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Litman Gregory Fund Taps Star Portfolios

Stocks in this article: MSILXMSVFXMSEFX

Among the most noteworthy managers in the new Litman Gregory fund is Steven Romick. During the past 10 years, his FPA Crescent fund has returned 8.9% annually, outdoing 99% of competitors in Morningstar's moderate allocation category. A contrarian, Romick buys unloved stocks and often holds big cash stakes when he can't find any bargains. Besides the mutual fund, Romick also runs a hedge fund that sells short and buys illiquid securities, which are hard to trade. For the Litman Gregory fund, Romick will incorporate some ideas that have been used in the hedge fund.

A strong performer in down markets is John Orrico, manager of Arbitrage Fund that has returned 5.5% annually and ranked as the top-performing market-neutral fund during the past 10 years. Orrico's flagship fund -- which is currently closed to new investors -- practices traditional merger arbitrage, buying stocks that are targets of acquisitions. For the Litman Gregory fund, Orrico will buy bonds as well as stocks that are involved in mergers.

Another manager who can help to diversify a portfolio is Matt Eagan. His Loomis Sayles Bond has returned 10.0% annually during the past ten years, outdoing 92% of competitors in the multisector bond category. Like most bond funds, the flagship Loomis Sayles fund tends to lose money when interest rates rise. But for the Litman Gregory portfolio, Eagan will be permitted to sell short and use other techniques that may limit losses during difficult bond markets.

Because of the big bond allocation, the Litman Gregory alternative fund would lag the S&P 500 in a roaring bull market. But Litman Gregory doesn't expect to see a major rally any time soon. Because of the sluggish economy and overwhelming debt problems, DeGroot figures that stocks will remain volatile and deliver meager total returns of 6% annually for the next five years. In that environment, the new fund should provide competitive results and help to diversify conventional portfolios, DeGroot says.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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