What controls are in place to mitigate risk and ensure diversification?
The presence of multiple sub-advisors reflecting different investment approaches as well as the quality of the sub-advisors contribute to diversification and risk control. In addition, Litman Gregory’s monitoring of the sub-advisors and overall fund portfolio also plays a role. Litman Gregory watches for unintended concentration in specific stocks (e.g. more than one sub-advisor owning the same stock resulting in a large weighting) and also pays attention to sector weights and other portfolio-level diversification issues. If in our judgment, overlapping positions result in a level of exposure that we don’t believe is prudent for the overall fund we will step in and work with the sub-advisors to reduce the exposure. As of early 2008, this has only happened once since the 12/31/96 launch of the first Litman Gregory Masters Funds.
It is important to remember that each Litman Gregory Masters Funds is subject to equity-market risk and may at times lose more than its benchmarks or peer-group during a market decline.