LITMAN/GREGORY. Investment Strategies

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1 Investment Strategies For Client Use

2 Investment Strategies Litman/Gregory Portfolios at a Glance Litman/Gregory s tactical asset allocation expertise helps identify undervalued asset classes and weights the portfolios to take advantage of these opportunities. Litman/Gregory s fund selection expertise is based on careful, in-depth research of managers Litman/Gregory s 17-year performance track record is a result of these key strengths. With 17 years of portfolio management Advisors can be confident that Litman/ manager due diligence, and investment experience and demonstrated asset- Gregory makes independent investment selection, as well as constructing and allocation and fund-selection expertise, decisions that reflect our experience monitoring investment strategies. Litman/Gregory offers investment strategies managing our own clients accounts. based on intensive investment research. Litman/Gregory s research is driven Our firm has built its reputation based on by our dedication to objectivity and Professional financial advisors have been the quality of our investment research. independence our sole objective is selecting Litman/Gregory as an investment Litman/Gregory Research, Inc. has to excel for our clients. strategist for their clients since published our research through the No- Load Fund Analyst newsletter since 1989, Our proprietary manager due-diligence About Litman/Gregory and to financial professionals through process adheres to a strict discipline Litman/Gregory consists of four affiliated AdvisorIntelligence, a research and that seeks to identify managers with a businesses, collectively referred to practice management website published sustainable edge. as Litman/Gregory. These include by Litman/Gregory Analytics, LLC, since Litman/Gregory Research, Inc., Litman/ Our own Masters Select Funds Performance Gregory Analytics, LLC, as well as draw on our proprietary manager due Litman/Gregory Research, Inc. has Litman/Gregory Asset Management, diligence, selection, and monitoring. Our published and tracked its investment LLC and Litman/Gregory Fund Advisors, investment decision-making is grounded strategies since The model LLC.* The latter two Litman/ Gregory by a carefully thought-out investment portfolios of Litman/Gregory Research, companies are registered investment discipline that has been refined over many Inc. have been awarded a place on advisors that together manage over $6 years. Staying true to this investment the Hulbert Financial Digest Honor billion in assets as of June 30, 2006.** discipline has been a key to our success. Roll for six consecutive years. This national independent survey (previously Litman/Gregory additionally provides Litman/Gregory investment research published in Forbes magazine, based research, advice, and investment strategies is trusted by over 1,500 professional on Hulbert data) recognizes risk-adjusted to investment advisors, such as your financial advisors, for several key performance in both up- and downadvisor, for use with their clients. reasons. We only make investment markets. These portfolios are not identical moves when we have a high level to the portfolios provided to advisors but Litman/Gregory investment strategies are of conviction that our clients will are developed by the same research available on platforms that execute the be rewarded for the risk. All of our team and process. While past performance trading and rebalancing of Litman/Gregory investment decisions are valuation does not guarantee future results a portfolio recommendations. driven and are based on in-depth, fact we know well from our analysis of fundamental research. And we always managers we believe our intense Litman/Gregory has a distinct perspective carefully explain the analysis and among investment strategists. While we rationale that underlie our decisions. have the intense research focus of an institutional firm, Litman/Gregory also has Litman/Gregory's Litman/Gregory Model hands-on experience managing money Research Team Portfolio Performance for individuals and we are mindful of the Litman/Gregory has built a dedicated trust our clients and advisors place in us. and highly skilled research team. The Litman/Gregory s model portfolio team is comprised of 10 members performance has been recognized on the who are focused on asset allocation, Hulbert Financial Digest Honor Roll *Litman/Gregory Fund Advisors, LLC ( LGFA ) is the advisor to the Masters Select Funds (the Funds ). LGFA is ultimately responsible for the performance of the Funds due to its responsibility to oversee the investment managers and recommend their hiring, termination, and replacement. **Litman/Gregory companies that manage assets are Litman/Gregory Asset Management, LLC and Litman/Gregory Fund Advisors, LLC. for six consecutive years for risk-adjusted performance in both up and down markets.

3 research focus, tightly defined process, and strong discipline constitute our edge. Litman/Gregory's Role as Investment Strategist Litman/Gregory offers a selection of investment strategies that your financial advisor can recommend based on their suitability for you. After carefully assessing your risk tolerance, financial circumstances, and goals, your financial advisor will recommend an appropriate Litman/Gregory investment strategy. Litman/Gregory selects the asset allocation and the managers in each strategy and monitors the model portfolio on an ongoing basis. Changes may be made to the weighting of the asset classes within the model portfolio and to the managers employed within each asset class. Litman/Gregory's Investment Approach Litman/Gregory determines the asset allocation for each strategy based on fundamental, valuation-driven asset-class research. The individual investments are selected based on careful due diligence. Litman/Gregory continuously monitors the allocations of the model portfolios and will recommend to rebalance the model portfolios periodically. Litman/Gregory utilizes a carefully defined and tightly disciplined investment approach in constructing and monitoring the model portfolios. There are four components to our strategy: 1. The Neutral Allocation Litman/Gregory s process begins with the construction of neutral (or strategic) allocations for each investor risk tolerance type. The neutral allocations represent the baseline, long-term target allocations to broad asset classes, and are determined by using portfolio optimization and extensive scenario analysis. The goal of each of the neutral allocations is to provide a sensible long-term allocation that seeks to maximize return without exceeding a specific maximum annual loss threshold. Our neutral allocations serve as the benchmarks against which we measure the value of the additional components of our strategy: tactical asset allocation and manager selection. As an example of the neutral allocation, Litman/Gregory has developed the Equity-Tilted Balanced model portfolio* with an allocation suited to an investor who is willing * This model portfolio is referred to as Balanced Growth on the Toews i-vest platform to accept short-term risk in pursuit of above-average returns over the long-term. The portfolio seeks to limit losses to a maximum of 15% over any 12- month period (though we cannot guarantee that those loss thresholds won t be exceeded). The neutral allocation is established as the baseline of the portfolio and is the default allocation we use when we believe that no asset-class valuation opportunities exist. Below is a sample neutral allocation. Sample Model Portfolio: Litman/Gregory Equity-Tilted Balanced Portfolio Neutral Allocation Larger-Cap U.S. Stocks (50%) Investment Grade Bonds (25%) International Stocks (15%) Smaller-Cap U.S. Stocks (10%) This is a sample portfolio only. Actual managed portfolios may differ at the time of investment. Investing in mutual funds in volves risk of loss of principal. Investing in foreign securities involves certain risk, including political, economic, and currency risks, and differences in accounting methods and governmental regulations. Investing in small companies involves additional risks, such as limited liquidity and greater volatility. Investment in lower-rated and non-rated securities presents a greater risk of loss to principal and interest than higher rated securities. 2. Tactical Allocation Overlay Litman/Gregory believes that markets are usually, but not always, efficient. We conduct intensive, fundamental assetclass valuation analysis designed to identify any misvaluation opportunities that arise. Before we will deviate tactically from our neutral allocations, our discipline requires first that our conviction level in the opportunity be extremely high, and second, that we can do so without altering the risk profile of our investment strategies. We are not confident in our ability to assess short-term psychological influences on markets, but we are confident that over longer periods, valuations and prices will converge. For this reason we are Litman/Gregory Model Portfolios Litman/Gregory portfolios are constructed according to a target maximum acceptable annual loss threshold. Litman/Gregory may tactically deviate from this strategic allocation to take advantage of compelling asset class opportunities. comfortable taking a three-to-five-year time horizon on our tactical moves. As an example of the tactical allocation, Litman/Gregory may alter the neutral allocation of the Equity-Tilted Balanced model portfolio shown above to take advantage of what we deem to be undervalued asset classes. For example, at certain times, if you are invested in the Litman/ Gregory Equity- Tilted Balanced model portfolio, your portfolio may look like the allocation below: Sample Model Portfolio: Litman/Gregory Equity-Tilted Balanced Portfolio Tactical Allocation Larger-Cap U.S. Stocks (50%) International Stocks (15%) Investment Grade Bonds (15%) Smaller-Cap U.S. Stocks (10%) International Bonds (5%) Cash (5%) The portfolio differs from the neutral allocation because Litman/Gregory has elected to under-weight or over-weight positions in certain asset classes to take advantage of misvaluations or further limit risk. This is a sample portfolio only. Actual managed portfolios may differ at the time of investment. Investing in mutual funds involves risk of loss of principal. Investing in foreign securities involves certain risk, including political, economic and currency risks and differences in accounting methods and governmental regulations. Investing in small companies involves additional risks, such as limited liquidity and greater volatility. Investment in lower-rated and non-rated securities presents a greater risk of loss to principal and interest than higher-rated securities.

4 This portfolio shows how the neutral allocation may be altered by tactical asset allocation. In this example, there is an allocation to cash, an underweighting to investmentgrade bonds and a weighting to international bonds. Litman/Gregory seeks to add value to the portfolio by continuously monitoring and periodically revising the portfolio and asset allocation. 3. Investment Selection Once we determine each portfolio s asset allocation, we choose investments in specific mutual funds. These funds may be managed by active managers (selected on the basis of our intensive manager due diligence) or may be index vehicles such as ETFs. Some of the platforms that offer Litman/Gregory model portfolios specify a universe of mutual funds or investment vehicles from which we can select to include in our portfolios. Our choice of investments may be limited by the platforms. We believe that hiring highly skilled professional money managers can create a performance advantage over time. However, successfully selecting active managers requires a commitment to research that goes beyond numbers it is a labor-intensive process that requires experience, expertise, and deep access to fund management firms. In our manager due-diligence process, Litman/Gregory seeks to: 1. Identify why a fund performed well 2. Determine if the portfolio management team has an identifiable edge 3. Assess whether the edge is sustainable To be successful in adding value at the manager level we believe that we need only a small number of excellent managers, and so we set the bar extremely high. Our process requires that we thoroughly understand the manager s investment process, the entire analyst team implements and articulates the approach consistently, a positive culture exists and is likely to remain in place, and a strong shareholder focus pervades. We don t like managers who are focused on building businesses over building wealth for their shareholders.

5 We will spend a significant amount of time understanding the manager s process before including them in an investment strategy. We will not select a manager simply based on past performance. Instead we will first analyze the manager quantitatively by reviewing criteria such as: The historic manager record, including separate accounts or prior funds Risk and return versus peers and the benchmark Consistent implementation of their investment process Consistency of performance in a variety of market environments Expenses that are below our thresholds Management s willingness to manage asset growth responsibly After using quantitative criteria to narrow the field, we make qualitative assessments of managers we believe to be promising. This process begins with an in-depth due diligence questionnaire, which gathers detail on the firm, the team, and the investment process. If we still consider a manager promising after analyzing the results of the due diligence questionnaire, we will conduct telephone interviews directly with the manager and his team, followed by site visits to their office. During this process we are trying to determine whether the management team has an identifiable edge and whether we believe that edge is sustainable. This involves assessing some of the following criteria: Degree of discipline in the execution of the investment approach Consistency in the understanding and implementation of the approach across the entire team Passion for investing and obsessiveness in seeking a performance edge Culture and stability of the organization Quality and experience of the team Shareholder orientation All these components are assessed in determining whether a manager makes the cut. Once we have identified a manager in whom we hold a high degree of confidence, we may include them in a model portfolio, and will continue to monitor whether they implement their investment process consistently and retain their edge. In cases where we cannot identify active managers in whom we have sufficient confidence we will use an index instead. We also run index-only investment strategies that employ exchange traded funds (ETFs). Our ETF investment strategies take full advantage of our strategic and tactical allocation, but eliminate manager risk and reduce costs. While we are confident in our ability to select active managers, we recognize that some investors and their advisors prefer indexing as an option and the Litman/Gregory ETF portfolios offer a compelling alternative to capture tactical allocation expertise while investing in close-to-pure benchmark vehicles. 4. Active Monitoring On an ongoing basis we review the portfolios and track the variance between actual and target allocations and consider the trade-offs involved in rebalancing. We will recommend to rebalance at least once a year but usually no more than a few times a year, depending on the degree of variation and whether our research indicates that the timing is advantageous. Our patient, disciplined approach and generally low activity is designed to keep our turnover low and reduce trading costs. Quarterly Commentary Each quarter we share a comprehensive investment commentary reviewing performance and explaining in detail the rationale that underlies our investment decision making. This detailed commentary helps you understand how we are seeking to improve returns and limit the risk of the model portfolios. What Makes Litman/Gregory s Approach Different? Tactical Asset Allocation We will assess changes in the economy, review the outlook and relative valuations of key asset classes, and make changes to the model portfolios to take advantage of tactical opportunities. We will only make these changes if we have a high level of conviction that we will be rewarded and if we can do so without Impacting our downside risk. We believe this approach will improve performance versus retaining a static allocation.» Manager Due Diligence Litman/Gregory is obsessively thorough in analyzing managers. Because an important part of the value we add can come from the managers we select, we apply our extensive research resources and long experience in manager assessment to finding and hiring only great managers that we are confident will beat their benchmarks.» Ongoing Management and Monitoring Litman/Gregory s investment strategy is dynamic we continually monitor asset classes to enable us to reposition the portfolios as needed. Your financial advisor is delegating these important decisions to Litman/Gregory to make sure that your portfolio is properly allocated and monitored on an ongoing basis.» Disciplined Process Litman/Gregory is guided by a well defined investment discipline that grounds our decision making. We frequently remind our clients of this core discipline in our investment commentaries and how it influences our decision making. A core tenet of our discipline is to ignore shorter-term psychological influences, which can be difficult to predict, in favor of longerterm valuation analysis, in which we can be more confident. We believe that eventually fundamentals and securities prices will converge, and that by being rational and patient we can use shorterterm valuation disparities to create opportunities to add return. Portfolio Risk Management Litman/Gregory uses scenario analysis to assess risk exposure in each model portfolio. We consider different possible scenarios that could trigger a market decline. We assess these downside risks to determine the downside exposure of the overall portfolio. This may lead us to be more or less defensive in our allocation.

6 The Basis of Litman/Gregory's Investment Framework: 1. Maintaining diversification: Openness to global diversification expands your universe of investments, while lowering portfolio risk. 2. The long view: The long view allows you to take advantage of mispriced, out-offavor investments. 3. Understanding history: While you need to understand historical trends, you can't depend on their repetition. 4. Having a bias towards action: If you do not develop convictions and act upon them, you cannot achieve superior results. 5. Thinking creatively: Thinking "outside the box" can occasionally turn up unusually compelling opportunities. 6. Leveraging talent: You can offer your clients world-class management with the help of external experts such as mutual fund and separate account managers. The Discipline Behind Litman/Gregory Investment Strategies Litman/Gregory s discipline means taking action only when we believe the odds of success are high. We are long-term investors looking for fundamental value in equity and debt markets throughout the world. After constructing a portfolio and identifying asset class opportunities, we will execute our strategy with what we believe to be the best funds we can buy. Risk control is critical to our approach. We attempt to manage risk through diversification and ongoing scenario analysis. Our portfolio management process is dynamic we are constantly reviewing portfolio structure and content in an effort to enhance returns and control risk. Investing In a Litman/Gregory Model Portfolio Before investing your account using a Litman/Gregory model portfolio, your financial advisor will spend time with you to understand your tolerance for risk, your history of investing, your financial circumstances, and your objectives. First your advisor will establish a risk profile for you, then recommend an investment portfolio for you. Your advisor can invest and rebalance your portfolio according to the Litman/Gregory model portfolio. You will receive quarterly reports showing how your portfolio has performed. Litman/Gregory will continuously monitor the asset allocation and managers within the model portfolio. If we elect to change the asset allocation (by over or underweighting a particular asset class) or replace a manager, we will notify the platform to make this change to your portfolio. The rationale behind any changes to the model portfolio will be explained in the quarterly investment commentary that Litman/Gregory provides to your advisor. Your financial advisor will meet with you periodically to ensure that your Litman/ Gregory portfolio continues to reflect your risk profile and objectives. If there are any changes to your risk profile or objectives, you should discuss this with your financial advisor, who can then make changes, if needed, to the Litman/Gregory model portfolio in which you are invested. The material discussed in this brochure is meant for general illustration and/or information purposes only and it is not to be construed as tax, legal or investment advice. Litman/Gregory does not provide legal or tax advice. Please note that individual situations may vary and this information should be used with individual professional advice. There is no guarantee that any specific goal will be met. Past performance is no guarantee of future results. Litman/Gregory 4 Orinda Way, Suite 200-D Orinda, CA Copyright , Litman/Gregory