Q&A with Bill Fries 2006

Sub-advisor to the Masters’ Select International Fund

The opinions and conclusions expressed herein are those of Litman/Gregory Fund Advisors, LLC and Bill Fries at the time the material is written and may not be reflective of current conditions.

Bill Fries is a sub-advisor in the Masters’ Select International Fund and a portfolio manager at Thornburg Investment Management (“Thornburg”). He joined Thornburg in 1995 as a Managing Director and has managed the Thornburg International Value Fund since May of 1998 and the Thornburg Value Fund since October of 1995. Fries has managed a portion of Masters’ Select International Fund assets since September 2003 and has been in the investment management business since the early 1970s. Prior to joining Thornburg he was vice president of equities at USAA Investment Management Company. Fries began his investment career as a securities analyst and bank investment officer. He received his designation as a Chartered Financial Analyst in 1974. Fries also served in the U.S. Marine Corps as a Communications Officer from 1961 to 1964.

What first attracted you to the investment business?

I’ve always been generally curious about companies. The curiosity started when I was growing up. My family would go on car trips and my father would point out the factories that we drove by and talk about what they manufactured. I always found it intriguing and would ask a lot of questions. I also vividly remember being introduced at a fairly early age to the marvels of compound interest by one of my math teachers in middle school. I was fascinated by the impact of compound interest on savings accounts. These early interests in finance and investing were part of what eventually led me to major in Finance in college. After graduation I served in the Marine Corp and upon the completion of my tour of duty, pursued research positions in the financial industry.

How did your investment philosophy develop?

I’ve been fortunate during my investment career to have had the opportunity to work with talented and generous people willing to share their investment experience with me. As an analyst at Girard Bank in Philadelphia, I followed a number of industries and also learned the bond business. Other analyst positions broadened my industry exposure and knowledge. In all, I spent the first 14 years of my career as an analyst. The combination of this experience and my years as a portfolio manager of several USAA Investment Management Company funds (at different times), each with a different investment objective, provided a broad prospective on the equity investment challenge. This experience has been the foundation of the philosophy underlying the portfolios I manage today—that value is complex and embodies more than just financial measures related to stock price and can be found in a variety of stock types, including: cyclical issues we call basic value, high quality or “blue chip” issues we call consistent earners and young companies with above average growth potential we call emerging franchises.

Can you briefly discuss the key elements of your stock picking discipline?

Our core philosophy is to invest in promising companies available at a discount to our estimate of their intrinsic value. Our stock selection process begins with screens to identify potential opportunities, although this is not the exclusive source of new investment ideas. From this output and the ideas stimulated by it, we employ a rejection process to eliminate issues without compelling risk/reward merit. We look for companies with an identifiable path to future success. Scrutiny of financial statements, SEC mandated documents and identification of the key variables in a company’s business model are elements of the research process. Contact with management for elaboration and explanation is a normal part of this process and may include company visits as well. In the final analysis, stock price valuation is key. Valuation analysis is focused on comparisons of earnings, cash flows, book values, etc. with past levels and peers. Cash flow analysis, earnings discount models and recent private transaction value measures may also be used.

What factors have been most important to your success?

We believe that the philosophy, process and people each contribute to providing competitive results over time. Independent judgment and a contrarian philosophy combined with the vigorous pursuit of corporate truth through research of companies is core to our success, in my judgment. Thoughtful insight along with valuation discipline, I believe, also plays a role.

How do you and your team work together and how do the research efforts of the team contribute to the portfolio you run for Masters’ Select?

Our research process is collaborative. The investment team works closely with one another, leveraging off of each others’ expertise, knowledge and experience. I act as team leader and make the final buy/sell decisions in conjunction with team members. The stock selections we contribute to the Masters’ Select portfolio are a subset of our broader International Value portfolio.

As you and your team research companies, what are the most important sources of information?

The firm's primary sources of internal research include the subject companies' published information, conference calls and visits with company management, as well as with competitors, suppliers and customers, and informational databases. We also utilize external data and analyses from Baseline, Bloomberg and First Call, as well as reports from brokerage and consulting firms; however, our ultimate conclusions are based on our independent evaluation of all sources of data. We use informational databases as well as financial services that report on corporate and government activities. In addition, company and industry research reports are received daily from leading brokerage, investment, finance and consulting firms. We also hold conference calls with street analysts covering subject companies, seeking underlying logic for differing points of view.

How does running a very concentrated portfolio that is part of a diversified fund differ from running a more broadly diversified portfolio? How do you choose the 8 to 15 stocks you hold for Masters’ Select from your more diversified portfolios?

Holdings in the Master Select portfolio reflect stocks deemed to have the best risk/reward tradeoff among international holdings, subject to judgment with regard to avoiding over concentration of geography, capitalization, liquidity and industry exposure. Large position size tends to highlight the criticality of stock selection and the value of in-depth risk analysis.

The fund invests in foreign securities, which exposes investors to economic, political and market risks and fluctuations in foreign currencies.

Neither the information contained herein or the opinions expressed shall be construed as an offer to sell or a solicitation to buy any securities mentioned herein. Click here to view the most recent portfolio holdings of the fund.

To obtain a current prospectus for the Masters’ Select Funds at no charge, please click here or call 1-800-960-0188. The prospectus contains more complete information with respect to the risks, costs and expenses of investing in the Funds. Please read it carefully before investing.

For industry terms and definitions, click here.