Q&A with Ted Tyson 2006

Subadvisor to the Masters’ Select International Fund

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

Ted Tyson is the chief investment officer and a portfolio manager of Mastholm Asset Management, LLC. Prior to forming Mastholm in 1997, Tyson was the founder and head of international equity at American Century Investment Management, which he joined in 1988. He has over 18 years of investment experience in domestic and international markets. The Mastholm portfolio is managed by a team of three portfolio managers led by Ted Tyson and including Doug Allen, worked with Ted at American Century and Tom Pak who joined Mastholm when the firm first opened its doors.

What first attracted you to the investment business?

Basically starvation. I was a journalist for several years in San Francisco in the early 1980s and decided to go out on my own and sell articles on a freelance basis. I was slowly going bankrupt when I met a guy who was starting up a brokerage operation. Even though I didn’t have a great familiarity with the stock market, I was more or less the entire research operation. So I pretty much got dropped in head first. From the first day, I couldn’t believe how interesting the whole business of stock picking was — I just never looked back.

How did your investment philosophy develop?

The advantage of starting out on the brokerage side of the business was that it allowed me to talk to a wide variety of investment managers. I realized fairly quickly that I had a strong bias toward growth investing. It just seemed to me common sense that markets were fairly efficient pricing mechanisms and that the greatest opportunity was likely to be in those stocks that had achieved a sustainable advantage in their industry and whose growth rates were likely to surprise on the upside over time.

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

We survey on a daily basis the earnings of every company worldwide that has reported in the previous 24 hours, looking for companies where earnings growth is significantly higher than historic levels and, preferably, higher than anticipated by any analysts who follow the company. We then narrowly focus in on one and only one question: What is the catalyst for the higher level of growth and to what degree is it sustainable? It’s a pure bottom-up process, company by company.

What factors have been most important to your success?

Money management attracts a lot of really smart, hardworking people—it’s a difficult industry in which to be at the head of the class. Most of the people I’ve known who have been successful over time have the same characteristics in common: They find an investment philosophy they believe in and stick with it regardless of market conditions. And they realize that very few managers succeed based on inspiration as opposed to simple, relentless focus and application. It’s hard work, so you better love what you’re doing. And I do. I genuinely can’t imagine a more interesting job.

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?

Each member of the team has certain industry specialties and specific country or region responsibilities. We meet daily to discuss our individual research; and decision making, as far as possible, is based on group consensus.

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

First, we use a quantitative screen to isolate companies showing higher than anticipated rates of growth. The advantage of a “quant” screen is that it forces you to look at areas of the market where earnings momentum is less obvious — often because it is just beginning to emerge. After that, it’s a pure process of meeting the managements—every member of the team travels extensively — and using a wide variety of industry contacts to cross-reference and put into context what we’re hearing from the companies themselves.

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?

Very little, in practice. Historically, our top 10 holdings represent 30% to 40% of our diversified portfolios, so we already practice a high degree of concentration. It does allow us to be less concerned with sector and country considerations and to focus purely on total return, knowing that we are not responsible for overall diversification that flows from the multi-manager format.

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.

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