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Rating:Litman/Gregory Drops TCW as Subadvisor to Two Funds Not Rated 0.0 Email Routing List Email & Route  Print Print
Friday, April 11, 2008

Litman/Gregory Drops TCW as Subadvisor to Two Funds

News summary by MFWire's editors

Litman/Gregory Fund Advisors has dropped TCW Investment Management as subadvisor to two of its funds in the wake of the sudden departure of a TCW portfolio manager. TCW had managed 33 percent of the Masters' Select Focused Opportunities Fund and 20 percent of the Masters' Select Equity Fund.

Replacing TCW at the Focused Opportunities Fund is Sands Capital. TCW's allocation at the Select Equity Fund has been divided evenly between Sands and Turner Investment Partners.

The changes took effect April 3.

"The catalyst behind our removal of TCW was the unexpected resignation of co-manager Steve Burlingame in February," Litman officials said in a statement last week, noting that Burlingame's departure was the "third significant departure from the TCW team since we hired them to run a portion of Mastersí Select Equity Fund in October of 2003."

Below is the press release issued by Litman/Gregory last week.

Company Press Release

April 3, 2008 - Effective today Sands Capital Management (Sands) and Turner Investment Partners (Turner) are being added as new sub-advisors in the Mastersí Select Funds. Sands will replace TCW Investment Management Company (TCW) on Mastersí Select Focused Opportunities, while TCWís allocation in Mastersí Select Equity will be split evenly between Sands and Turner.

The catalyst behind our removal of TCW was the unexpected resignation of co-manager Steve Burlingame in February. Craig Blum, the other co-manager, became the sole portfolio manager at that time. Although we continue to think very highly of Blum, Burlingameís departure was the third significant departure from the TCW team since we hired them to run a portion of Mastersí Select Equity Fund in October of 2003. This string of departures undermines the high level of confidence that we must have to hire and retain a Mastersí Select manager. TCW managed 20% of Mastersí Select Equity and 33% of Mastersí Select Focused Opportunities.

Sands and Turner are growth managers we have known and respected for a number of years. We did additional work on both firms during the past six weeks as we carefully considered them for Mastersí. Both have experience managing relatively concentrated portfolios. The reasons we chose to add both Sands and Turner as sub-advisors to Mastersí Select Equity Fund are three-fold. First, based on our due diligence, they both meet the high standard that we require for a Mastersí Select stock picker. Second, because the highly concentrated portfolios run by each Mastersí Select sub-advisor can be very volatile, we have come to believe that more manager diversification (provided all the stock pickers are highly skilled) reduces the odds that a majority of sub-advisors will experience a slump at the same time. We believe this will smooth out the overall fundís relative performance over shorter time periods without hurting long-term performance. So provided that our prospective and current sub-advisors meet our demanding criteria, we are likely to slightly grow our sub-advisor team over time. In this case, Sands and Turner have very different approaches to picking growth stocks, which we believe increases the potential diversification benefit. Finally, by adding to our sub-advisor team we increase the depth of the fundís management team, so that if an existing sub-advisor is no longer a good fit for a fund, we are not necessarily forced to hire a replacement but can instead re-allocate that sub-advisorís assets to existing Mastersí managers. In the much newer Mastersí Select Focused Opportunities Fund, given the fundís small asset base, we felt a one-for-one replacement with Sands for TCW was more appropriate at this time.

Brief Descriptions of Sandsí and Turnerís Investment Processes

Sands, which was founded in 1992, believes that over longer periods of time, stock prices tend to follow earnings growth. They believe great investment ideas are rare, and for that reason they have a history of running a concentrated portfolio focused on companies that, based on their research, are high-quality, seasoned, and with excellent long-term growth prospects. The investment approach is purely bottom-up and focuses on finding industry-leading companies that have a sustainable competitive edge that Sands believes will enable them to fend off competitive pressures while allowing them to maintain or grow market share. Evaluating and validating their fundamental thesis involves contact with company management as well as suppliers and competitors. Ultimately, the team looks for six key factors: sustainable above-average earnings growth, leadership position in a promising business space, significant competitive advantage or unique business franchise, dedicated management, financial strength, and a rational valuation relative to business prospects. The portfolio managers for the Sands sleeve of Mastersí Select Equity will be Frank Sands Jr. and Michael Sramek with input from the entire Sands research team.

Turner, founded in 1990, believes that earnings expectations drive stock prices: companies whose earnings exceed Wall Street expectations should see their stock price perform well. Turner seeks to buy companies whose growth is accelerating. The investment process combines quantitative, fundamental, and technical analysis. Turnerís portfolio managers and analysts are sector specialists. They focus on their proprietary quantitative screen's top-ranked companies in each sector for their fundamental research. Bottom-up analysis focuses on identifying companies with accelerating revenue and earnings growth, a large potential market opportunity, expanding margins, and other growth characteristics that they believe will lead to better-than-expected earnings. Once a stock is targeted for purchase or sale, technical analysis is used to identify attractive entry (or exit) price points, although Turner may sell quickly if a company misses earnings. Valuations are not a critical element of the buy/sell decision. The portfolio managers for Turnerís sleeve of Mastersí Select Equity will be Bob Turner, Chris McHugh and Bill McVail.  

Edited by: Armie Margaret Lee

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