A small investment advisory firm in Northern California with no experience running mutual funds has introduced its first product, and a lot of people must think it looks like a winner.
Litman/Gregory Fund Advisors won't actually be picking the stocks for its new Masters' Select Equity Fund, which debuted Jan. 1.
Rather, the Orinda, Calif., firm has contracted that job to six veteran fund managers who collectively rank as some of the best in the business.
They are Shelby Davis of the Davis New York Venture Fund, Jean-Marie Eveillard of SoGen International, Foster Friess of the Brandywine Fund, Mason Hawkins of Longleaf Partners, Spiros Segalas of Harbor Capital Appreciation and Richard Weiss of Strong Common Stock.
Morningstar gives above-average (four-star) ratings to the Harbor and SoGen funds, and superior (five-star) marks to the others.
The chance to buy into an all-star lineup with a single, commission-free purchase is one aspect that makes Masters' Select Equity ( 960-0188; $5,000 minimum) attractive.
"We wanted our clients to have the ability to access a handful of great managers in a diversified portfolio featuring low expenses and a low minimum investment," says Craig Litman, a principal at Litman/Gregory and co-publisher of the "No-Load Fund Analyst" newsletter.
In fact, two of the above funds--Longleaf Partners and Strong Common Stock--currently are closed to new shareholders, and two others--Davis New York Venture and SoGen International--carry sales charges. A fifth fund, Brandywine, requires a steep $25,000 minimum purchase, even for IRAs.
Another intriguing feature is that the Masters' portfolio will limit each manager to a maximum of 15 stocks apiece. The idea is to include only the favorite investment ideas of each, to not allow the portfolio to become cluttered.
"We have a conviction that managers who run concentrated portfolios do better," Litman says. "We feel a manager's 15th-favorite pick will do better than his 150th selection."
Hawkins calls the concentrated approach a great advantage, noting that he tries to hold only 20 or 25 stocks in his flagship Longleaf Partners portfolio.
"Overdiversification can produce unexceptional results," he says. "It's very difficult for anyone to know a large number of businesses very well."
Four of the managers--Hawkins, Davis, Eveillard and Segalas--will focus on buying the best large stocks they can find, operating independently. They also will have a maximum of $300 million each to work with, assuming Masters' Select Equity shuts its doors at $1.5 billion. Friess and Weiss, also operating independently, will invest in small companies, overseeing no more than $150 million apiece.
Litman/Gregory plans to turn away new investors when the fund reaches $1.5 billion so that heavy cash inflow doesn't hurt its performance.
"We want to keep it small enough so that the managers can be as flexible as they want," Litman says, adding that it's possible that new investors might be turned away at an even lower threshold.
After its first week of existence, the Masters' Series Equity had attracted $60 million in assets.
Segalas, a growth investor, predicts the concentrated number of holdings might encourage him to trade his stocks actively. That might boost the fund's turnover rate and trading costs.
"Since I'm limited to 15 companies, I would have to sell something if I find something else that's hot to buy," he says.
But Hawkins, a value investor, says he will pursue the same low-turnover, buy-and-hold approach that he uses with Longleaf Partners.
Expenses on Masters' Select Equity are running about 1.5% a year but are likely to drop to about 1.35% when the fund reaches $100 million in assets. Ultimately, Litman/Gregory hopes to bring the shareholder-borne costs down to about 1.1%. The portfolio is not a so-called fund of funds, with a double layering of fees, Litman emphasizes.
Although the fund can shift up to 35% of its assets into cash during rough markets, Masters' Select Equity will usually remain close to fully invested, Litman says. In addition, the portfolio will focus on domestic stocks, with the exception of certain picks made by Eveillard, who specializes in global companies.
It's also worth noting that Friess, who normally invests in companies of various sizes, will target the stocks of small and medium-size ones only.
"For the Masters' fund, we'll limit our selections to companies with capitalizations under $5 billion and, preferably, under $1 billion," he says.
The $5,000 minimum investment on Masters' Select Equity is reduced to $2,500 for people willing to set up an automatic investment plan, and to $1,000 for IRA investors. Shares can also be purchased through discount brokerages Charles Schwab & Co., Fidelity Investments and Jack White & Co.