Litman Gregory Fund Taps Star Portfolios

NEW YORK ( TheStreet) -- Jeffrey Gundlach's performance has been sizzling. During the past year his DoubleLine Total Return Bond ( DBLTX) has returned 10.5%, outdoing the Barclays Capital Aggregate U.S. Bond Index by five percentage points and ranking as the top intermediate-term fund, according to Morningstar.

Before launching DoubleLine in 2010, Gundlach delivered top results as portfolio manager of TCW Total Return Bond ( TGLMX). But investors could have done even better by investing in Gundlach's hedge fund, says Jeremy DeGroot, chief investment officer of Litman Gregory Asset Management. In the hedge fund, Gundlach outperformed by betting aggressively on lower quality securities.
Jeffrey Gundlach, DoubleLine Capital

Now investors can get exposure to Gundlach's aggressive strategy in a mutual fund. The approach is one of four that are being packaged into a new fund, Litman Gregory Masters Alternative Strategies ( MASNX). To offer a compelling investment, Litman Gregory has recruited a team of star managers who all run successful funds, including Steven Romick, portfolio manager of FPA Crescent ( FPACX), John Orrico, portfolio manager of Arbitrage ( ARBFX), and Matt Eagan, co-manager of Loomis Sayles Bond ( LSBDX).

Why buy the Litman Gregory alternative offering instead of the managers' flagship funds? DeGroot says that the managers all provide Litman Gregory with special approaches that have not been offered before in mutual funds.

The new alternative fund is the latest in a series from Litman Gregory that rely on best-of-breed managers. Most of the offerings have delivered competitive returns. Funds that have outdone their category averages during the past decade include Masters' Select International ( MSILX), Masters' Select Value ( MSVFX) and Masters' Select Equity ( MSEFX).

For the new alternative fund, Litman Gregory has recruited stock and bond managers that follow different disciplines. The goal is to assemble a diversified portfolio that could prove resilient under a variety of market conditions. The Litman Gregory alternative fund will be benchmarked against a portfolio that is 40% in stocks and 60% in bonds. "The aim is to perform better than a 40-60 portfolio while recording less volatility," says DeGroot.

Meet the Managers

In recent years, many companies have introduced alternative funds. These sell short or use other approaches that can prosper in an era of erratic stock markets. While there is a clear need for funds that can excel in down markets, DeGroot said that many of the new funds have inexperienced managers and high fees. To offer a better solution, Litman Gregory sought managers with long track records. The new fund's institutional class shares have an expense ratio of 1.49%, which is lower than the average figure for alternative funds and a fraction of what hedge funds charge.

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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