There is no hard and fast rule, but our willingness to stick with a stock picker is heavily influenced by our confidence in their skill and enthusiasm for being a part of Litman Gregory Masters Funds. Our regular monitoring keeps us up to date on the manager’s portfolio and the reasons behind good or bad performance. And, based on our contact we are always assessing whether the reasons we hired the sub-advisor in the first place remain valid. However, if for any reason our confidence in the sub-advisor comes into question we will typically do a thorough update of our due diligence. This could be triggered by performance that is poor for an extended period of time (exactly how long will depend on the magnitude and the reasons for the underperformance), or other more subjective factors that arise from our ongoing monitoring. Due diligence updates go beyond our regular ongoing monitoring, and may involve another site visit and round of interviews. If we come away from this review process feeling highly confident that the reasons we liked the stock picker in the first place are still intact, we will stick with the manager even in the face of several years of underperformance. If our confidence has lessened but is still strong we may weigh the alternatives. If our confidence is not high then we will begin to search for a replacement.
It is worth noting that concentrated portfolios tend to be more volatile than diversified portfolios. Sometimes a stock picker is too early in buying a stock, resulting in a period of weak performance, but ultimately the stock picker successful over the long term. And even highly skilled stock pickers make mistakes. So we expect all our sub-advisors to have occasional periods when performance is poor. Fortunately, the diversification in each Litman Gregory Masters Funds significantly mitigates the risk from any single manager, and so far the funds have experienced many more positive manager performances than bad manager performances.