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There’s something different about the Masters’ Select Funds. Though it’s not unusual for a team of professionals to manage mutual funds, these offerings put a fresh spin on it.

Rather than bulk up with an in-house team of analysts and portfolio managers to establish the Masters’ Select Funds, Litman/Gregory Fund Advisors chose to play overseer. It hired highly regarded money managers as subadvisers — each responsible for a portion of one of its funds.

"Each manager has a very concentrated mandate to own only eight to 15 of their best ideas," says Chief Investment Officer Jeremy DeGroot. The funds are diversified from the different styles in investment philosophies of each manager, so there’s a broader mix of industries and stocks.

The largest fund is top-rated Master’s Select International Fund, with $1.4 billion in assets and a return of just more than 39 percent this year. Its five-year annualized return of 7.6 percent still places it among the top in Morningstar’s foreign large blend fund category.

DeGroot recently offered insight on his market perspective:

What’s your take on the market rally we’ve seen this year, and what do you expect lies ahead?

I want to be clear that Litman/Gregory’s view doesn’t impact how the Masters Funds are invested since those funds are built stock by stock by the managers. The reason I’m saying that is because Litman/Gregory is not that optimistic about stock returns looking out three to five years from now.

We think the consumers’ need to increase savings and rebuild their balance sheets is going to lead to slower growth in consumption.

That among other factors will lead to reduced earnings growth for companies. So in terms of outlook, we’re kind of in the subpar economic recovery group. We’re not in the V-shaped economic recovery group.

What’s guiding that outlook?

The market is expecting a stronger earnings recovery than we think is likely.

We think the baseline case scenario is for subpar recovery coming out of this recession. That’s because of the overhang of debt in our economy — because of all the government spending, the huge deficit that’s likely to lead to higher interest rates down the road, probably higher taxes on individuals. Those are not going to be positive for economic growth.

After taking a hit, don’t consumers usually return to being fat and happy — shaking off what ails them?

This time is different from most typical economic cycles in that this recession is more of a balance sheet recession. It wasn’t caused by the Federal Reserve worrying about inflation and an overheating economy and raising rates — leading to a contraction in consumer credit and a reduction in spending and business inventories getting cut. That did happen, but that’s not really what triggered the recession. We’re building debt upon debt, and we’re overspending our income for a number of decades.

Historically there have been some studies that have looked at the after-effects of balance sheet recessions, and they take much longer for economies to rebound. Unemployment usually stays significantly higher than it does in a normal recession. You know the Fed can’t lower rates any more. They’re doing other things to increase liquidity. We’re always hesitant, as everyone in the investment business is, to say it’s different this time. But it’s different from the typical cycle in our view.

Are there any factors that would trigger you to adopt the more positive scenario?

We think there has to be a significant reduction in household debt levels. We think it’s going to happen, hopefully fairly gradually, but when that happens, that is a headwind to growth. But we also think there are some worst-case scenarios for subpar growth where there could be a significant decline in the dollar. We expect a modest sustained gradual decline because it’s in no one’s interest to have the dollar crash.

With all the turmoil in the market over the last few years, has your firm’s team approach been tested?

We talk to managers about their mistakes a lot. And we think you really learn about the person, the team and their mind-set. If they’re willing to admit their mistakes and learn from them or if their ego is too big to really even acknowledge it.

The bottom line is that we removed one manager in the fall of last year, not based on short-term performance. It had been a process of reassessing over a couple of years, but with the other mangers we reconfirmed our confidence in their ability to perform well.

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