Frequently Asked Questions

The views herein are those of Litman/Gregory Fund Advisors, LLC (“Litman/Gregory”) at the time the material is written and may not be reflective of current conditions.

Masters' Select Concept
Due Diligence and Manager Selection
Portfolio Construction and Management
Communication and Disclosure
Litman/Gregory's Role
Operations
Performance
Miscellaneous

Masters’ Select Concept

What is the concept behind the Masters’ Select Funds?

Litman/Gregory created the Masters’ Select Funds with the objective of isolating the stock-picking skills of a group of highly regarded and experienced portfolio managers. To meet this objective, we designed the funds 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 fund’s sub-portfolios.
• Each stock-picker runs a very focused sub-portfolio of not more than 15 of his or her favorite stocks within each Masters’ Select Fund; the exception being the Masters’ Select Focused Opportunities Fund, in which each manager selects no more than 7 of their highest conviction ideas. 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 (their) more-diversified portfolios over a market cycle.
• While each individual manager’s portfolio is focused, we achieve broader diversification in several ways. With the Equity, International and Focused Opportunities funds we include managers with differing investment styles and market-cap orientations (the Focused Opportunities Fund is classified as non-diversified so that it may invest in a smaller range (15-21) of securities). The Value Fund incorporates managers who each take a distinctive approach to assessing companies and defining value. With the Smaller Companies Fund, much like Equity and International, the managers use different investment approaches though each focuses on the securities of smaller companies.
• Limiting the asset base of each fund is supportive of the Masters’ concept. Litman/Gregory believes that excessive asset growth can result in diminished performance. We have committed to close each Masters’ Select Fund to new shareholders at a level that we believe will preserve the managers’ ability to effectively implement the “select” concept.

What makes the Masters’ Select Funds distinctive? 

We believe it is a combination of five factors:  

• The skill of the sub-advisors;
• The mandate that each sub-advisor run a concentrated sub-portfolio of only their highest conviction ideas;
• The inherent diversification that comes from a multi-manager approach;
• Litman/Gregory’s responsibility for due diligence, monitoring and overall operations of the funds; and,
• The willingness of Litman/Gregory to limit assets to levels that preserve the managers’ ability to own only their highest-conviction names.

Why does Litman/Gregory believe concentrated portfolios can deliver better long-term performance?

First, it is worth noting that we don’t believe that all stock pickers are able to add value through concentrated investing. We also don’t believe concentration will result in higher returns in all time periods. However, for skilled, high-conviction stock pickers, we believe there is the potential to deliver higher returns over the long run with a concentrated portfolio.

Over the years we’ve interviewed hundreds of stock pickers and have come to understand that most active managers are not equally confident in all the stocks they hold in a broadly diversified portfolio. Consequently, if we believe a particular stock picker can add value via active management, then we believe it is logical that the stock picker can add more value over the long run by concentrating on a smaller number of their highest conviction ideas.

If concentrating on only their best ideas increases a manager’s ability to beat a benchmark, why don’t all managers concentrate?

There are three broad reasons why more managers don’t concentrate their portfolios to a greater degree. First, as we noted, not all managers have approaches that would benefit from concentration. For example, a top-down manager who seeks to identify industries or regions likely to perform well might want to own a larger number of names to ensure good representation in that area. Second, even managers who emphasize bottom-up company research may not feel comfortable with the risks entailed in owning a smaller number of names, so they add more names to reduce overall portfolio risk. Third, asset growth often requires managers to own more names and larger-cap names. As noted earlier, there is a fourth issue—stock pickers who are not skilled may not be able to add value through concentration. In fact, they may detract value by virtue of less diversification. The Masters’ concept addresses each of those issues. We only choose managers we believe are highly skilled and likely to benefit from concentration, we seek to achieve overall portfolio diversification by combining managers, and we limit assets.

Why does Litman/Gregory believe in closing each fund at a pre-determined asset level?

We believe flexibility is important. Ideally, a stock picker should be able to efficiently buy and sell stocks at the prices they deem attractive. They should be able to do this without their own trading volume influencing the price of the stock being bought or sold. However, when an investment firm runs too much money it may take a long time to buy or sell a full position because the number of shares being bought or sold may make up many days of the stock’s average daily trading volume. The result is that the stock price could move against the buyer/seller during the lengthy transaction period or the buying or selling could itself move the stock price.

By keeping the individual asset levels of each sub-advisor relatively small Litman/Gregory believes the Masters’ Select Funds will have several advantages. Because Masters’ Select requires the sub-advisors to hold only their highest-conviction ideas, it is not unusual for a stock to be sold in a Masters’ Select portfolio at a time when it is still attractive enough to be a “hold” in the sub-advisor’s more-diversified portfolios. When this happens, Masters’ small asset base allows the advisor to sell the position quickly and with little market impact. On the buy side, in some cases sub-advisors have been able to buy holdings for Masters’ that they can not buy for other, larger funds they manage. Though this is not typical, several sub-advisors have been able to do this on occasion.

Due Diligence and Manager Selection

When selecting stock pickers for the Masters’ Select Funds, what are Litman/Gregory’s selection criteria?

We believe that superior investment managers exhibit most of the following characteristics:

• A well-defined process that is executed with discipline. There are many intelligent people in the investment business, but based on our many years of researching stock pickers we believe that great stock pickers have a process that is usually explicitly outlined and faithfully followed rather than intuitive. This helps to reduce decision errors that result from mental shortcuts born from overconfidence or sloppy work.
• The passion for stock picking that results in the drive to work harder and more creatively in order to gain an edge. The investment business is intellectually stimulating but hugely demanding. Successful investors usually have a love for the business that allows them to make lifestyle sacrifices as they pursue their overriding passion for stock picking.
• The confidence and ability to think and act independently. Great stock pickers tend not to be influenced by consensus views. Hand in hand with thinking independently is a long time horizon and a high degree of patience. (They are willing to be wrong at least temporarily.)
• Intellectual honesty. Great stock pickers are honest about their circle of competence and are aware of their biases so that they can be objective in their analysis. While confident, they are also able to recognize and admit mistakes and learn from them so they can go on to fight another day.
• Experience and an above-average long-term performance relative to an appropriate benchmark index and peer group. Litman/Gregory measures investment manager performance against performance composites made up of other stock pickers 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 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.
• An investment process that lends itself to concentrated investing. Though we don‘t require that a stock picker have experience in running concentrated portfolios, they must have a process that lends itself to concentrated investing to be considered for a Masters’ Select sub-advisory position.
• A high level of enthusiasm for being part of Masters’ Select. We require that any Masters’ Select sub-advisor be enthusiastic about the opportunity.

We have extensive experience evaluating investment advisory firms using the above criteria, and we believe that each of the investment managers selected to participate in the funds exhibits most of these qualities.

How do you identify sub-advisor candidates?

We have been conducting due diligence on stock pickers since the founding of our firm in 1987, so we are already very familiar with many industry veterans. Also, by being in the industry for many years, we are familiar with many others by reputation. Aside from managers we already know, we also search industry databases and we are often contacted by investment management firms interested in running money for Masters’ Select. Finally, we also query stock pickers we respect for recommendations. Once we have identified a candidate we conduct extremely thorough due diligence to determine whether the stock picker is worthy of running money for a Masters’ Select fund.

Where can I learn more about Litman/Gregory’s due diligence process?

Our due diligence process is an extremely thorough multi-step process that is described here and titled: Researching Equity Managers and Mutual Funds: The Litman/Gregory Approach.

How do you assess whether a stock picker is able to add value by running a concentrated portfolio?

It is easiest to evaluate this if they already have experience and success running a concentrated portfolio. For example, Mason Hawkins and Bill Nygren have both run concentrated funds. For stock pickers who have not run a highly concentrated portfolio, we ask them to put together a “mock” portfolio to reflect the stocks they would hold if they were already running a Masters’ Select portfolio. We then discuss the portfolio so that we can understand the criteria and the process used to identify the highest-conviction ideas and to build the portfolio. An important part of the process is a detailed discussion of the stocks in the portfolio with the objective of gaining an understanding about why they have stronger conviction that these holdings will be successful. We then make a qualitative assessment as to whether the manager has good reasons for their varying conviction levels between stocks (we may also discuss stocks they hold in their more diversified portfolios) and whether they are genuinely more confident in some holdings than others.

Is the due diligence process the same when hiring a stock picker for Masters’ Select as it is when selecting a third-party fund Litman/Gregory’s affiliates use in client portfolios?

While the basic due diligence process is the same, we will additionally assess the stock picker’s comfort with running a concentrated portfolio and their enthusiasm for being part of Masters’ Select. Our selection criteria for hiring Masters’ Select sub-advisors are the most demanding.

How do you know you’re getting the sub-advisor’s highest conviction ideas?

There are two ways we can assess this. The objective way is to compare the sub-advisors’ performance for Masters’ Select against other portfolios they run. This is particularly telling if the other portfolios are significantly more diversified. When we hire sub-advisors it is with the objective that they be able to deliver higher long-term returns with their concentrated Masters’ Select portfolio than they would in their more-diversified portfolios. (We understand that over shorter time periods this won’t always be true.) The subjective way to assess whether the Masters’ Select portfolio reflects the sub-advisor’s best thinking is through our contact with them, including stock discussions, which provide us with a window in which to assess their enthusiasm for and respect for the relationship with Litman/Gregory and Masters’ Select.

How do you monitor the sub-advisors after they are hired?

We watch their trades on a regular basis to confirm that the account is being run as we expected based on our due diligence. In addition we have regular contact with the sub-advisors to discuss various aspects of the portfolio, including individual holdings, and we stay updated on developments at their firm and with the analyst team.

How long will you stick with a manager if performance is poor?

There is no hard and fast rule, but our willingness to stick with a stock picker is heavily influenced by our confidence in their skill and enthusiasm for being a part of Masters’ Select. Our regular monitoring keeps us up to date on the manager’s portfolio and the reasons behind good or bad performance. And, based on our contact we are always assessing whether the reasons we hired the sub-advisor in the first place remain valid. However, if for any reason our confidence in the sub-advisor comes into question we will typically do a thorough update of our due diligence. This could be triggered by performance that is poor for an extended period of time (exactly how long will depend on the magnitude and the reasons for the underperformance), or other more subjective factors that arise from our ongoing monitoring. Due diligence updates go beyond our regular ongoing monitoring, and may involve another site visit and round of interviews. If we come away from this review process feeling highly confident that the reasons we liked the stock picker in the first place are still intact, we will stick with the manager even in the face of several years of underperformance. If our confidence has lessened but is still strong we may weigh the alternatives. If our confidence is not high then we will begin to search for a replacement.

It is worth noting that concentrated portfolios tend to be more volatile than diversified portfolios. Sometimes a stock picker is too early in buying a stock, resulting in a period of weak performance, but ultimately the stock picker successful over the long term. And even highly skilled stock pickers make mistakes. So we expect all our sub-advisors to have occasional periods when performance is poor. Fortunately, the diversification in each Masters’ Select fund significantly mitigates the risk from any single manager, and so far the funds have experienced many more positive manager performances than bad manager performances.

What would cause Litman/Gregory to replace a manager?

When we hire stock pickers as sub-advisors for a Masters’ Select fund, it is our objective to apply an extremely high standard and to be exceptionally thorough in our research of the stock-picking team, their process, their execution, the culture and business objectives of the organization and their enthusiasm for being part of Masters’ Select. In meeting this objective, we hope that each sub-advisor we hire will be with the fund for the duration of his or her career. The conviction we gain from this process also makes it easier for us to ride through the occasionally bad periods of performance that even great stock pickers experience. Despite these efforts, sometimes events outside our control force a change—such as when Bruce Bee (one of the original Masters’ Select International managers) died. The other reason for a change would be if our opinion changes with respect to a manager’s ability to deliver good performance.

When we believe it is in shareholders’ best interests to make a change it is almost always because of one or more of the following reasons:

• We believe we were wrong about the stock picker’s skill.
• We realize that the stock picker is not at his or her best running a highly concentrated portfolio.
• Something has changed at the stock picker’s organization that reduces our confidence in the ability of the stock picker to perform well going forward.
• We come to believe that the stock picker is not adequately attentive to the Masters’ Select portfolio.

Fortunately, we have not had to make many sub-advisor changes over the years across the five Masters’ Select funds.

What are the incentives for highly successful stock pickers to work for Masters’ Select?

Our sub-advisors may be motivated by one or more factors, including:

• The respect for Litman/Gregory they’ve gained over the years as a result of the initial and ongoing due diligence we have done on their firm. This influences the confidence they have in our firm as a strong potential partner.
• Their confidence in the Masters’ Select concept.
• A number of our sub-advisors have expressed a real passion for concentrated investing that is reflected in their excitement in getting the opportunity to do so in a real world portfolio. In most cases, this is not an option in the separate accounts or the mutual funds they run.
• The prestige of being part of a Masters’ Select group.
• The opportunity for friendly competition against the other Masters’ Select sub-advisors.
• The revenue stream from the Masters’ Select account.

Are the managers under contract? If not, what is to stop them from walking away?

As is often the case in our industry, the managers are not under long-term contracts. This means that they could walk away or we could fire them at any point. Practically speaking, if the relationship is going well and they are doing a good job, we will want to keep them and they will want to stay. If that is not the case, we wouldn’t want to keep them and we certainly wouldn’t want a sub-advisor to be contractually forced to run money for Masters’ Select. To date we have removed several sub-advisors though it is obviously our goal to make good long-term hires so that removals are rare.

Who are the Masters’ Select managers?

Portfolio Construction and Management

How do you determine how many sub-advisors to hire for each fund and the blend of manager styles?

The number of sub-advisors is a function of the type of fund and the number of highly skilled managers we can identify as potential sub-advisors. Generally we expect to have at least three sub-advisors and preferably four to seven. The higher end would typically be for funds with multiple styles (e.g., Masters’ Select Equity) while the lower end would be single style funds (e.g., Masters’ Select Value) and Masters’ Select Focused Opportunities.

We will not add a manager if we believe the new manager is not at least as skilled as the existing sub-advisors. We may also consider the distinctive nature of a particular stock picker’s investment approach. We are more likely to add a new sub-advisor if we believe they will add material diversification to the overall portfolio.

With respect to the blend of styles, unless it is a style-specific fund, we seek to keep each Masters’ Select fund roughly style-neutral. This can be accomplished by various combinations of value, growth and blend managers.

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.

Generally, the target allocation at the time each fund is launched is intended to be permanent. Although we do not actively manage the allocations, we have made changes to maintain the fund’s style neutrality after making a manager change.

Please refer to the specific fund pages (Equity, International, Value, Smaller Companies, Focused Opportunities) for target manager allocations.

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.

If the sub-advisors have drifted from their allocations based on their performance relative to each other and this can’t be corrected from new cash inflows we will consider rebalancing. However, the allocation will have to drift materially before we would rebalance. Typically we wouldn’t rebalance unless one or more sub-advisor’s allocations were at least two percentage points off target, and even then we would only move cash reserves if available. If a rebalancing required stock to be sold we would consider this only if the sub-advisor was at least four percentage points off target, and even then we reserve the right to use our judgment. We have rebalanced a number of times in several of the Masters’ Select funds but we have never had to force stock sales to do so.

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 Masters’ Select fund.

It is important to remember that each Masters’ Select fund is subject to equity-market risk and may at times lose more than its benchmarks or peer-group during a market decline.

Are the managers able to purchase derivatives or short stocks?

The fund’s managers can short stocks though it is highly unlikely that they will do so. The fund can also transact in derivatives though the only derivatives transactions expected to be part of any of the funds’ ongoing strategy are foreign currency futures contracts for the sole purpose of hedging currency exposure when foreign stocks are held. Even in this case, it is unlikely that most foreign currency exposure will be hedged. In the case of Masters’ Select International Fund, some of the managers do not hedge their currencies while others will hedge, depending on the circumstances.

On rare occasions managers may write options as part of a tax management strategy. But other than currency hedging, derivatives are highly unlikely to be part of the funds’ holdings.

Do the managers work together in managing the fund portfolio?

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

Do the managers buy the stocks or does Litman/Gregory?

Each individual sub-advisor directs their respective trades.

Is there a conflict of interest for a manager to select stocks for both their own fund and for Masters’ Select?

No. If they are buying or selling stocks for their own fund simultaneous to buys or sells for Masters’ Select, they would apply an allocation process that would be fairly applied. However, because of the high conviction level required in a Masters’ Select portfolio, there may be times when the sub-advisor sells a holding out of Masters’ Select that still qualifies as a hold in a more broadly diversified portfolio. Other times, because of the smaller asset base, there may be instances where the sub-advisor is able to buy a position for the Masters’ Select portfolio that is too small or not liquid enough for a larger portfolio.

Who is the custodian for the Masters’ Select Funds?

State Street Bank.

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:

• Selling high loss lots and replacing them with new positions of equal conviction;
• Doubling up on underwater positions and then selling the original loss lots after 31 days (to avoid a wash sale);
• Selling loss lots and buying them back after 31 days (again to avoid loss lots).

In addition, we remind the stock pickers to avoid short-term capital gains if possible.

Though Masters’ Select is run in a tax-aware manner, there may be years when the fund has material distributions. Moreover, since the funds’ shareholder group includes non-taxable shareholder, tax strategies are employed only if the stock picker believes they won’t unduly favor one type of shareholder over another.

What level of portfolio turnover is typical for a Masters’ Select Fund?

This varies widely based on the fund and circumstances. Some of the Masters’ Select 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.

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

Masters’ Select International’s annual turnover has ranged between 88% and 160% over the five years ended 12/31/08.

Masters’ Select Value's annual turnover has ranged between 24% and 39% over the five years ended 12/31/08.

Masters’ Select Smaller Companies’ turnover has been as high as 149% during its life and we believe it is likely to be over 100% in most years.

Masters’ Select Focused Opportunities’ turnover relative to the other Masters’ Select Funds is likely to be more volatile by virtue of its’ greater concentration. It has ranged between 46% and 72% over the two years ended 12/31/08. (However, if the fund adds more sub-advisors in the future that may not be the case.)

Communication and Disclosure

What is Litman/Gregory’s philosophy with respect to shareholder communication?

Our philosophy seeks to achieve the following:

• Educate shareholders about the funds’ investment philosophy
• Explain expectations honestly and realistically
• Provide useful information that will help shareholders assess the funds’ success in pursuing their objectives
• Always communicate honestly about all relevant developments and expectations

How often are portfolio holdings disclosed?

Portfolio holdings are disclosed quarterly at www.mastersfunds.com.

What other information is regularly disclosed?

Each month on www.mastersfunds.com we post portfolio characteristics including sector and market-cap weightings as well as other data. Total net assets, the current expense accrual rate and the number of stocks are also reported. Performance reporting is also provided monthly.

Our shareholder reports also disclose the amount of the aggregate personal investment in the Masters’ Select funds by Litman/Gregory personnel and our independent trustees.

Do you disclose individual sub-advisor performance?

We do not for several reasons. First, we strongly encourage our sub-advisors to focus on long-term performance. We believe that reporting performance could, in certain instances, result in some pressure to focus on short-term performance to the potential detriment of long-term performance. Similarly, because the individual sub-advisor portfolios are concentrated we expect more short-term performance volatility at the sub-advisor level. This could also result in short-term performance pressure. Finally, performance comparisons with the sub-advisor’s own funds may, at times, be awkward for the portfolio managers.

If you are contemplating firing a sub-advisor will you let shareholders know?

No. Our responsibility is first and foremost to do everything we can to increase the odds of meeting each fund’s long-term performance objectives. If we are contemplating removing a manager it is likely that it will play out in one of two ways. It could be that we have already decided to remove them, but have yet to tell them, pending a replacement. In this instance we would not want to make this information public because we don’t believe it is likely to result in an attentive and focused sub-advisor. Alternatively, we may be considering a change pending re-assessment of one or more factors. In that event we would not necessarily want to alert the sub-advisor to that fact since it could impact the way they respond to our concerns, nor would we want to put the sub-advisor through the potential embarrassment of a public announcement. In either instance we believe our shareholders’ interests are better served by deferring any discussion until a change is actually made.

The only exception to publicly announcing that a sub-advisor is under review is when there has been a key and public personnel change (e.g. when David Winters, a Masters’ Select Value sub-advisor, left Franklin Mutual Advisors).

Litman/Gregory’s Role

What are the Litman/Gregory companies?

Litman/Gregory Fund Advisors, LLC, was founded in 1996 and is the Advisor to the Masters’ Select Funds and is an affiliate of three other Litman/Gregory Companies:

• Litman/Gregory Asset Management, LLC was founded in 1987 and manages money for high net worth individuals and families as well as foundations, endowments and company retirement plans.
• Litman/Gregory Research Inc. was founded in 1989, publishes the No-Load Fund Analyst investment research publication.
• Litman/Gregory Analytics, LLC was founded in 2000 and operates Advisor Intelligence, a web-based investment research service for financial advisors.

Since 1987 Litman/Gregory and its affiliates have researched, analyzed and written about hundreds of stock picking teams and mutual funds and put their ideas to the test by designing and successfully investing in portfolios of funds. Drawing on insights gained from years of evaluating and analyzing mutual funds, Litman/Gregory Fund Advisors, LLC was formed in 1996 to oversee the Masters’ Select Funds' operations.

Ken Gregory and Jeremy DeGroot share responsibility at Litman/Gregory for overseeing the Masters’ Select Funds. Ken Gregory is a Trustee of the Trust. He is also co-founder of Litman/Gregory and Chief Investment Strategist of Litman/Gregory Asset Management. Jeremy DeGroot, CFA, is Chief Investment Officer of Litman/Gregory Asset Management and joined the firm in 1999.

What are Litman/Gregory’s responsibilities in addition to manager selection?

First and foremost we select the sub-advisors for board approval. Beyond that we have six primary areas of responsibility:

• On an ongoing basis we monitor and evaluate the sub-advisors. We evaluate the managers’ stock picks, attentiveness, and clarity of thinking with respect to Masters’ Select. We also pay attention to developments in each sub-advisor’s organization as well as the manager’s performance.
• When necessary we replace managers. With more than 20 sub-advisors across five funds there are occasionally going to be instances where a change must be made.
• We are responsible for monitoring the overall fund portfolios. On a day-to-day basis we pay attention to what the sub-advisors are buying and selling. We don’t second-guess their decisions however, because each sub-advisor works independently and is unaware of the overall fund portfolio, it is important for us to watch for unintended fund-level concentrations in specific industries or stocks. This is rarely a problem, though there was one instance where three of the managers in Masters’ Select International owned the same stock. Stock overlap is not a concern to us unless the holding becomes an unusually large percentage of the fund’s portfolio. In this case a particular stock was performing very well and grew to 10% of the overall portfolio. Prior to that point we conferred with the three sub-advisors. After its portfolio allocation continued to grow through appreciation up to 10%, we asked each sub-advisor to trim their holding to help us reduce the allocation in the portfolio to 7%.
• We oversee expense management. This includes negotiating and overseeing expenses, including all vendor relationships. We take this job very seriously and are always looking for opportunities to reduce expenses. We pass along one hundred percent of all cost savings to shareholders.
• Tax management is another area we pay attention to. When a fund has a big loss in a holding we make sure the sub-advisor is aware of the tax-selling opportunity in case there is another stock that may be equally attractive that he may want to hold in its place. We leave this decision up to the managers and view our role as limited to making sure they are aware of tax-selling opportunities.
• Finally, we are responsible for shareholder communications. We take our responsibility to communicate with shareholders very seriously. Our mission in all of our shareholder communications is to be honest and open about everything impacting our fellow shareholders. In addition to the required annual and semi-annual reports we also post on-line and mail out letters in the off-quarters (some fund supermarkets won’t mail this “non-required” correspondence) and update our website on a frequent basis.

What is Litman/Gregory’s Commitment to Shareholders?

Our Commitment to Shareholders is posted here and can also be found in our prospectus and the annual and semi-annual reports.

How does Litman/Gregory fulfill its commitment to making Masters’ Select a shareholder-friendly fund company?

Some of the ways we put shareholders’ interests first include:

• In all that we do with respect to Masters’ Select, our overriding decision criteria focuses on the benefit to shareholders.
• We communicate thoroughly and honestly with our shareholders.
• We work hard to continue to reduce fund expenses.
• We pass through all cost savings to shareholders.
• We have introduced meaningful fee breakpoints on the portion of the management fees we are paid, of our own volition.
• We have committed to “soft closing” our funds (in which we stop accepting new shareholder relationships) at relatively low asset levels, and we have followed through when individual funds have reached these levels.
• We and our independent trustees have invested significant amounts of our personal assets in the Masters’ Select funds. These amounts are disclosed in our shareholder reports.

Operations

How are fund expense levels determined?

There are three elements to fund expenses:

1. The sub-advisor fee that is individually negotiated with each sub-advisor.
2. Our fee which starts at 0.40% and declines when each fund reaches its closing level. The combination of our fee and the sub-advisors’ fees equal the total management fee.
3. The operating expenses, which are a function of economies of scale as assets grow and our ability to negotiate attractive contract rates with our vendors.

Are the Masters’ Select Funds available on major fund supermarkets?

Yes.

When a Masters’ Select Fund “soft closes” to new shareholders, can existing shareholders add to their positions?

Initially yes, though it is possible that if too much subsequent asset growth occurs we may “hard close” the fund, which means we would stop accepting all additional investments.

Why do the funds have a redemption fee?

The redemption fee is intended to deter short-term investors. Litman/Gregory instituted the redemption fee long before market timing scandals impacted the fund industry. The entire fee is remitted to the portfolio for the benefit of shareholders.

Performance

What are Litman/Gregory’s performance objectives for Masters’ Select?

The stated objective of each fund is to deliver long-term growth of capital. More specifically, we seek to out-return relevant benchmarks over the long run, which we define as at least five years. Taken further, we seek to outperform in the vast majority of rolling five-year time periods. There is no guarantee that these objectives will be met.

What are Litman/Gregory’s expectations for fund risk levels? How does Litman/Gregory define risk?

Our focus is on long-term return. Consequently we think of risk in terms of not achieving long-term return objectives. However, practically speaking we believe investors tend to think of risk in terms of absolute loss. So our general objective is to keep the risk of one-year loss roughly in line with each fund’s benchmark. The mix of managers and the number of managers is partly a function of this objective. There is no guarantee that this objective will be met.

Miscellaneous

Who are the Masters’ Select Funds appropriate for?

We believe the funds are appropriate for investors who:

• Understand equity-market risk.
• Seek strong long-term performance relative to relevant benchmarks but are less concerned about relative short-term performance.
• Believe in active management and the potential for concentrated investing, in the right hands, to add value over the long-run.
• Have familiarized themselves with the Masters’ Select Funds, believe in the specific concept and have confidence in Litman/Gregory’s skill in picking and overseeing the sub-advisors.
• Are looking for the specific type of exposure inherent in the specific fund in which they are investing.

Must be preceded or accompanied by a prospectus.

Mutual fund investing involves risk. Principal loss is possible. Please refer to the prospectus for special risks associated with investing in the Masters’ Select Funds, including, but not limited to, risks involved with non-diversification and investments in foreign and debt securities and smaller companies.

Litman/Gregory Fund Advisors, LLC has ultimate responsibility for the performance of the Masters’ Select Funds due to its responsibility to oversee the Funds’ investment managers and recommend their hiring, termination and replacement.

Masters’ Select Funds are distributed by Quasar Distributors, LLC