Ken Gregory, president of Litman/Gregory Asset Management LLC, has a sharp eye for finding great portfolio managers.
With more than 25 years of experience, Gregory's talents have been noted and his techniques bring profits to investors. So how does he do it? Gregory told The Wall Street Journal that he looks for managers with a passion for the art of investing, strong and clear strategies and the willingness to invest highly in promising ventures.
Nine years ago, Gregory launched the Masters' Select Equity Fund, a fund that spreads its assets to managers that meet Gregory's discerning criteria. Along with Master's Select International Fund, both of Gregory's funds have made a big splash and remain at the top of their peer group. Even at their lowest, Gregory's funds perform well. Gregory's funds have a combines $2.8 billion in assets.
Gregory said he began the Masters' Select funds based on his firm's "confidence in our ability to identify exceptional stock pickers. We also had really come to believe that, in the right hands, a concentrated portfolio would generate better returns over the long run than that same stock picker running a more diversified portfolio."
Gregory's managers are allowed to choose up to just 15 stocks. He believes that enables the manager to better understand the situation of the particular companies and, therefore, to invest more wisely.
"If a stock picker is spending a lot of time running multiple portfolios and doing a lot of marketing and has responsibility for running some of the business, that is a lot," he said. "We like to see a high degree of focus, without too much on the plate of the stock picker other than the stock picking itself."
To avoid the volatility inherent in concentrated portfolios, Gregory adds multiple subadvisers.
"By combining multiple subadvisers, we get the benefit of concentration in their highest-conviction ideas without the volatility that normally would come along," he said.
Past performance plays very little into Gregory's decision making. There is no guarantee that a manager who has done exceedingly well in the past will do well in the future, he said. Therefore, he favors consistency.
"There are an awful lot of smart people in the investment business, but not very many of them are consistently successful. We think the reason is that not many of them have a truly well-defined process and are truly disciplined in executing it. The stock pickers that we like really want to win and they work very hard and very creatively at maintaining an investment edge."
So who are the super stars of the investment world? Gregory listed a few subadvisers he considers brilliant, consistent and focused: "Bill Nygren at Oakmark, Mason Hawkins and Staley Cates at Longleaf, Bill Miller at Legg Mason, Bob Rodriguez at FPA, and Chris Davis at Selected Funds. We really like the Brandywine Funds, which use a team approach, with Bill D'Alonzo as the chief investment officer there."