Sub-advisor to the Masters’ Select Value and Focused Opportunities Funds
The opinions and conclusions expressed herein are those of Litman/Gregory Fund Advisors, LLC and Michael Embler at the time the material is written and may not be reflective of current conditions.
Michael Embler is the portfolio manager for the segment of the Fund’s assets managed by Franklin Mutual Advisers, LLC (“Mutual Series”). Embler, the Chief Investment Officer of Mutual Series, is also the portfolio manager of the Mutual Recovery and Mutual Beacon funds. Embler has been in the securities industry since 1991. He was a vice-president at Dow Jones Federal Filings, Inc, where he was the co-founder of the Daily Bankruptcy Review. Following that he was the portfolio manager of a proprietary special situations investment fund at Nomura Holding America (10/94-5/01).
I have been an active investor personally since my late teenage years. At a very macro level, I have always been enamored with the capital system where individuals and institutions are the actual owners of the companies which drive our economy. At a personal level, I find security analysis to be an exciting process, which never grows stale, as each company, industry and geographical area presents new challenges and considerations. I originally approached the investment area from the special situations arena, with a focus on distressed securities. Distressed investing is unique in that it combines all aspects of corporate securities analysis — incorporating both credit and equity analysis as well as corporate governance considerations. And the workout process allows participants to become active in determining the underlying structure of the restructured company — a process which allows the practitioner to apply the theoretical outcomes of the analysis on a very practical and concrete basis. The philosophy at Mutual Series of thinking and acting as long-term owners and becoming active when we believe management is not acting as proper stewards of capital is very much consistent with my background and overall approach to the business.
The investment philosophy at Mutual Series has been consistent for over half a century. We are fundamental, bottom-up value investors seeking to acquire securities of companies trading at a meaningful discount to intrinsic value. We do this by investing mainly in undervalued stocks, but also in distressed securities and merger arbitrage opportunities. We think this strategy serves to reduce the ultimate downside risk in a given investment, while preserving significant upside potential. More specifically my past involvement in special situation and distressed investments has been perfectly consistent with the Mutual Series approach. First, I have seen too many companies and industries which were "flavors of the month," that is, beloved by investors for a period of time. But ultimately these companies failed because investors and managements exhibited "irrational exuberance" in allocating capital without regard to proper attention paid to strategic considerations or proper risk analysis. Second, I bring a strong credit orientation to equity analysis - with a focus on the net underlying cash flow characteristics of the business and the optimal balance sheet structure given these cash flows. Finally, having been deeply involved in the process of negotiating capital restructurings, I have a deep appreciation for underlying value drivers to equity owners and the practical application of balance sheet considerations, corporate governance issues and management quality issues.
As discussed above, at Mutual Series we are always looking for companies trading at a material discount to their intrinsic value. We believe that by doing so we reduce downside risk while retaining maximum upside potential. In determining intrinsic value we seek to understand a company's strategic industry position, and then analyze the company's earning power and cash generation capacity. We focus on the use of this cash, whether it is reinvested in positive net present value projects or returned to shareholders in the form of dividends or buybacks. If a company meets our investment valuation criteria but we do not believe management or the board is meeting their responsibilities to shareholders we are not afraid to agitate for change.
Patience and discipline. Once we arrive at target prices, whether to buy a security or sell an existing holding, the key is to execute consistent with our conclusions.
The team is the key to Mutual Series. We have 17 investment professionals, most of whom have some level of portfolio management responsibility but all of whom are, at their core, investment analysts. When an analyst identifies a buy or sell opportunity, the entire group runs through the investment with the primary analyst, often raising questions or issues which require extended follow-up to answer. Only after a consensus is reached is the investment bought or sold by the funds. As Chief Investment Officer of the entire fund complex, I manage this process. It is my job, after consultation with my fellow analysts, to buy or sell a specific security in the Masters’ Select Value Fund.
This varies by investment of course, but in addition to extensive discussions with the company itself, we often engage in discussions with other industry participants, suppliers and customers. In certain industries there is extensive information available from sources not generally sourced by the market, such as mandated reports to federal or state agencies. Our analysts generally cover industry sectors, sometimes further segmented geographically, and over time have developed multiple contacts and sources of information within their industries and geographical markets.
For us, the process of managing the Masters’ Select Value Fund is not materially different from running our broader funds, because we are purely bottom-up stock-pickers. We seek to purchase securities which match our investment criteria, rather than trying to mimic market indices. Consequently, the management of the Masters’ Select Value Fund portfolio is simply an extension of our underlying approach. Of the universe of stocks which we identify as worthy for inclusion in the Mutual Series funds, we try to choose those which offer investors the best risk-reward characteristics for inclusion in the Masters’ Select Value Fund.
Neither the information contained herein or the opinions expressed shall be construed as an offer to sell or a solicitation to buy any securities mentioned herein. Click here to view the most recent portfolio holdings of the fund.
The fund may invest in foreign securities, which exposes investors to economic, political and market risks and fluctuations in foreign currencies. The Fund is non-diversified, which means it concentrates more of its assets in fewer securities than a diversified fund.
To obtain a current prospectus for the Masters’ Select Funds at no charge, please click here or call 1-800-960-0188. The prospectus contains more complete information with respect to the risks, costs and expenses of investing in the Funds. Please read it carefully before investing.
 For industry terms and definitions, click here.
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