June 22, 2000

Questions and Answers About Masters' Select Value Fund

1.    Value investing has underperformed growth investing over most of the past few years.  Why introduce a value fund now?
There are three reasons we are launching a value fund now.  First, the performance of Masters’ Select Equity and Masters’ Select International has validated our confidence in the Masters’ Select concept (e.g. a team of several world class stock pickers, each independently investing in only their highest conviction stocks). Second, value investing is a legitimate long-term investment philosophy.  Our ability to pull together four premier value investors to run Masters’ Select Value gives us confidence that it will be highly competitive with other value funds.  Third, but of less importance, value investing has been out-of-favor for several years. We believe there are better stock picking opportunities now in the “value stock universe” than in the growth stock universe.  History has shown time and again that no single asset class or investment style stays on top forever. 

2. How were the managers selected?
For all the Masters’ Select funds we select stock pickers who we believe are among the best in their peer group. In assessing the potential to deliver superior future returns some of the factors we consider include: historical record, the manager’s investment process with a particular emphasis on an identifiable discipline, the manager’s focus on the job of stock picking, the manager’s independence and obsessiveness to get an edge, and the quality of the supporting team.  In the case of Masters’ Select Value, we specifically sought managers whose approach to identifying value differed somewhat from each other, in order to provide an extra element of diversification to the overall fund portfolio.

3.  Since Bill Miller and Mason Hawkins are already managing the Masters’ Select Equity Fund, why should I invest in both funds?
Masters’ Select Equity Fund is designed as a core fund holding around which an investor can build a portfolio. Thus, the fund gives investors exposure to a variety of market caps and stock picking styles.  Masters’ Select Value Fund gives investors a dedicated value portfolio managed by four premier value managers.  While Miller and Hawkins pick stocks for both funds, roughly half the value fund will be run by two other skilled value stock-pickers, Bill Nygren of Oakmark Select and Larry Sondike of Mutual Shares.  Whether or not an investor holds Masters’ Select Equity, we believe Masters’ Select Value is an excellent choice for investors who want dedicated value exposure beyond what they may already get from their other fund or stock holdings.

4.  Do the managers work together to decide what stocks to buy?
No, each manager works independently and constructs his portfolio segment without input from the others.  The managers generally have the autonomy to buy and sell the securities of their choosing, subject to the investment guidelines of the Prospectus and Statement of Additional Information.

5.  It’s been said that Bill Miller isn’t really a value manager since he sometime buys high multiple stocks like AOL.  Why did you include him in a Value Fund?
Over the years, the majority of stocks Miller has owned are typical of traditional value managers.  However, Miller is also more willing than many value investors to build models and look at a variety of scenarios to attempt to assess and value the future potential of a business.  Occasionally, rapidly growing companies are priced at significant discounts to Miller’s assessment of their value.  When this happens, Miller may own stocks that are not considered traditional value stocks.  We believe that most of the time, most of Miller’s holdings will be consistent with typical value stocks.  If he occasionally owns one or more stocks that are more typical of growth managers, they will make up only a small portion of this fund’s overall portfolio. We believe Miller is an exceptionally gifted stock picker and worth including in this fund even if he occasionally strays outside of the traditional value camp with respect to a few holdings.

6.   How do you know that you’ll actually be getting each manager’s favorite ideas?
We have found through the operation of our other funds, Masters’ Select Equity and Masters’ Select International Fund, that each of the managers understands the concept and is committed to the “favorite ideas” requirement of the Fund.  The fact that the aggregate cumulative total return of the managers’ Masters’ portfolios has been better than the aggregate performance of their own funds over the same time period suggests the concept is working well.

7. What should investors expect with respect to diversification within Masters’ Select Value Fund?
We expect the fund’s portfolio to consist of over 30 stocks as a general rule and often the portfolio will include over 40 holdings.  We expect the fund to have a mid and large-cap bias.  However, both Hawkins and Sondike may at times hold a number of small-cap and foreign stocks.  Miller and Nygren can also hold stocks of small and foreign companies, but are less likely to do so.  Generally we expect stocks of small and foreign companies to be less than 20% of the fund, though the allocations could occasionally be somewhat higher.

8.  According to the Fund’s prospectus, Masters’ Select Value is a non-diversified fund. What is the significance of this characterization?
This is a technical term under the Federal securities laws and IRS regulations that describes a fund that is permitted to have more than 25% of its assets invested in companies that each represent 5% or more of the fund’s assets.  Most of the time we expect the fund to qualify as a “diversified” fund.  However, we recognize the potential for four value managers to hold overlapping positions that could result in several holdings exceeding 5% or more of the fund’s assets.  For this reason the Fund was structured as a non-diversified fund. Part of the role of Litman/Gregory Fund Advisors is to spot overlapping positions so the fund avoids single stock or industry exposures that we don’t deem prudent. When significant overlap does occur, we discuss with the managers the impact on the overall fund portfolio.

9. Why are the fund’s initial expenses capped at 1.70%?  Will they decline?
As with most new funds, our initial expense caps are a function of our uncertainty about the fund’s rate of asset growth.  Because of that uncertainty, Litman/Gregory Fund Advisors has agreed to cap the expenses for the first year at 1.70%.  As assets grow, expenses will decline on a per share basis.  The expense structure of Masters’ Select Value Fund is similar to Masters’ Select Equity.  As a frame of reference, Masters’ Select Equity’s expenses in its first year were 1.47% although the initial expense cap was 1.75%.  For 1999 they were down to 1.26%.  There is clearly no guarantee that the assets of Masters’ Select Value Fund will grow, but if we are able to responsibly grow assets as we expect, first year expenses will be lower than the cap levels disclosed in the prospectus. In addition, we constantly look for ways to minimize shareholder expenses.  We do this by negotiating with our vendors and passing every penny saved on to the Fund.  We discourage “hot” money and market timers by imposing a redemption fee on shares held for less than six months, the proceeds of which go directly to the Fund to offset operating expenses.  We charge no 12b-1 fees.  We’ve also agreed to waive two basis points from the management fee to help keep expenses down.

10.    If there aren’t any loads or back end charges, why the six-month redemption fee?
We put the redemption fee in place to discourage investment by market timers and others who do not share our long-term investment philosophy.  These types of investors disrupt management of the fund and increase transactions costs, which is why all redemption fee proceeds inure to the Fund and the benefit of remaining shareholders.

11.   Will you ever close the fund?
Yes we will.  We believe that too many assets hurt the performance of any fund.  We will close the fund at a level that will allow the managers to continue to flexibly execute the “favorite ideas” concept, probably between $600 million and $1 billion. 

12. How can I invest?
You can invest directly in the Fund by submitting an application in good order to the Fund’s transfer agent, or you may purchase the Fund via several Fund Supermarkets, such as Charles Schwab & Co, Fidelity or Waterhouse Securities. These firms may charge you a transaction fee, please call them directly for details. Please read the prospectus carefully before investing. You may download the prospectus from this website or to obtain information about the Fund via mail or to speak with our transfer agent, please call 1-800-960-0188.

Past Performance does not guaranty future results.  This material must be preceded by or accompanied by a prospectus.  Read the prospectus carefully before investing, it contains more complete information with respect to risks, charges and expenses. Litman/Gregory Fund Advisors has ultimate responsibility for the Fund’s performance due to its responsibility to oversee investment managers and recommend their hiring, termination and replacement.  First Fund Distributors, Phoenix, AZ 85018.