The Masters' Select Funds Overview

Investment Philosophy

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

First, the Funds’ investment advisor, Litman/Gregory Fund Advisors, LLC (“Litman/Gregory”) believes it is possible to identify investment managers who will deliver superior long-term performance relative to their passive benchmarks and peer groups. This belief is based on Litman/Gregory and its affiliates’ extensive experience evaluating stock pickers and mutual funds on behalf of their clients.

Second, Litman/Gregory believes 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. 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.

The Masters' Select Concept

Based on the above beliefs, each Masters’ Select Fund seeks to isolate the stock-picking skills of a group of highly regarded investment 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 Litman/Gregory believes to be exceptionally skilled are chosen to manage each of the Fund’s sub-portfolios.
• Of equal importance, each stock picker runs a very concentrated sub-portfolio of not more than 15 of his or her “highest conviction” stocks.  In the Focused Opportunities Fund, each stock picker may own no more than seven stocks.
• Although each manager’s portfolio is concentrated, Masters’ Select seeks to manage risk partly by building diversification into each Fund.
  • With the Equity and International Funds, Litman/Gregory has sought to achieve this by including managers with differing investment styles and market cap orientations.
  • With the Smaller Companies Fund, much like Equity and International, Litman/Gregory has brought together managers who use different investment approaches, though each focuses on the securities of smaller companies.
  • With the Value Fund, Litman/Gregory has included managers who each take a distinct approach to assessing companies and defining value. Please note that the Value Fund is classified as a “non-diversified” fund; however, its portfolio has historically met the qualifications of a “diversified” fund.
  • With the Focused Opportunities Fund, this is done by using multiple managers with diverse investment styles. However, even with this diversification, the Fund is classified as a “non-diversified” fund, as it may hold as few as 15 stocks and no more than 21 stocks. In the future, if more sub-advisors are added, the Fund could become more diversified.
• Litman/Gregory believes that excessive asset growth often results in diminished performance.  Therefore, each Masters’ Select Fund may close to new investors at a level that Litman/Gregory believes will preserve each manager’s ability to effectively implement the “select” concept.  If more sub-advisors are added to a particular Fund, the Fund’s closing asset level may be increased.

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 benchmark index and peer group. 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 to an unwavering commitment to the manager’s process and circle of competence. This combination of sound process and discipline helps to minimize decision errors by the manager.
• The confidence and ability to think and act independently.
• The intellectual honesty to realize a mistake, learn from it and move on.
• A 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. Litman/Gregory seeks investment managers who have attempted to mitigate non-investment distractions by delegating most business management and marketing duties.

Litman/Gregory and its affiliated companies have extensive experience evaluating investment advisory firms using the above criteria, and they believe that each of the investment managers selected for 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 his or her enthusiasm for the Masters’ Select opportunity.