Frequently Asked Questions
PartnerSelect Funds Concept
We believe it is a combination of five factors:
- The skill of the sub-advisors;
- A mandate that allows sub-advisor to run a concentrated sub-portfolio of their highest conviction ideas in order to bring distinctive strategies that are very different from a benchmark;
- The even greater flexibility we can provide in individual manager mandates through the diversification of a multi-manager approach;
- Litman Gregory’s responsibility for due diligence, monitoring and overall operations of the funds; and,
- The willingness of Litman Gregory to limit assets to levels that preserve the managers’ ability to own only their highest-conviction names.
Why does Litman Gregory believe concentrated portfolios can deliver better long-term performance in its equity funds?
First, it is worth noting that we don’t believe that all stock pickers are able to add value through concentrated investing. We also don’t believe concentration will result in higher returns in all time periods. However, for skilled, high-conviction stock pickers, we believe there is the potential to deliver higher returns over the long run with a concentrated portfolio.
Over the years we’ve interviewed hundreds of stock pickers and have come to understand that most active managers are not equally confident in all the stocks they hold in a broadly diversified portfolio. Consequently, if we believe a particular stock picker can add value via active management, then we believe it is logical that the stock picker can add more value over the long run by concentrating on a smaller number of their highest conviction ideas.
If concentrating on only their best ideas increases a portfolio manager’s ability to beat a benchmark, why don’t all managers do this?
There are three broad reasons why more managers don’t concentrate their portfolios to a greater degree. First, as we noted, not all managers have approaches that would benefit from concentration. For example, a top-down manager who seeks to identify industries or regions likely to perform well might want to own a larger number of names to ensure good representation in that area. Second, even managers who emphasize bottom-up company research may not feel comfortable with the risks entailed in owning a smaller number of names, so they add more names to reduce overall portfolio risk. Third, asset growth often requires managers to own more names and larger-cap names. As noted earlier, there is a fourth issue—stock pickers who are not skilled may not be able to add value through concentration. In fact, they may detract value by virtue of less diversification. The Masters’ concept addresses each of those issues. We only choose managers we believe are highly skilled and likely to benefit from concentration, we seek to achieve overall portfolio diversification by combining managers, and we limit assets.
We believe flexibility is important. Ideally, a stock picker should be able to efficiently buy and sell stocks at the prices they deem attractive. They should be able to do this without their own trading volume influencing the price of the stock being bought or sold. However, when an investment firm runs too much money it may take a long time to buy or sell a full position because the number of shares being bought or sold may make up many days of the stock’s average daily trading volume. The result is that the stock price could move against the buyer/seller during the lengthy transaction period or the buying or selling could itself move the stock price.
By keeping the individual asset levels of each sub-advisor relatively small Litman Gregory believes the Litman Gregory Masters Funds will have several advantages. Because Litman Gregory Masters Funds requires the sub-advisors to hold only their highest-conviction ideas, it is not unusual for a stock to be sold in a Litman Gregory Masters Funds portfolio at a time when it is still attractive enough to be a “hold” in the sub-advisor’s more-diversified portfolios. When this happens, Masters’ small asset base allows the advisor to sell the position quickly and with little market impact. On the buy side, in some cases sub-advisors have been able to buy holdings for Masters’ that they can not buy for other, larger funds they manage. Though this is not typical, several sub-advisors have been able to do this on occasion.
We believe the funds are appropriate for investors who:
- Understand equity-market risk.
- Seek strong long-term performance relative to relevant benchmarks but are less concerned about relative short-term performance.
- Believe in active management and the potential for concentrated investing, in the right hands, to add value over the long-run.
- Have familiarized themselves with the PartnerSelect Funds, believe in the specific concept and have confidence in Litman Gregory’s skill in picking and overseeing the sub-advisors.
- Are looking for the specific type of exposure inherent in the specific fund in which they are investing.
Litman Gregory created the PartnerSelect Funds (formerly known as Litman Gregory Masters Funds) with the objective of isolating the investment skills of a group of highly regarded and experienced portfolio managers. To meet this objective, we designed the funds with both risk and return in mind, placing particular emphasis on the following factors:
- Only managers Litman Gregory believes to be exceptionally skilled are chosen to manage each fund’s sub-portfolios.
- Each equity manager runs a focused sub-portfolio of his or her highest-conviction stocks within each PartnerSelect fund. We believe 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 (their) more-diversified portfolios over a market cycle.
- Our Alternatives Strategies Fund and High Income Alternatives Fund managers are given flexible mandates that can include concentration on best ideas as well as being opportunistic in when to take on additional risk in pursuit of higher return.
- While each individual manager’s portfolio is distinct, we achieve broader diversification by using multiple managers with different styles or strategies.
- Limiting the asset base of each fund is supportive of the PartnerSelect Funds concept. Litman Gregory believes that excessive asset growth can result in diminished performance. We have committed to close each PartnerSelect fund to new shareholders at a level that we believe will preserve the managers’ ability to effectively execute their strategy including a focus on “best ideas.”
Due Diligence and Manager Selection
There is no hard and fast rule, but our willingness to stick with a stock picker is heavily influenced by our confidence in their skill and enthusiasm for being a part of Litman Gregory Masters Funds. Our regular monitoring keeps us up to date on the manager’s portfolio and the reasons behind good or bad performance. And, based on our contact we are always assessing whether the reasons we hired the sub-advisor in the first place remain valid. However, if for any reason our confidence in the sub-advisor comes into question we will typically do a thorough update of our due diligence. This could be triggered by performance that is poor for an extended period of time (exactly how long will depend on the magnitude and the reasons for the underperformance), or other more subjective factors that arise from our ongoing monitoring. Due diligence updates go beyond our regular ongoing monitoring, and may involve another site visit and round of interviews. If we come away from this review process feeling highly confident that the reasons we liked the stock picker in the first place are still intact, we will stick with the manager even in the face of several years of underperformance. If our confidence has lessened but is still strong we may weigh the alternatives. If our confidence is not high then we will begin to search for a replacement.
It is worth noting that concentrated portfolios tend to be more volatile than diversified portfolios. Sometimes a stock picker is too early in buying a stock, resulting in a period of weak performance, but ultimately the stock picker successful over the long term. And even highly skilled stock pickers make mistakes. So we expect all our sub-advisors to have occasional periods when performance is poor. Fortunately, the diversification in each Litman Gregory Masters Funds significantly mitigates the risk from any single manager, and so far the funds have experienced many more positive manager performances than bad manager performances.
As is often the case in our industry, the managers are not under long-term contracts. This means that they could walk away or we could fire them at any point. Practically speaking, if the relationship is going well and they are doing a good job, we will want to keep them and they will want to stay. If that is not the case, we wouldn’t want to keep them and we certainly wouldn’t want a sub-advisor to be contractually forced to run money for Litman Gregory Masters Funds. To date we have removed several sub-advisors though it is obviously our goal to make good long-term hires so that removals are rare.
Our sub-advisors may be motivated by one or more factors, including:
- The respect for Litman Gregory they’ve gained over the years as a result of the initial and ongoing due diligence we have done on their firm. This influences the confidence they have in our firm as a strong potential partner.
- A fee sharing structure that provides them with greater reward for strong success.
- Their confidence in the PartnerSelect Funds concept.
- A number of our sub-advisors have expressed a real passion for concentrated investing that is reflected in their excitement in getting the opportunity to do so in a real world portfolio. In most cases, this is not an option in the separate accounts or the mutual funds they run.
- The prestige of being part of a PartnerSelect Funds group.
- The opportunity for friendly competition against the other PartnerSelect Funds sub-advisors.
- The revenue stream from the account.
When we hire stock pickers as sub-advisors for a Litman Gregory Masters Funds, it is our objective to apply an extremely high standard and to be exceptionally thorough in our research of the stock-picking team, their process, their execution, the culture and business objectives of the organization and their enthusiasm for being part of Litman Gregory Masters Funds. In meeting this objective, we hope that each sub-advisor we hire will be with the fund for the duration of his or her career. The conviction we gain from this process also makes it easier for us to ride through the occasionally bad periods of performance that even great stock pickers experience. Despite these efforts, sometimes events outside our control force a change—such as when Bruce Bee (one of the original Litman Gregory Masters Funds International managers) died. The other reason for a change would be if our opinion changes with respect to a manager’s ability to deliver good performance.
When we believe it is in shareholders’ best interests to make a change it is almost always because of one or more of the following reasons:
- We believe we were wrong about the stock picker’s skill.
- We realize that the stock picker is not at his or her best running a highly concentrated portfolio.
- Something has changed at the stock picker’s organization that reduces our confidence in the ability of the stock picker to perform well going forward.
- We come to believe that the stock picker is not adequately attentive to the Litman Gregory Masters Funds portfolio.
Fortunately, we have not had to make many sub-advisor changes over the years across the five Litman Gregory Masters Funds funds.
There are two ways we can assess this. The objective way is to compare the sub-advisors’ performance for PartnerSelect Funds against other portfolios they run. This is particularly telling if the other portfolios are significantly more diversified. When we hire sub-advisors it is with the objective that they be able to deliver higher long-term returns with their concentrated PartnerSelect Funds portfolio than they would in their more-diversified portfolios. (We understand that over shorter time periods this won’t always be true.) The subjective way to assess whether the PartnerSelect Funds portfolio reflects the sub-advisor’s best thinking is through our contact with them, including stock discussions, which provide us with a window in which to assess their enthusiasm for and respect for the relationship with Litman Gregory and PartnerSelect Funds.
Is the due diligence process the same when hiring a stock picker for PartnerSelect Funds as it is when selecting a third-party fund Litman Gregory’s affiliates use in client portfolios?
While the basic due diligence process is the same, we will additionally assess the stock picker’s comfort with running a concentrated portfolio and their enthusiasm for being part of PartnerSelect Funds. Our selection criteria for hiring PartnerSelect Funds sub-advisors are the most demanding.
How do you assess whether a stock picker is able to add value by running a concentrated portfolio?
It is easiest to evaluate this if they already have experience and success running a concentrated portfolio. For example, Bill Nygren has run concentrated funds. For stock pickers who have not run a highly concentrated portfolio, we ask them to put together a “mock” portfolio to reflect the stocks they would hold if they were already running a Litman Gregory Masters Funds portfolio. We then discuss the portfolio so that we can understand the criteria and the process used to identify the highest-conviction ideas and to build the portfolio. An important part of the process is a detailed discussion of the stocks in the portfolio with the objective of gaining an understanding about why they have stronger conviction that these holdings will be successful. We then make a qualitative assessment as to whether the manager has good reasons for their varying conviction levels between stocks (we may also discuss stocks they hold in their more diversified portfolios) and whether they are genuinely more confident in some holdings than others.
Our due diligence process is an extremely thorough multi-step process that is described here and titled: Researching Equity Managers and Mutual Funds: The Litman Gregory Approach.
We have been conducting due diligence on stock pickers since the founding of our firm in 1987, so we are already very familiar with many industry veterans. Also, by being in the industry for many years, we are familiar with many others by reputation. Aside from managers we already know, we also search industry databases and we are often contacted by investment management firms interested in running money for PartnerSelect Funds. Finally, we also query stock pickers we respect for recommendations. Once we have identified a candidate we conduct extremely thorough due diligence to determine whether the stock picker is worthy of running money for one of the PartnerSelect Funds.
When selecting stock pickers for the PartnerSelect Funds, what are Litman Gregory’s selection criteria?
We believe that superior investment managers exhibit most of the following characteristics:
- A well-defined process that is executed with discipline. There are many intelligent people in the investment business, but based on our many years of researching stock pickers we believe that great stock pickers have a process that is usually explicitly outlined and faithfully followed rather than intuitive. This helps to reduce decision errors that result from mental shortcuts born from overconfidence or sloppy work.
- The passion for stock picking that results in the drive to work harder and more creatively in order to gain an edge. The investment business is intellectually stimulating but hugely demanding. Successful investors usually have a love for the business that allows them to make lifestyle sacrifices as they pursue their overriding passion for stock picking.
- The confidence and ability to think and act independently. Great stock pickers tend not to be influenced by consensus views. Hand in hand with thinking independently is a long time horizon and a high degree of patience. (They are willing to be wrong at least temporarily.)
- Intellectual honesty. Great stock pickers are honest about their circle of competence and are aware of their biases so that they can be objective in their analysis. While confident, they are also able to recognize and admit mistakes and learn from them so they can go on to fight another day.
- Experience and an above-average long-term performance relative to an appropriate benchmark index and peer group. Litman Gregory measures investment manager performance against performance composites made up of other stock pickers using a similar stock-picking style and market capitalization. Litman Gregory maintains its own database and has developed proprietary software to measure and analyze performance over various periods.
- 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.
- An investment process that lends itself to concentrated investing. Though we don‘t require that a stock picker have experience in running concentrated portfolios, they must have a process that lends itself to concentrated investing to be considered for a Litman Gregory Masters Funds sub-advisory position.
- A high level of enthusiasm for being part of PartnerSelect Funds. We require that any sub-advisor be enthusiastic about the opportunity.
We have extensive experience evaluating investment advisory firms using the above criteria, and we believe that each of the investment managers selected to participate in the funds exhibits most of these qualities.
We watch their trades on a regular basis to confirm that the account is being run as we expected based on our due diligence. In addition we have regular contact with the sub-advisors to discuss various aspects of the portfolio, including individual holdings, and we stay updated on developments at their firm and with the analyst team.
Portfolio Construction and Management
This varies widely based on the fund and circumstances. Some of the PartnerSelect Funds managers have lower turnover than others. Sometimes market volatility impacts turnover either because rapid stock price spikes and/or dips change the relative appeal of certain stocks, or because in a declining market tax-motivated trading can increase turnover.
The funds are not tax managed but we are tax-aware. Litman Gregory tracks individual tax lots and brings tax lot selling opportunities to each sub-advisor’s attention. Tax strategies that have been employed include:
- Selling high loss lots and replacing them with new positions of equal conviction;
- Doubling up on underwater positions and then selling the original loss lots after 31 days (to avoid a wash sale);
- Selling loss lots and buying them back after 31 days (again to avoid loss lots).
In addition, we remind the stock pickers to avoid short-term capital gains if possible.
Though Litman Gregory Masters Funds is run in a tax-aware manner, there may be years when the fund has material distributions. Moreover, since the funds’ shareholder group includes non-taxable shareholder, tax strategies are employed only if the stock picker believes they won’t unduly favor one type of shareholder over another.
State Street Bank.
Is there a conflict of interest for a manager to select stocks for both their own fund and for PartnerSelect Funds?
No. If they are buying or selling stocks for their own fund simultaneous to buys or sells for PartnerSelect Funds, they would apply an allocation process that would be fairly applied. However, because of the high conviction level required in a PartnerSelect Funds portfolio, there may be times when the sub-advisor sells a holding out of the fund that still qualifies as a hold in a more broadly diversified portfolio. Other times, because of the smaller asset base, there may be instances where the sub-advisor is able to buy a position for the PartnerSelect Funds portfolio that is too small or not liquid enough for a larger portfolio.
Each individual sub-advisor directs their respective trades.
They do not. Each sub-advisor works autonomously on their portion of the overall Litman Gregory Masters Funds. The overall fund comprises the combination of each individual sub-portfolio.
Certain strategies in the Alternative Strategies Fund and High Income Alternatives Fund use derivatives and/or shorting. Most short selling is done in the Alternative Strategies Fund by equity-oriented managers as part of the normal course of merger-arbitrage (owning the target company and shorting the acquiring company), or as part of a pair trade, where a manager owns a stock and shorts one or more closely related stocks in order to hedge industry risk. Managers may also short stocks as part of “stub” trades, where they are long a conglomerate or holding company, and short one or more publicly traded subsidiaries in order to isolate the undervaluation of the remaining company. There are typically a limited number of very small directional short equity positions where the manager is betting against a stock. Managers may at time use options as hedges around specific events, primarily for hedging.
Derivatives, in the form of credit default swaps (CDS) and interest rate swaps or futures, are used by two credit-oriented managers for hedging credit and interest rate risk, respectively. Additionally, one of those managers (DCI) uses CDS to gain long and short credit exposure to a diversified group of individual companies as a core part of their overall strategy. Loomis Sayles also uses currency forwards to hedge currency risk in non-USD positions, as well as for expressing (typically modest) directional views on other currencies.
The managers of the equity funds can short stocks though it is highly unlikely that they will do so. The funds can also transact in derivatives though the only derivatives transactions expected to be part of any of the funds’ ongoing strategy are foreign currency futures contracts for the sole purpose of hedging currency exposure when foreign stocks are held. Even in this case, it is unlikely that most foreign currency exposure will be hedged. In the case of Litman Gregory Masters Funds International Fund, some of the managers do not hedge their currencies while others will hedge, depending on the circumstances.
On rare occasions managers may write options as part of a tax management strategy. But other than currency hedging, derivatives are highly unlikely to be part of the funds’ holdings.
The presence of multiple sub-advisors reflecting different investment approaches as well as the quality of the sub-advisors contribute to diversification and risk control. In addition, Litman Gregory’s monitoring of the sub-advisors and overall fund portfolio also plays a role. Litman Gregory watches for unintended concentration in specific stocks (e.g. more than one sub-advisor owning the same stock resulting in a large weighting) and also pays attention to sector weights and other portfolio-level diversification issues. If in our judgment, overlapping positions result in a level of exposure that we don’t believe is prudent for the overall fund we will step in and work with the sub-advisors to reduce the exposure.
It is important to remember that each Litman Gregory Masters Funds is subject to equity-market risk and may at times lose more than its benchmarks or peer-group during a market decline.
The actual allocations will naturally drift as a result of each manager’s individual performance, so we allocate each day’s cash inflows based on how far each sub-advisor is from their target allocations. Thus, the sub-advisor who is furthest below his or her allocation will get the most money; the sub-advisor who is next furthest below will get the second largest amount and so forth.
If the sub-advisors have drifted from their allocations based on their performance relative to each other and this can’t be corrected from new cash inflows we will consider rebalancing. However, the allocation will have to drift materially before we would rebalance. Typically we wouldn’t rebalance unless one or more sub-advisor’s allocations were at least two percentage points off target, and even then we would only move cash reserves if available. If a rebalancing required stock to be sold we would consider this only if the sub-advisor was at least four percentage points off target, and even then we reserve the right to use our judgment. We have rebalanced a number of times in several of the Litman Gregory Masters Funds but we have never had to force stock sales to do so.
The percentage allocation to each manager is informed by our objective to achieve overall risk and diversification goals for each fund. For the equity funds we are more likely to allocate equally across managers with differing styles, and it is not our intention to tactically shift weights between managers. For the Alternatives Strategies and High Income Alternatives funds we pay close attention to statistics like pair-wise correlations that show the degree to which each manager’s performance is correlated with the other managers. We also consider a range of scenarios and seek to weight each manager’s allocation relative to the others so as to generate attractive absolute and risk-adjusted returns across a variety of market conditions, rather than trying to optimize for a specific environment. However, we may tactically overweight a manager based on our assessment of the relative attractiveness of their opportunity set versus other managers (and have done so in the past). In general, though, we consider frequent tactical rotation to be a difficult way to consistently add value, so we set a high bar for a “fat pitch” opportunity before we make such moves.
Please refer to the specific fund pages for target manager allocations.
The number of sub-advisors is a function of the type of fund and the number of highly skilled managers we can identify as potential sub-advisors. Generally we expect to have at least three sub-advisors and preferably four to seven.
We will not add a manager if we believe the new manager is not at least as skilled as the existing sub-advisors. We may also consider the distinctive nature of a particular manager’s investment approach. We are more likely to add a new sub-advisor if we believe they will add material diversification to the overall portfolio.
With respect to the blend of styles, unless it is a style-specific fund, we seek to keep each of our equity funds roughly style-neutral. This can be accomplished by various combinations of value, growth and blend managers.
Communication and Disclosure
No. Our responsibility is first and foremost to do everything we can to increase the odds of meeting each fund’s long-term performance objectives. If we are contemplating removing a manager it is likely that it will play out in one of two ways. It could be that we have already decided to remove them, but have yet to tell them, pending a replacement. In this instance we would not want to make this information public because we don’t believe it is likely to result in an attentive and focused sub-advisor. Alternatively, we may be considering a change pending re-assessment of one or more factors. In that event we would not necessarily want to alert the sub-advisor to that fact since it could impact the way they respond to our concerns, nor would we want to put the sub-advisor through the potential embarrassment of a public announcement. In either instance we believe our shareholders’ interests are better served by deferring any discussion until a change is actually made.
The only exception to publicly announcing that a sub-advisor is under review is when there has been a key and public personnel change (e.g. when David Winters, a Litman Gregory Masters Funds Value sub-advisor, left Franklin Mutual Advisors).
We do not for several reasons. First, we strongly encourage our sub-advisors to focus on long-term performance. We believe that reporting performance could, in certain instances, result in some pressure to focus on short-term performance to the potential detriment of long-term performance. Similarly, because the individual sub-advisor portfolios are concentrated we expect more short-term performance volatility at the sub-advisor level. This could also result in short-term performance pressure. Finally, performance comparisons with the sub-advisor’s own funds may, at times, be awkward for the portfolio managers.
Each month on www.mastersfunds.com we post portfolio characteristics including sector and market-cap weightings as well as other data. Total net assets, the current expense accrual rate and the number of stocks are also reported. Performance reporting is also provided monthly.
Our shareholder reports also disclose the amount of the aggregate personal investment in the Litman Gregory Masters Funds by Litman Gregory personnel and our independent trustees.
Portfolio holdings for the equity funds are disclosed quarterly at www.mastersfunds.com. Portfolio holdings for the Alternative Strategies fund are disclosed annually and semi-annually in our shareholder reports.
Our philosophy seeks to achieve the following:
- Educate shareholders about the funds’ investment philosophy
- Explain expectations honestly and realistically
- Provide useful information that will help shareholders assess the funds’ success in pursuing their objectives
- Always communicate honestly about all relevant developments and expectations
Litman Gregory's Role
How does Litman Gregory fulfill its commitment to making PartnerSelect Funds a shareholder-friendly fund company?
Some of the ways we put shareholders’ interests first include:
- In all that we do with respect to PartnerSelect Funds, our overriding decision criteria focuses on the benefit to shareholders.
- We communicate thoroughly and honestly with our shareholders.
- We work hard to continue to reduce fund expenses.
- We pass through all cost savings to shareholders.
- We have introduced meaningful fee breakpoints on the portion of the management fees we are paid, of our own volition.
- We have committed to “soft closing” our funds (in which we stop accepting new shareholder relationships) at relatively low asset levels, and we have followed through when individual funds have reached these levels.
- We and our independent trustees have invested significant amounts of our personal assets in the PartnerSelect Funds. These amounts are disclosed in our shareholder reports.
Litman Gregory Asset Management, LLC (LGAM) is an RIA founded in 1987 that manages money for high net worth individuals and families as well as foundations and endowments. Litman Gregory Fund Advisors, LLC, was formed by LGAM in 1996 and is the Advisor to the PartnerSelect Funds. Litman Gregory Analytics, LLC was formed by LGAM in 2000 and operates Advisor Intelligence, a web-based investment research service for financial advisors.
Litman Gregory and its affiliates have researched, analyzed and written about hundreds of stock picking teams and mutual funds and put their ideas to the test by designing and successfully investing in portfolios of funds.
First and foremost we select the sub-advisors for board approval. Beyond that we have six primary areas of responsibility:
- On an ongoing basis we monitor and evaluate the sub-advisors. We evaluate the managers’ stock picks, attentiveness, and clarity of thinking with respect to Litman Gregory Masters Funds. We also pay attention to developments in each sub-advisor’s organization as well as the manager’s performance.
- When necessary we replace managers. With more than 20 sub-advisors across four funds there are occasionally going to be instances where a change must be made.
- We are responsible for monitoring the overall fund portfolios. On a day-to-day basis we pay attention to what the sub-advisors are buying and selling. We don’t second-guess their decisions however, because each sub-advisor works independently and is unaware of the overall fund portfolio, it is important for us to watch for unintended fund-level concentrations in specific industries or stocks. This is rarely a problem, though there was one instance where three of the managers in Litman Gregory Masters Funds International owned the same stock. Stock overlap is not a concern to us unless the holding becomes an unusually large percentage of the fund’s portfolio. In this case a particular stock was performing very well and grew to 10% of the overall portfolio. Prior to that point we conferred with the three sub-advisors. After its portfolio allocation continued to grow through appreciation up to 10%, we asked each sub-advisor to trim their holding to help us reduce the allocation in the portfolio to 7%.
- We oversee expense management. This includes negotiating and overseeing expenses, including all vendor relationships. We take this job very seriously and are always looking for opportunities to reduce expenses. We pass along one hundred percent of all cost savings to shareholders.
- Tax management is another area we pay attention to. When a fund has a big loss in a holding we make sure the sub-advisor is aware of the tax-selling opportunity in case there is another stock that may be equally attractive that he may want to hold in its place. We leave this decision up to the managers and view our role as limited to making sure they are aware of tax-selling opportunities.
- Finally, we are responsible for shareholder communications. We take our responsibility to communicate with shareholders very seriously. Our mission in all of our shareholder communications is to be honest and open about everything impacting our fellow shareholders. In addition to the required annual and semi-annual reports we also post on-line and mail out letters in the off-quarters (some fund supermarkets won’t mail this “non-required” correspondence) and update our website on a frequent basis.
When a PartnerSelect fund “soft closes” to new shareholders, can existing shareholders add to their positions?
Initially yes, though it is possible that if too much subsequent asset growth occurs we may “hard close” the fund, which means we would stop accepting all additional investments.
There are three elements to fund expenses:
- The sub-advisor fee that is individually negotiated with each sub-advisor.
- Our fee which starts at 0.40% and declines when each fund reaches its closing level. The combination of our fee and the sub-advisors’ fees equal the total management fee.
- The operating expenses, which are a function of economies of scale as assets grow and our ability to negotiate attractive contract rates with our vendors.
Our focus is on long-term return. Consequently we think of risk in terms of not achieving long-term return objectives. However, practically speaking we believe investors tend to think of risk in terms of absolute loss. So our general objective is to keep the risk of one-year loss roughly in line with each fund’s benchmark. The mix of managers and the
The stated objective of the equity funds is to deliver long-term growth of capital. For our Alternative Strategies Fund the goal is achieve attractive absolute and relative long-term returns with lower risk and lower volatility than the stock market, and with relatively low correlation to stock and bond market indexes. For the High Income Alternatives Fund, the goal is to generate a high level of current income from diverse sources, consistent with capital preservation. For all funds we seek to out-return relevant benchmarks over the long run, which we define as at least five years. Taken further, we seek to outperform in the vast majority of rolling five-year time periods. There is no guarantee that these objectives will be met.