Portfolio Construction and Management

What level of portfolio turnover is typical for a Litman Gregory Masters Funds?

This varies widely based on the fund and circumstances. Some of the Litman Gregory Masters Funds managers have lower turnover than others. Sometimes market volatility impacts turnover either because rapid stock price spikes and/or dips change the relative appeal of certain stocks, or because in a declining market tax-motivated trading can increase turnover.

Litman Gregory Masters Equity’s annual turnover has ranged between 35% and 102% over the five years ended 12/31/08.

Are the funds run in a tax-aware manner?

The funds are not tax managed but we are tax-aware. Litman Gregory tracks individual tax lots and brings tax lot selling opportunities to each sub-advisor’s attention. Tax strategies that have been employed include:

Is there a conflict of interest for a manager to select stocks for both their own fund and for Litman Gregory Masters Funds?

No. If they are buying or selling stocks for their own fund simultaneous to buys or sells for Litman Gregory Masters Funds, they would apply an allocation process that would be fairly applied. However, because of the high conviction level required in a Litman Gregory Masters Funds portfolio, there may be times when the sub-advisor sells a holding out of Litman Gregory Masters Funds that still qualifies as a hold in a more broadly diversified portfolio.

Do the managers work together in managing the fund portfolio?

They do not. Each sub-advisor works autonomously on their portion of the overall Litman Gregory Masters Funds. The overall fund comprises the combination of each individual sub-portfolio.

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.

How often do you rebalance back to the target allocations for each manager?

The actual allocations will naturally drift as a result of each manager’s individual performance, so we allocate each day’s cash inflows based on how far each sub-advisor is from their target allocations. Thus, the sub-advisor who is furthest below his or her allocation will get the most money; the sub-advisor who is next furthest below will get the second largest amount and so forth.

How do you determine how much to allocate to each manager? Do you change the percentages?

Typically the allocations are equal. However, our desire to limit small-cap exposure at the overall fund level may lead us to allocate less to dedicated small-cap managers in certain funds. And our desire to maintain a style-neutral portfolio in certain funds may also lead the allocations to specific sub-advisors to differ.