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Monday, October 08, 2007|
Litman/Gregory Selects Sub-Adviser for Re-Opened Fund
Litman/Gregory Fund Advisors has found the sub-advisor it was searching for. In September the firm announced that that it was re-opening its Masters' Select International Fund because of net redemptions and had been searching for a new sub-adviser at the same time. At the conclusion of a two year search, Litman chose Northern Cross, LLC.
Litman/Gregory Fund Advisors (Litman/Gregory) is very pleased to announce the addition of Northern Cross, LLC (Northern Cross) as a new sub-advisor in the Masters' Select International Fund.
Rationale for Sub-Advisor Addition
Approximately two years ago Litman/Gregory began a search for a sub-advisor to add to the Masters' Select International team. There are several reasons why we concluded that adding a sixth sub-advisor should be beneficial for the shareholders of the Fund, provided we could find one that met our strict standards.
* First and foremost, we want to retain the ability of the fund's existing shareholders to invest in the fund. When we first considered adding another sub-advisor the fund was closed to new shareholders but continued to receive very strong cash flows from existing shareholders. Because of capacity constraints of some of the fund's sub-advisors who invest in smaller company stocks, we were concerned that at some point the fund may have to close even to new purchases by existing shareholders (hard close). Besides precluding existing shareholders from making new investments, a hard close would also put the fund in an ongoing net redemption mode, which could make the fund less tax-efficient and at times could be a negative from a portfolio management standpoint. Since we started our search, the fund's situation has changed, with net shareholder redemptions in 12 of 15 months prior to September, so concerns about a hard close have not been an issue of late. (In fact, we temporarily re-opened the fund to new shareholders in September as a result of this prolonged period of net redemptions). However, we realize that it could again become an issue. Adding a sub-advisor adds capacity and mitigates this concern.
* Adding another sub-advisor adds to the fund's manager diversification. Increased manager diversification could lead to somewhat reduced volatility at the fund level without undermining the fund's long-term return potential (provided the new sub-advisor meets our performance expectations). * By adding to our sub-advisor team we build depth so that if an existing sub-advisor is no longer a good fit for the fund, we are not necessarily forced to hire a replacement. We have a very high level of confidence in our current team-so this move does not reflect any dissatisfaction with our current managers and we are not anticipating any changes to the team. However, in the eleven-year life of Masters' Select we have had some sub-advisor changes for reasons ranging from death of a sub-advisor, to changing circumstances at sub-advisor firms, to recognition of a mistake in our sub-advisor selection.
The key to successfully implementing any sub-advisor addition is choosing the right sub-advisor. After looking at a number of firms over the past couple of years we ultimately found two that we were excited about. From those two we chose the Northern Cross team, who we had been interested in for a number of years.
Northern Cross Background
Howard Appleby, Jean-Francois Ducrest, Jim LaTorre and Ted Wendell are the co-founders and principal owners of Northern Cross, LLC and comprise the portfolio management team. In addition, Northern Cross Investments Ltd., led by Hakan Castegren, consults to Northern Cross, LLC. Castegren has managed the Harbor International Fund since December 1987 and we have known him and conducted research on (and owned in our affiliate's managed accounts) the Harbor International Fund ever since.
Appleby, a British citizen, has 25 years of investment experience and moved to the USA in 1986. He had a sell-side relationship with Castegren beginning in 1996 that involved presenting stock ideas on a regular basis, which eventually led to him becoming part of the investment group as an analyst in 2002. In 2003 he became a founding partner and portfolio manager of Northern Cross LLC. Ducrest, a French citizen, has 19 years investment experience. His sell-side relationship with the group dates to 1992 when he began presenting stocks for potential inclusion in Castegren's managed products. Ducrest joined the investment group as an analyst in 2002, and in 2003, he became a founding partner and portfolio manager of Northern Cross LLC. LaTorre began his investment career in 1982. LaTorre began working with Castegren in 1992, and became Director of Research for Castegren in 1993. From 1996 to 2002, LaTorre also managed the Harbor International Fund II. In 2003, he became a founding partner and portfolio manager of Northern Cross, LLC. Wendell has been in the investment management business since 1985 when he began his association with Castegren. He became a founding partner of Northern Cross LLC in 2003.
As mentioned, we have a long history with Castegren and through him we have known Wendell since the early 1990s and first met LaTorre in the mid-1990s. We first met Ducrest and Appleby after they joined the team in 2003. Since that time we have continued to talk to the team in person and over the phone and have been in a full due diligence mode this year. Our due diligence process allowed us to gain an in-depth understanding of Northern Cross's investment team, the investment philosophy and process they share with Castegren, and the execution of their process. We also assessed their enthusiasm and approach to running a highly concentrated portfolio. In each of these areas we have been very impressed.
Northern Cross Investment Philosophy and Process
Northern Cross invests in non-U.S. large-cap stocks. They believe that a deep understanding of a company and its industry is a requirement to successfully implement their long-term, low-portfolio-turnover investment approach. Northern Cross's investment process encompasses a top-down, theme-oriented approach coupled with intensive, fundamental, bottom-up industry and company-specific analysis. The team focuses their research on quality blue-chip companies that are poised to deliver long-term profit margin expansion and that are the beneficiary of long-term secular (not short-term cyclical) trends. They also look for undervalued assets, industries undergoing consolidation and companies that are restructuring. On-site meetings with company management are an important part of their research process. In addition to assessing a company's relative P/E ratio, other valuation metrics considered are a company's long-term margin-expansion potential compared to its enterprise value/sales multiple, its long-term sustainable free-cash-flow yield, and its absolute P/E ratio looking many years out. Northern Cross concentrates their portfolios in their best ideas with the most attractive risk/reward potential and they are willing to deviate significantly from benchmark industry and country weightings.
New Sub-Advisor Allocations
With the addition of Northern Cross we will gradually reposition the portfolio to the target allocations cited in the table below. Over the longer-run it is very likely that Northern Cross's allocation will more closely match those of the existing managers. It should be noted that the unequal allocations are a by-product of style balancing and/or capacity of the individual sub-advisors and are not a reflection of our confidence in one sub-advisor versus another.
Sub-Advisors Firm -- Target Allocations -- Style
David Herro Harris Associates L.P. -- 20% -- Value Amit Wadhwaney Third Avenue Management -- 15% -- Value Bill Fries Thornburg Investment Mgmt. -- 20% -- GARP Northern Cross Team Northern Cross, LLC -- 10% -- GARP Jim Gendelman Marsico Capital Mgmt. -- 17% -- Growth Ted Tyson Mastholm Asset Management -- 18% -- Growth
About the Masters' Select International Fund
Masters' Select International Fund seeks long-term growth by investing in foreign stocks. Each of the six managers separately runs a portion of the portfolio composed of their highest conviction stocks. The Fund may invest in emerging markets, although it is expected that exposure to developed markets will be significantly greater. Although each manager runs a concentrated portfolio of no fewer than eight or more than 15 of their favorite ideas, the Fund as a whole is diversified by industry, country and stocks. Typically the Fund should hold between 60 and 85 securities. The Fund seeks to maintain risk in line with its peer group of international stock funds.
The fund will invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks and fluctuations in foreign currencies. Though not a small-cap fund, the fund 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.
The fund's 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. 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. 10/07
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