Q&A with David Herro 2006

Sub-advisor to the Masters’ Select International Fund

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

David Herro is the portfolio manager for the portion of the Fund's assets managed by Harris Associates, L.P (“Harris Associates”). Herro has been in the investment business since 1986 and is a partner, portfolio manager, director, and Chief Investment Officer- International Equities at Harris Associates. He has managed the Oakmark International Fund and the Oakmark International Small Cap Fund since their inceptions in 1992 and 1995, respectively.

What first attracted you to the investment business?

I had been interested in the stock market since high school, and by the time I was in college I had a full fledged portfolio. Having an early interest in economics and current affairs, combined with being a caddy for a stock broker, probably played important roles in generating such a strong interest so early in life.

How did your investment philosophy develop?

My investment philosophy evolved over time but centers around the very simple concept of “buy low, sell high.” It’s a function of combining my academic training as an economist, reading the likes of Ben Graham and David Dreman, and applying common sense.

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

Key elements of our discipline center around determining the proper value of a business, and having the conviction to purchase undervalued stocks even though they may be out of favor. To us, the value of a business is ultimately determined by the amount of free cash that is generated and how that free cash is used, or recycled by the management. Once a value is determined by these two factors, it is compared to the current price of the company. If the company’s value is significantly (generally 30% or more) below its current market price, it is a potential investment. As long term investors (as opposed to short-term speculators), our patience and discipline enable us to take advantage of bargains that the traders don’t have the patience for. It is common for the market to base its assessment of company value on the next couple of quarters, whereas we believe that the true value of a business is determined by its ability to generate cash over the long term.

What factors have been most important in driving your success?

There are two important factors that lead to success in this business, in my opinion. The first is using a sound investment analysis process. Second, and maybe even more important, is having the discipline and conviction to stick to your philosophy even in bad times. Far too often, managers “scramble” when the going gets tough only to change course at the most inopportune time (the bottom). To be successful, one has to stick to one’s guns; I believe that doing this, along with having a great approach, brings about investment success.

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?

We utilize a team approach at Harris Associates. Though I spend close to 50% of my time traveling and interviewing managements, all areas are well covered because chances are more than one of us will work on a specific area. We have a team of seven analysts and generally all of the research we base our investment decisions on is our own.

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

Generally, the best way of securing information is through company visits. Though they are not the only important source of investment information, they are the most direct. We really don’t utilize brokerage house research because the writers of the research have different objectives than we do as buyers.

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?

Actually concentration is very consistent with how we, at Harris Associates, manage money. It is predicated on the belief that one should follow one’s conviction and that over-diversification kills returns over time. We have a high degree of confidence in our ability to make good equity investments; therefore, we think that concentration actually contributes to performance.

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.