About the Funds
PartnerSelect Solutions Series offers alternative and non-traditional strategies intended to improve diversification of a more general stock-bond portfolio
The goal of our Solutions Series funds—Alternatives Strategies Fund and High Income Alternatives Fund—is to find and combine distinct value-added strategies in ways that create valuable diversification and reduced volatility without compromising the opportunity for satisfying long-term return. We see each fund fulfilling specific objectives in a portfolio that are difficult to achieve otherwise using traditional long-only stocks and bonds. The importance to us of having good return potential in addition to the diversification makes the funds suitable as strategic, long-term allocations and this is how we use the funds in our own client portfolios. It is a contrast to the approach by many in the alternatives space where the focus is primarily on reducing volatility during periods of disruption—often at the expense of generating satisfying long-term returns.
Alternative Strategies Fund
The Alternative Strategies Fund was created based on the following fundamental beliefs:
First, Litman Gregory believes it is possible to identify investment managers who will deliver superior long-term performance relative to their passive benchmarks and peer groups. This belief is based on Litman Gregory’s extensive experience evaluating managers and mutual funds on behalf of their clients. The five managers in this fund were chosen for their specialized and demonstrated expertise, as well as for their complementary, non-correlated investment approaches.
Second, not only do we want high-quality managers, but we want to offer access to them at an acceptable cost. We spent years engaged in research to find and improve on a mix of managers to ensure we are delivering on both fronts.
Third, this fund doesn’t seek to simply replicate what each manager is already doing elsewhere, but to bring investors additional value-add in two distinct ways. First, Litman Gregory has allocated to these managers based on its analysis of how to optimize the collective risk adjusted potential across a range of scenarios. Second, we consider how the broader diversification of the multi-strategy format can best allow individual strengths to be maximized – such as through added flexibility, concentration, and the ability to be more opportunistic when the environment is compelling.
The Alternative Strategies Fund Concept
The Alternative Strategies Fund is a multi-manager fund that combines alternative and absolute-return-oriented strategies chosen based on Litman Gregory’s conviction that each individual strategy is compelling and that collectively the overall fund portfolio is well diversified. This fund is intended to complement traditional stock and bond portfolios by offering diversification, seeking to reduce volatility, and to potentially enhance returns relative to various measures of risk.
This fund will contain many risk-control factors including the selection of strategies that seek lower risk exposure than conventional stock or stock-bond strategies, the risk-sensitive nature of the managers, the skill of the managers, and the overall strategy diversification.
Typically, each manager’s allocation is fixed, but Litman Gregory may tactically alter the managers’ allocations to attempt to take advantage of particularly compelling opportunities for a specific strategy or to further manage risk. We will have a high hurdle for making a tactical allocation shift and don’t expect such top-down shifts to happen frequently.
High Income Alternatives Fund
There are several reasons behind our decision to introduce the PartnerSelect High Income Alternatives Fund.
First and foremost, whenever we are considering creating a new fund, we view it through the lens of our affiliate Litman Gregory Asset Management’s (LGAM) role as an independent investment advisor and fiduciary, managing diversified portfolios for our clients. We want to ensure that there are clear and compelling fundamental reasons for the fund to exist, and that it merits a meaningful strategic allocation in our client (and personal) portfolios.
Second, LGAM has been investing in income-oriented strategies beyond traditional core investment-grade bond for many years, and we have developed expertise in the space. We wanted to leverage this experience to create an income-focused fund with investments that could generate attractive returns, while playing an important role in navigating risks that come with interest-rate and credit cycles. Combining our expertise and experience in non-traditional income strategies and our access to top-tier managers, we saw an opportunity to build a distinctive, income-focused fund at a competitive fee.
We partnered with skilled, experienced managers running differentiated and complementary strategies that are not available as standalone public funds. Each manager offers access to non-traditional sources of income that clients may not otherwise own, or to which they may be underallocated. We are seeking to generate a high level of income consistent with capital preservation, meaning that we want to maximize income within the context of prudent risk management.
Selection Criteria—What Makes a Manager a Solution Series Candidate?
The managers in this fund were chosen for their specialized and demonstrated expertise, as well as for their complementary, non-correlated investment approaches.
The Litman Gregory team looked for skilled managers who either 1) ran strategies that we believed were low risk and not strongly correlated with traditional financial assets (especially stocks) or 2) had the ability to take on more risk but had a strongly risk averse mindset and approach with an emphasis on preservation of capital and a track record consistent with that objective. We also wanted managers willing to be opportunistic and take somewhat more risk at times when valuations suggest that risk should be well rewarded. Other factors we considered included enthusiasm for being part of this fund, how the strategies complemented each other, a long history, and reasonable fees.
We narrowed our list down to managers/firms who ran different types of strategies and who each had a combination of experience, expertise, performance track record, a risk-averse mindset or investment philosophy, strong focus on risk management, and reasonable fees. We then did intensive additional due diligence on these managers to assess whether we could gain confidence that they would be able to deliver on their risk/return objectives for these strategies and what they would bring to our fund that would be different and value-added. We believe we have achieved that goal with each manager.
PartnerSelect Access Series offers distinctive, high-active-share equity-focused managers
We seek managers that we believe are skilled with an identifiable and repeatable investment edge. We like managers with the courage to invest with conviction in pursuit of the best long-term returns, and don’t want managers bending to the business risk brought on by short term performance pressure. Our focus is on connecting great managers with great shareholders who understand what they want and why the mandate we create for managers is likely to add value.
Litman Gregory favors managers who invest in areas that are less efficient than the largest, most liquid and most followed areas of the market, and where we can bring strategies we want to own ourselves but that are otherwise unavailable in the U.S. to fund investors.
Our equity funds are based on two fundamental beliefs:
First, it is possible to identify investment managers who will deliver superior long-term performance relative to their passive benchmarks and peer groups. This belief is based on our extensive experience evaluating stock pickers and mutual funds on behalf of our investment management clients.
Second, 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 a more diversified portfolio over a market cycle. However, most stock pickers typically manage portfolios that are diversified beyond these highest-conviction holdings in order to reduce risk and to facilitate the management of the larger amounts of money they oversee.
The Concept Behind Our Equity Funds
Based on the above beliefs, these funds seek to isolate the stock-picking skills of a group of highly regarded investment managers. To meet this objective, the funds are designed with both risk and return in mind, placing particular emphasis on the following factors:
- We only choose stock pickers we believe to be exceptionally skilled.
- Each stock picker is able to run a smaller, higher-conviction portfolio relative to the broader portfolio it runs.
- Although each manager’s portfolio is concentrated, our equity funds seek to manage risk partly by building diversification into each fund.
- The Equity and International funds offer diversification by including managers with differing investment styles and market-cap orientations.
- The Smaller Companies Fund brings together managers who use different investment approaches, though each focuses on the securities of smaller companies.
- SBH Focused Small Value is a concentrated portfolio whose managers are highly risk aware in building the portfolio.
- We believe that excessive asset growth often results in diminished performance. Therefore, each fund may close to new investors at a level that Litman Gregory believes will preserve each manager’s ability to effectively implement the PartnerSelect Funds concept.
Selection Criteria—What Makes a Manager a Candidate for Our Equity Funds?
Litman Gregory believes that superior investment managers exhibit most of the following characteristics.
- Consistently above-average intermediate and long-term performance relative to an appropriate benchmark index and peer group. Litman Gregory maintains its own database and has developed proprietary software to measure and analyze performance over various periods.
- A well-defined investment process that is executed with discipline. Discipline refers to the commitment to in-depth research to support each and every decision and also to an unwavering commitment to the manager’s process and circle of competence. This combination of sound process and discipline helps to minimize decision errors by the manager.
- The confidence and ability to think and act independently.
- The intellectual honesty to realize a mistake, learn from it and move on.
- A passion for stock picking that results in the drive to work harder and more creatively in order to gain an edge.
- 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.
Litman Gregory and its affiliated companies have extensive experience evaluating investment advisory firms using the above criteria, and they believe that each of the investment managers selected for the funds exhibits most of the qualities mentioned above. Moreover, specific to PartnerSelect Funds, Litman Gregory evaluates each manager’s ability and inclination to run a concentrated portfolio and his or her enthusiasm for the opportunity.