Litman Gregory Masters Alternative Strategies (MASNX), April 2012

By David Snowball

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Objective and Strategy

MASNX seeks to achieve long-term returns with lower risk and lower volatility than the stock market, and with relatively low correlation to stock and bond market indexes.  Relative to “moderate allocation” hybrid funds, the advisor’s goals are less volatility, better down market performance, fewer negative 12‐month losses, and higher returns over a market cycle. Their strategy is to divide the fund’s assets up between four teams, each pursuing distinct strategies with the whole being uncorrelated with the broad markets.  They can, in theory, maintain a correlation of .50 relative to the US stock market.


Litman Gregory Fund Advisors, LLC, of Orinda, California. At base, Litman Gregory (1) conceives of the fund, (2) selects the outside management teams who will manage portions of the portfolio, and (3) determines how much of the portfolio each team gets.  Litman Gregory provides these services to five other funds (Equity, Focused Opportunities, International, Smaller Companies and Value). Collectively, the funds hold about $2.4 billion in assets.


Jeremy DeGroot, Litman Gregory’s chief investment officer gets his name on the door as lead manager but the daily investments of the fund are determined bythree teams, and Jeff Gundlach. There’s a team from FPA led by Steve Romick, a team from Loomis Sayles led by Matt Eagan, a team from Water Island Capital led by John Orrico.  And Jeff Gundlach.

Management’s Stake in the Fund

None yet reported.

Opening date

September 30, 2011.

Minimum investment

$1000 for regular accounts, $500 for IRAs.  The fund’s available, NTF, through Fidelity, Scottrade and a few others.

Expense ratio

1.74%, after waivers, on $230 million in assets (as of 2/23/12).  There’s also a 2% redemption fee for shares held fewer than 180 days.  The expense ratio for the institutional share class is 1.49%.


Investors have, for years, been reluctant to trust the stock market.  Investors have pulled money for pure equity funds more often than they’ve invested in them.  An emerging conventional wisdom is that domestic bonds are at the end of a multi-decade bull market.  Investors have sought, and fund companies have provided, a welter of “alternative” funds.  Morningstar now tracks 262 funds in their various “alternative” categories.  Sadly, many such funds are bedeviled by a combination of untested management (the median manager tenure is just two years), opaque strategies and high expenses (the category average is 1.83% with a handful charging over 3% per year).

All of which makes MASNX look awfully attractive by comparison.

The Litman Gregory folks started with a common premise: “In the years ahead, we believe there will be mediocre returns and higher volatility from stocks, and low returns from bonds . . . [we sought] “alternative” strategies that we believe are not highly dependent on tailwinds from stocks and bonds to generate returns.”  Their search led them to hire four experienced fund management teams, each responsible for one sleeve of the fund’s portfolio.

Those teams are:

Matt Eagan and a team from Loomis-Sayles who are charged with implementing an Absolute-Return Fixed-Income which centers on high-yield and international bonds, with the prospect of up to 20% equities.  Their goal is “positive total returns over a full market cycle.”

John Orrico and a team from Water Island Capital, who are charged with an arbitrage strategy.  They manage the Arbitrage Fund (ARBFX) and target returns “of at least mid-single-digits with low correlation” to the stock and bond markets.  ARBFX averages 4-5% a year with low volatility; in 2008, for instance, is lost less than 1%.

Jeffrey Gundlach and the DoubleLine team, who will pursue an “opportunistic income” strategy.  The goal is “positive absolute returns” in excess of an appropriate broad bond index.  Gundlach uses this strategy in at least one hedge fund, a closed-end fund, DoubleLine Core Fixed Income (DLFNX) and Aston and RiverNorth funds for which he’s a subadvisor.

Steve Romick and a team from FPA, who will seek “contrarian opportunities” in pursuit of “equity-like returns over longer periods (i.e., five to seven years) while seeking to preserve capital.”   Romick manages FPA Crescent (FPACX) which wins almost universal acclaim (Five Star, Gold, LipperLeader) for its strong returns, risk consciousness and flexibility.

Litman Gregory picked these teams on two grounds: the fact that the strategies made sense taken as a portfolio and the fact that no one executed the strategies better than these folks.

The strategies are sensible, as a group, because they’re uncorrelated; that is, the factors which drive one strategy to rise or fall have little effect on the others.  As a result, a spike in inflation or a rise in interest rates might disadvantage one strategy while allow others to flourish. The inter-correlations between the four strategies are low (though “how low” will vary depending on market conditions).  Litman anticipates a correlation between the fund and the stock market in the range of 0.5, with a potentially-lower correlation to the bond markets.  That’s far lower than the two-year correlation between U.S. large cap stocks and, say, emerging markets stocks, REITs, international real estate or commodities.

The record of the sub-advisors speaks for itself: these really do represent the “A” team in the “alternatives without idiocy” space.  That is, these folks pursue sensible, comprehensible strategies that have worked over time.  Many of their competitors in the “multi-alternative” category pursue bizarre and opaque strategies (“hedge fund index replicant” strategies using derivatives) where the managers mostly say “trust us” and “pay us.”  On whole, this collection is far more reassuring.

Can Litman Gregory pull it off?  That is, can they convert a good idea and good managers into a good fund?  Likely.  First, the other Litman funds have been consistently solid if somewhat volatile performers.


Current Morningstar

Morningstar Risk

Current Lipper Total Return

Current Lipper Preservation


* *

Above Average

* * *

* * *

Focused Opportunities

* * *

Above Average

* * * * *

* * * *


* * * *

Above Average

* * * *

* *

Smaller Companies

* * *

Above Average

* * * *

* *


* *

Above Average

* * *

* * *

(all ratings as of 3/30/2012)

Second, Alternative Strategies is likely to fare better than its siblings because of the weakness of its peer group.  As I note above, most of the “multi-alternative” funds are profoundly unattractive and there are no low-cost, high-performance competitors in the space as there is in domestic equities.

Third, the fund’s early performance is promising.  We commissioned an analysis of the fund by the folks at Investment Risk Management Systems (a/k/a FundReveal), who looked at daily volatility and returns, and concluded:

Despite its short existence, the daily returns produced by the fund can indicate the effectiveness of fund investment decision-making . . . We have analyzed the fund performance for 126 market days, using the last 2 rolling quarters of 63 market days each. The daily FundReveal information makes it possible to get an idea of how well the fund is being managed. . . Based on the data available, MASNX is a safe fund which maintains very low risk (volatility). This is important in turbulent and uncertain markets. It is one of the top ranking funds in the safety category. Very few funds have higher ADR (average daily return) and lower Volatility than MASNX.

IRMS and I both add the obvious caveat: it’s still a very limited dataset, reflects the fund’s earliest stages and its performance under a limited set of market conditions.

The final question is, could you do better on your own?  That is, could you replicate the strategy by simply buying equal amounts of four mutual funds?  Not quite.  There are three factors to consider.  First, the portfolios wouldn’t be the same.  Litman has commissioned a sort of “best ideas” subset from each of the managers, which will necessarily distinguish these portfolios from their funds’.  Second, the dynamics between the sleeves of your portfolio – rebalancing and reweighting – wouldn’t be the same.  While each portfolio has a roughly-equal weight now, Litman can move money both to rebalance between strategies and to over- or under-weight particular strategies as conditions change.  Few investors have the discipline to do that sort of monitoring and moving.  Finally, the economics wouldn’t be the same.  It would require $10,000 to establish an equal-weight portfolio of funds (the Loomis minimum is $2500) and Loomis carries a front load that’s not easily dodged.  Assuming a three-year holding period and payment of a front load, the portfolio of funds would cost 1.52% while MASNX costs 1.74%.

Bottom Line

In a February Wall Street Journal piece, I nominated MASNX as one of the three most-promising new funds released in 2011.  In normal times, investors might be looking at a moderate stock/bond hybrid for the core of their portfolio.  In extraordinary times, there’s a strong argument for looking here as they consider the central building blocks for their strategy.

Fund website

Litman Gregory Masters Alternative StrategiesThe fund’s FAQ is particularly thorough and well-written; I’d recommend it to anyone investigating the possibility of investing in the fund.  IRMS provides the more-complete discussion of MASNX on their blog.

2013 Q3 Report

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.