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October 3, 2008 - Effective today Clyde McGregor of Harris Associates is being added as a new sub-advisor in the Masters’ Select Funds. McGregor will replace Legg Mason Value’s Bill Miller on Masters’ Select Equity and Masters’ Select Value.
Litman/Gregory has known McGregor for years as the result of our long familiarity with the Oakmark funds and specifically from researching the Oakmark Global Fund, which he co-manages. Over the past few months, Litman/Gregory completed additional due diligence on McGregor with a specific focus on how he would run a concentrated Masters’ Select portfolio. McGregor was one of several managers considered for the position. Litman/Gregory’s interest in McGregor was the result of very positive impressions from numerous prior contacts, McGregor’s track record and the fact that McGregor has experience running concentrated portfolios for private accounts. The selection of McGregor as a Masters’ Select manager reflects a very high level of confidence in his stock-picking skills. McGregor’s addition to Masters’ Select Equity will make the fund more value-oriented than it was with Miller, though we believe it should still be considered a blend fund. Masters’ Select Value will have a purer value orientation with McGregor replacing the more eclectic Miller.
The addition of McGregor will mean that two of the four sub-advisors running Masters’ Select Value will be Harris Associates portfolio managers (only McGregor will be on Masters’ Select Equity). In considering whether this made sense for the fund, Litman/Gregory considered the similarities and differences between McGregor and Bill Nygren, the other Harris manager. Though Nygren and McGregor utilize the same Harris list of approved securities, that list is large, with 140 names. Nygren and McGregor expect to hold 10 to 15 positions for Masters’ Select Value. Historically there has not been significant overlap in the positions they have held, and at this time there is no overlap in their Masters’ portfolio. Their historical performance has also exhibited material variation. One significant difference between Nygren and McGregor is McGregor is an all-cap investor and Nygren has a larger-cap focus though he also buys mid-caps. McGregor is also more focused in assessing downside risk, in our opinion. The managers also have had different views on certain industries such as energy. All in all, we believe there are significant differences between Nygren and McGregor and though there could be some overlap in their holdings from time to time, we don’t expect the overlap to be significant and expect their portfolios to be quite different most of the time. To further minimize this risk the fund will target a 20% allocation to each of the Harris managers (rather than 25% each) and increase the target allocation to Southeastern Asset Management’s Mason Hawkins, and Franklin Mutual’s Michael Embler from 25% each to 30% each.
Brief Description of Clyde McGregor’s Investment Process
McGregor considers businesses whose shares are trading at a 30% or greater discount from his assessment of their intrinsic value. This assessment is based on the price buyers have paid for similar companies in private transactions and/or Harris’ discounted cash-flow analysis. To avoid value traps, McGregor wants to own companies that he expects will see their intrinsic value per share grow. In addition, his goal is to own businesses that “have vitality” and an ongoing reason to exist. Finally, he is looking to invest in companies run by management teams that treat shareholders as partners. McGregor will consider selling a stock as it approaches fair value; if there are other ideas that are significantly more compelling; if company fundamentals deteriorate undermining the valuation support; or if he feels management is no longer acting in shareholders’ best interests.
About the Masters’ Select Equity and Masters’ Select Value Funds
For information regarding the Masters’ Select Equity and Value funds please click on the below links.
Masters' Select Equity Fund
Masters' Select Value Fund
For general information on the Masters’ Select Funds please visit the Frequently Asked Questions section of our website by clicking here.
Should you have questions or need additional information please contact us via e-mail at LG-FA@lgam.com or by phone at (925) 253-5238.
Mutual fund investing involves risk, loss of principal is possible.Though not international funds, the funds may invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks and fluctuations in foreign currencies. Though not small-cap funds, the funds may invest in the securities of small companies. Small-company investing subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies. Masters’ Select Value Fund is a non-diversified fund, which means that it may concentrate more of its assets in fewer individual holdings than a diversified fund. Though primarily an equity fund, the fund may invest a portion of its assets in securities of distressed companies. Debt obligations of distressed companies typically are unrated, lower rated, in default or close to default and may become worthless.
References to other mutual fund should not be interpreted as an offer of those securities.
The funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company, and it may be obtained by calling 1-800-960-0188 or visiting www.mastersfunds.com. Read it carefully before investing.
Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.
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. 10/08
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