pickers and stock mutual funds on behalf of our clients.

Second, Litman/Gregory believes that at any point in time most stock pickers are not equally confident in all the stocks they hold within the diversified stock portfolios they manage. The stock picker may have exceptionally high conviction on only a small subset of stocks within a more broadly diversified portfolio. However, most stock pickers typically manage portfolios that are diversified beyond these highest conviction holdings in order to reduce risk and to facilitate the management of the larger amounts of money they oversee. Over a market cycle, Litman/Gregory believes that the performance of most skilled investment managers’ “highest confidence” stocks will exceed that of their more diversified portfolios.

The Masters' Select Concept

Each Masters’ Select Fund seeks to isolate the stock-picking skills of a group of highly regarded and experienced portfolio managers. To meet this objective, the funds are designed with both risk and return in mind, placing particular emphasis on the following factors:

• Only stock-pickers we believe to be exceptionally skilled were chosen to manage each fund’s sub-portfolio.
• Of equal importance, each stock-picker runs a very focused sub-portfolio of not more than 15 of his or her favorite stocks in four of our funds and five to seven stocks in another. We believe that most stock-pickers have an unusually high level of conviction in only a small number of stocks and that a portfolio limited to these stocks will, on average, outperform (a more diversified portfolio) over a market cycle.
• Even though each manager’s portfolio is focused, we seek ways to diversify each fund. With the Equity and International Funds, this has been achieved by including managers with differing investment styles and market cap orientations. The Value Fund incorporates managers who each take a distinctive approach to assessing companies and defining value. With the Smaller Companies and Focused Opportunities Funds, much like Equity and International, the managers use different investment approaches, though Smaller Companies focuses on the securities of small-and mid-cap companies and Focused Opportunities invests mainly in large and mid-sized U.S. companies, and some non-U.S. companies.
• Litman/Gregory believes that excessive asset growth often results in diminished performance. We have committed to close each Masters’ Select Fund to new investors at a level that we believe will preserve the managers’ ability to effectively implement the “select” concept.

Selection Criteria — What Makes a Manager a Masters’ Select Candidate?

Litman/Gregory believes that superior investment managers exhibit most of the following characteristics.

• Consistently above-average intermediate and long-term performance relative to an appropriate peer group and benchmark. Litman/Gregory measures investment manager performance against performance composites made up of other advisory firms using a similar stock-picking style and market capitalization. Litman/Gregory maintains its own database and has developed proprietary software to measure and analyze performance over various periods.
• A well defined investment process that is executed with discipline. Discipline refers to the commitment to in-depth research to support each and every decision and also an unwavering commitment to the manager’s process and circle of competency. This combination of sound process and discipline helps to minimize decision errors.
• The confidence and ability to think and act independently.
• The intellectual honesty to realize a mistake, learn from it and move on.
• The passion for stock-picking that results in the drive to work harder and more creatively in order to gain an edge.
• A focus on the job of stock-picking and portfolio management. Thus the Advisor seeks investment managers who have attempted to mitigate non-investment distractions by delegating most business management and marketing duties.

Who are the Masters'

Litman/Gregory Fund Advisors has extensive experience evaluating investment advisory firms, using the above criteria, and believes that each of the investment managers selected to participate in the funds exhibits most of the qualities mentioned above. Moreover, specific to Masters’ Select, Litman/Gregory evaluates each manager’s ability and inclination to run a concentrated portfolio and their enthusiasm for the Masters’ Select opportunity.