We believe flexibility is important. Ideally, a stock picker should be able to efficiently buy and sell stocks at the prices they deem attractive. They should be able to do this without their own trading volume influencing the price of the stock being bought or sold. However, when an investment firm runs too much money it may take a long time to buy or sell a full position because the number of shares being bought or sold may make up many days of the stock’s average daily trading volume. The result is that the stock price could move against the buyer/seller during the lengthy transaction period or the buying or selling could itself move the stock price.
By keeping the individual asset levels of each sub-advisor relatively small Litman Gregory believes the Litman Gregory Masters Funds will have several advantages. Because Litman Gregory Masters Funds requires the sub-advisors to hold only their highest-conviction ideas, it is not unusual for a stock to be sold in a Litman Gregory Masters Funds portfolio at a time when it is still attractive enough to be a “hold” in the sub-advisor’s more-diversified portfolios. When this happens, Masters’ small asset base allows the advisor to sell the position quickly and with little market impact. On the buy side, in some cases sub-advisors have been able to buy holdings for Masters’ that they can not buy for other, larger funds they manage. Though this is not typical, several sub-advisors have been able to do this on occasion.