The Masters' Select Equity Fund
Semiannual Report
June 30, 1997
Litman/Gregory Fund Advisors, LLC
<PAGE>
"It's hard to fault the
design of this fund. The
premise is sound, and
you would have a tough
time assembling a more
talented lot of money
managers for a lower
minimum purchase."
--From "Wall Street's Newest Hitmakers,"
Morningstar.net, June 13, 1997
<PAGE>
Dear Fellow Shareholder:
Since this is our first formal report to shareholders, it's my first opportunity
to formally thank you for your confidence. We are enthusiastic about the
potential for The Masters' Select Equity Fund. The fund's "favorite stocks"
concept, implemented by a blue chip group of stock pickers and backed by our
combined commitment to its success, is the basis for our optimism.
There were several noteworthy devel-opments during the first six months of
operations:
The Fund experienced significant asset growth. As of June 30, assets were $203
million. Expenses declined significantly from the start-up level of 1.75%. For
the first six months, expenses were 1.47% (annualized). With moderate asset
growth over the rest of the year, we expect expenses to average about 1.43% for
the full year. Asset growth was the primary driver in reducing expenses on a
per-share basis. We expect expenses to decline gradually, assuming the Fund's
asset base continues to grow. In addition, we are working hard to reduce
expenses in other ways. We have been able to renegotiate contracts with several
of the Fund's vendors, which should help reduce expenses in the future.
Your Fund benefited from a huge amount of media coverage during the first half
of the year, including coverage in Barron's, Money magazine, Kiplingers'
Personal Finance, Smart Money, the Wall Street Journal, New York Times, Los
Angeles Times, CNBC, CNNfN and Morningstar Investor, among others. Morningstar's
Web site, Morningstar.net, also wrote about Masters' Select Equity. Their
concluding remarks:"It's hard to fault the design of this fund. The premise is
sound, and you would have a tough time assembling a more talented lot of money
managers for a lower minimum purchase. Some potential shareholders will no doubt
want to see a complete portfolio before investing, but this supergroup appears
to have a promising future."
We will continue to do everything we can to maintain and reward your trust. As
overall manager, Litman/Gregory Fund Advisors plays the role of overseeing the
"Masters" and we have the ultimate responsibility for the performance of the
Fund. Working hard to further reduce expenses is part of our focus, as is
ensuring that our "Master" stock pickers are given every opportunity to succeed.
In that regard, we believe that it is critically important to the future success
of this fund to limit assets to a level that allows the managers maximum
flexibility in picking stocks. Based on feedback from the managers, we expect
Masters' Select Equity to close somewhere between $500 million and $750 million
in assets. Keeping the small-cap stock pickers' assets at $50 million to $75
million should give them a great deal of flexibility to execute the Fund's
focused strategy. When the Fund closes, it will remain open to existing
shareholders. It is possible, however, that the Fund may temporarily close even
to existing shareholders if cash inflows continue to be unusually strong. As of
this writing, assets are at $240 million.
As part of our commitment to shareholders, we intend to publish detailed and
informative semiannual and annual reports. In this report we address
performance, provide information on the portfolio and offer insight into the
qualitative side of assessing a stock picker's skill. We also profile Shelby
Davis, one of the Masters' Select Equity Fund managers.
/s/ Ken Gregory, President
Ken Gregory, President
<PAGE>
Ticker symbol: MSEFX
We are now listed in the Wall Street Journal, Los Angeles Times, USA Today, New
York Times, Chicago Tribune, San Francisco Chronicle and others.
Our listing reads MstrSeltEq.
Shareholder information phone number:
1-800-960-0188
To access account information 24 hours a day via touch-tone telephone, please
note the following:
Masters' Select Equity Fund number: 305
Account number: Second set of digits on your account statement
Your personal identification number:
Last four digits of Social Security or Taxpayer ID number
Contents
Fund Objective 3
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Portfolio Fit 3
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Performance 4
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Portfolio Summary 5
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What Makes a Great Stock Picker? 12
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Master Profile: Shelby Davis 16
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Statement of Assets and Liabilities 18
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Statement of Operations 19
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Financial Highlights 20
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Statement of Changes in Net Assets 20
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Notes to Financial Statements 21
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Address: Overnight Delivery
Regular Delivery Masters' Select Equity Fund
Masters' Select Equity Fund 1004 Baltimore
P.O. Box 419922 Kansas City, MO 64105
Kansas City, MO 64141-6922
2
<PAGE>
Fund Objective
Superior long-term performance relative to the overall U.S. stock market is the
objective of the Masters' Select Equity Fund. Naturally, there is no guarantee
that the Fund will achieve this objective. However, we believe we have a
uniquely structured fund that makes sense on a number of different levels.
1 First, your Fund benefits from the talents of six of the industry's most
experienced and successful investors.
2 Second, and of equal importance, each stock picker runs a very focused
portfolio of not more than 15 of his favorite stocks. We believe that most
stock pickers have an unusually high conviction level in only a small
number of stocks, and that a portfolio limited to these stocks will, on
average, outperform over a market cycle.
3 Third, even though each manager's portfolio is focused, the overall fund is
well diversified by style, industry and number of stocks. Given the
diversification across styles, we don't expect this fund to top the charts
in any single period. We are shooting for superior performance over a full
market cycle, counting on the Fund's structure and the managers' talent to
get us there.
Portfolio Fit
As with all equity funds, Masters' Select Equity is appropriate for investors
with a long-term time horizon who are willing to ride out occasional periods
when the Fund's net asset value declines. Within that context, we created this
fund to be used as a core equity fund holding. Although performance in each
specific down market will vary, we purposely set the allocations to each manager
with the objective of keeping risk about equal to that of the overall stock
market. At the same time, we wanted enough exposure to small caps and growth
stocks to attempt to deliver good performance in a bull market. In the end, the
focus on the highest conviction stocks of six very distinguished managers with
superior track records is what we believe makes the Fund an ideal core equity
fund holding.
<PAGE>
Performance
The primary objective of each of your Fund's stock pickers is to deliver
superior long-term performance. Short-term performance is of less concern. We
believe that a disciplined, patient approach to investing is a critical element
to achieving long-term success. It's what allows our stock pickers to act on
their convictions even in periods when market psychology may temporarily lead to
a disconnect between underlying company fundamentals and stock performance. This
long-term approach is particularly important given each manager's mandate to run
a concentrated portfolio of his highest-conviction stocks. Though the overall
fund is diversified, each stock picker's portfolio is not. For each individual
manager, we believe that this concentration will result in superior long-term
performance made up of shorter, out-of-sync periods of performance on both the
upside and downside. Patience drawn from a high level of conviction should allow
each stock picker to tough out temporary periods of underperformance. We believe
that the Fund as a whole will deliver smoother performance because of its
overall diversification.
Though six months of operations is not a long enough period to draw any
conclusions, we are generally pleased with the Fund's performance. This is
especially true given the huge early cash flows into Masters' Select. Your
Fund's managers had a difficult time keeping up with this early cash surge, and
this resulted in a very heavy cash weighting in the portfolio during the first
few weeks of the year. Because the stock market was strong during this period,
the Fund's high cash holdings hurt performance. (Cash reserves have declined
since January and have remained between 6% and 8% in recent months. We expect
cash to stabilize at less than 5% of assets.) In addition, the first half of
1997 was characterized by very strong performance by large stocks and lagging
performance by the rest of the market. This is indicated in the following chart.
Performance of Market Capitalization Segments (price change only,
1/1/97-6/30/97)
S&P 500 Index (weighted toward the largest companies) 19.5%
S&P 400 MidCap Index 12.2%
Russell 2000 Index (small-cap stocks) 9.3%
Masters' Select by virtue of its diversity had exposure in areas that lagged the
large-cap-driven indexes. Over the long term, we expect performance to be
primarily a function of individual company fundamentals, not market size.
Performance of Masters' Select and Selected Benchmarks (1/1/97-6/30/97)
Masters' Select Equity Fund 15.3%
Lipper Growth Fund Index 15.4%
Lipper Small Cap Fund Index 6.0%
Wilshire 5000 17.6%
4
<PAGE>
Because Masters' Select Equity owns small-, mid- and large-caps, as well as
growth and value stocks, there is no perfect performance benchmark. Over the
long term, our goal is to outperform the U.S. stock market broadly represented
by the Wilshire 5000 Index. The Wilshire 5000 is weighted to big-cap stocks and
closely tracks the S&P 500. It also has some small company exposure that is not
included in the S&P. In our assessment, the Lipper Growth Index is probably the
best overall mutual fund benchmark for the Fund. We show the Lipper Small Cap
Fund Index for a small-cap benchmark, since we have some small-cap exposure.
Portfolio Summary
Portfolio Composition (6/30/97)
Large-Caps 40%
Mid-Caps 20%
Small-Caps 19%
Cash 8%
Foreign 12%
Other 1%
As reflected below, your Fund is well diversified in terms of industry exposure
and market capitalization exposure. Masters' Select holds 75 securities,
exclusive of cash equivalents.
Schedule of lnvestments as of June 30, 1997
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
Common Stocks (90.48%)
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Basic Materials
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carter Holt Harvey Limited Forest Products 1,000,000 2,587,942 1.26%
Mead Corporation Forest Products & Paper 36,500 2,272,125 1.11%
Reynolds Metal Co. Metals & Mining 26,500 1,888,125 0.92%
- -------------------------------------------------------------------------------------------------------------
$ 6,748,192 3.29%
Business Services
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Manpower Inc. Personnel Services 61,500 2,736,750 1.34%
Consumer Products & Distribution
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St. John Knits Apparel & Accessories 12,500 675,000 0.33%
TJX Companies, Inc. Apparel Retailer 49,600 1,308,200 0.64%
Linens 'N Things, Inc. Bed & Bath Prods., Housewares 52,500 1,555,313 0.76%*
Masco Corporation Building Products 41,500 1,732,625 0.85%
Triangle Pacific Corporation Building Products 30,000 952,500 0.46%*
Knoll, Inc. Business Furnishings 75,000 1,781,250 0.87%*
Fuji Photo Film Co., Ltd. (ADR + Ord) Film & Photo Supplies 60,000 2,430,000 1.19%
Dole Food Company, Inc. Food 63,500 2,714,625 1.32%
Quaker Oats Company Food 78,400 3,518,200 1.72%
Archer Daniels Midland Co. Food Processing 54,700 1,285,450 0.63%
Stage Stores, Inc. Specialty Retail 127,500 3,326,952 1.62%*
Westpoint Stevens, Inc. Textiles, Bed & Bath Products 43,900 1,714,844 0.84%*
Phillip Morris Companies, Inc. Tobacco, Food & Beverages 68,700 3,048,562 1.49%
Quaker Fabric Upholstery Fabric Mfg. 53,700 879,338 0.43%
- -------------------------------------------------------------------------------------------------------------
$26,922,859 13.15%
</TABLE>
*Non-income-producing securities.
continued
<PAGE>
Schedule of lnvestments as of June 30, 1997
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
Durable Goods
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Coltec Industries, Inc. Aerospace Components 45,000 877,500 0.43%*
Buderus AG Boilers & Heating Systems 4,850 2,669,572 1.30%
Kuhlman Corporation Electrical & Electronics 54,000 1,741,500 0.85%
Zero Corporation Electrical & Electronics 107,500 2,821,875 1.38%
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$ 8,110,447 3.96%
Energy
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Cabot Oil & Gas (Class A Shares) North American Oil Exploration 83,000 1,462,875 0.71%
Harken Energy Corporation North American Oil Exploration 225,000 1,575,000 0.77%*
Halliburton Co. Oil Equipment & Service 26,400 2,092,200 1.02%
Oceaneering International Inc. Oil Equipment & Service 40,000 740,000 0.36%*
San Juan Basin Royalty Trust Oil & Gas 335,000 2,721,875 1.33%
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$ 8,591,950 4.19%
Financial
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Chase Manhattan Corporation Banking 36,300 3,523,369 1.72%
Citicorp Banking 26,400 3,182,850 1.56%
Wells Fargo & Co. Banking 11,200 3,018,400 1.47%
American Express Financial Services 53,900 4,015,550 1.96%
Morgan Stanley Dean Witter
Discover & Co. Financial Services/Brokerage 56,600 2,437,337 1.19%*
Washington Mutual Inc. Savings & Loan Association 53,500 3,198,297 1.56%
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$19,375,803 9.46%
Health Care
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Gilead Sciences Inc. Biomedic & Genetic 44,000 1,218,250 0.60%*
Pfizer, Inc. Pharmaceuticals 33,700 4,027,150 1.97%
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$ 5,245,400 2.57%
Hotels & Restaurants
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Hilton Hotels Corporation Hotels 92,100 2,446,406 1.20%
McDonalds Corporation Restaurants 59,300 2,864,931 1.40%*
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$ 5,311,337 2.60%
Insurance
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General Reinsurance Corp. Property & Casualty Reinsurance 16,500 3,003,000 1.47%*
Media & Publishing
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Edipresse S.A Media 9,250 2,185,788 1.07%
Independent Press
Communications Ltd. Media 415,000 2,353,771 1.15%
GC Companies, lnc Motion Picture Theaters 49,500 2,264,625 1.11%*
Knight Ridder, Inc. Publishing 145,000 7,114,063 3.48%
McClatchy Newspapers
(Class A Shares) Publishing 28,000 822,500 0.40%
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$14,740,747 7.21%
</TABLE>
*Non-income-producing securities.
6
<PAGE>
Schedule of lnvestments as of June 30, 1997
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
Mulitple Industries
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<S> <C> <C> <C> <C>
Boeing Co. Aircraft, Defense & Electronics 61,400 3,258,038 1.59%
Philips Electronics, NV
(New York Shares) Recording, Electronics & Electrical 105,000 7,546,875 3.69%
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$ 10,804,913 5.28%
Real Estate
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Catellus Development Corporation Development & Property Mgmt. 375,000 6,796,875 3.32%*
CDL Hotels International Limited Real Estate & Hotels 6,150,000 2,500,549 1.22%
$ 9,297,424 4.54%
Technology
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Compaq Computer Corporation Computer Systems/Peripherals 28,700 2,848,475 1.39%*
Dell Computer Corporation Computer Systems/Peripherals 20,300 2,383,347 1.16%*
Hewlett-Packard Co. Computer Systems/Peripherals 120,500 6,748,000 3.30%
IBM Computer Systems/Peripherals 54,200 4,888,162 2.39%
Stratasys Inc. Computer Systems/Peripherals 40,000 642,500 0.31%*
Data General Corporation Computers/Personal Workstations 60,000 1,560,000 0.76%*
Genrad Inc. Electronic Instrumentation 52,500 1,187,813 0.58%*
Electro Scientific Industries, Inc. Electronic Products 30,000 1,255,313 0.61%*
Technitrol Electronics 50,000 1,368,750 0.67%
3Com Corporation Networking 21,200 953,338 0.47%*
Cisco Systems Inc. Networking 44,500 2,988,453 1.46%*
Texas Instruments Inc. Semiconductor Devices/Equipment 35,900 3,017,844 1.47%
Generale Cable Corporation Semiconductors 46,900 1,201,812 0.59%*
Intel Corporation Semiconductors 22,500 3,185,859 1.56%
Platinum Technology Inc. Software 131,500 1,758,813 0.86%*
Telxon Corporation Software 89,000 1,596,438 0.78%
JDA Software Group, Inc. Software & Programming 33,000 1,128,188 0.55%*
Symix Systems, Inc. Software & Programming 145,000 1,631,250 0.80%*
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$ 40,344,355 19.71%
Telecommunications
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Dycom Industries, Inc. Service & Supplies 40,000 550,000 0.27%*
ICG Communications Inc. Telecommunications Service 85,000 1,630,937 0.80%*
Omnipoint Corp. Telecommunications Service 80,000 1,327,500 0.65%*
Western Wireless (Class A Shares) Telecommunications Service 40,000 636,250 0.31%*
360 Degree
Communications Company Wireless Communications 375,000 6,421,875 3.14%*
Airtouch Communications Inc. Wireless Communications 38,300 1,048,462 0.51%*
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$ 11,615,024 5.68%
Transportation
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Kansas City Southern Industries, Inc. Distribution & Transportation 116,000 7,482,000 3.66%
Burlington Northern Santa Fe Railroad 29,700 2,669,287 1.30%
Caliber Systems Trucking & Transportation 30,000 1,117,500 0.55%
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$ 11,268,787 5.51%
Utilities
- --------------------------------------------------------------------------------------------------------------------------
Questar Corporation Natural-Gas Distribution 26,500 1,069,937 0.52%
- --------------------------------------------------------------------------------------------------------------------------
Total Common Stocks $185,186,925 90.48%
</TABLE>
*Non-income-producing securities.
continued
<PAGE>
Schedule of lnvestments as of June 30, 1997
<TABLE>
<CAPTION>
Industry Shares Held Market Value Portfolio %
Convertible Bonds (1.10%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scandinavian Broadcasting System S.A.
(7.25% due 8/1/05) Media 2,250,000 2,261,250 1.10%
Short-term Investments (7.66%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank @ 5.37%, 7/3/97 179,946 0.09%
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank @ 5.47%, 7/3/97 334,898 0.16%
- --------------------------------------------------------------------------------------------------------------------------
State Street Repo @ 5.25%, 7/1/97 15,169,000 7.41%
- --------------------------------------------------------------------------------------------------------------------------
Total Short-term Investments $15,683,844 7.66%
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Cash and Other Assets (net of liabilities) $1,544,631 0.76%
- --------------------------------------------------------------------------------------------------------------------------
Total Net Assets $204,676,650 100.00%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Non-income-producing securities.
8
<PAGE>
Following, each of the Masters' investment managers profiles one of their
portfolio holdings in your Fund.
CDL Hotels, Jean-Marie Eveillard
CDL Hotels is a chain of hotels in Asia, Australia, Europe and the United
States. It used to be a small division of City Developments Ltd., a major real
estate group in Singapore, until it was listed on the Hong Kong Stock Exchange
in 1989. City Developments Ltd. still has majority control of CDL Hotels.
Five years ago, at a time when prices for hotels were depressed, CDL began
making acquisitions in Asia, New Zealand and London. Additional purchases
followed in 1994, and CDL acquired control of the Plaza Hotel in New York City
in 1995. Today, with more than 60 hotels (mostly of the four-star variety), CDL
is one of the largest worldwide chains. With the Millennium brand, it is
beginning to develop a global identity. As the Pacific Rim continues to prosper,
more Asians (both businessmen and tourists) will travel throughout Asia, as well
as to cosmopolitan cities such as New York and London.
The company is profitable, with a net margin close to 10%. Last year about 47%
of profits came from Asia, 45% from Europe and North America and 8% from
Australia.
At present the stock is selling at about a 40% discount to the current value of
the hotels. While hotel values are high in Hong Kong (the company has only
modest exposure there) and have moved off the bottom in London and New York,
they are still depressed in some Asian countries, as well as in New Zealand and
Australia. So why is the stock apparently so cheap? First, hotels are in
temporary oversupply in some Asian countries. Second, the chain has not fully
developed a global identity. Third, the market capitalization is not large, at
less than $800 million. Fourth, the stock is listed in Hong Kong, where CDL has
only two hotels.
In short, opportunistic management has shrewdly acquired well-located hotels at
the bottom of the cycle. The chain is well run, and its new Millennium brand
will help. Most important, at least to value investors, the stock sells at a
large discount to current value, which seems to have room to grow in the next
few years. It looks like a genuine one dollar for sixty cents.
IBM, Shelby M. C. Davis
IBM is attractive to us because it is in the midst of a massive turnaround and
has a chance to become a growth company again. Finances are rock solid,
management is actively repurchasing stock and the focus for the future is to
grow in most segments of the computer industry by providing solutions to the
customer. Valuation is attractive at around 12 times 1998 earnings estimates.
This is a huge discount from the market (which is selling at around 18 times
earnings) and reflects the long memories investors have of IBM's dismal record
over the past 10 years. In this case, we do not believe the past is prologue.
Rather, IBM has made a new beginning, which, when combined with the fact that
the digital and information age is accelerating, should provide the backdrop for
favorable earnings progress in the new millennium. If our reasoning is correct,
and the company executes as forecast, investors should be treated to both a
rising earnings base and a rising valuation of the earnings--a potent mixture
for wealth building.
Linens `N Things, Foster Friess
Linens `N Things (LIN), a recent spin-off from CVS Corporation, is a NYSE
company that is a super place to buy your sheets, towels, plates, picture
frames, etc. Linens
<PAGE>
operates 132 specialty superstores and 33 smaller traditional stores. The
superstores average 33,000 square feet, and the smaller stores average 10,000
square feet.
From 1991 to 1997, the company's gross square footage has more than tripled from
1.2 million to 4.7 million. LIN expects to open approximately 25 stores in 1997
and 30 in 1998. It also could do opportunistic acquisitions of competitors or
sites.
The superstores carry 25,000 SKUs (each SKU represents a separate product). The
merchandise is composed of high-quality brand-name bedding, towels, pillows and
the like ("Linens") and housewares and home accessories ("Things"). Some of the
brands carried include Laura Ashley, Cannon, Martex, Royal Velvet, Braun, Krups
and Henckels. The company's own private labels are growing nicely, accounting
for approximately 10% of company sales in 1996, and continue to be an ever
larger source of revenues.
LIN has a very strong balance sheet and is almost debt-free. The company has
surprised the street with positive earnings surprises in each of the two
quarters reported since being spun out of CVS back in late 1996. The surprise
has been driven by a mix shift, more "things" with higher margins and also
higher same-store sales than expected. The "things" mix has grown from 10% of
sales in 1991 to 35% in 1996, and we expect it will continue to grow going
forward. This is the key fundamental development in the company's prospects that
Wall Street has underestimated and is also what served as a catalyst for our
recognition of the opportunity in the stock.
Sales for Linens `N Things are expected to exceed $1 billion in 1998, which
compares with just shy of $700 million in 1996. That is an increase of
approximately 45% in just two years. Over that same two-year period, Wall Street
estimates that earnings per share will grow 82%. In its most recent quarter,
LIN's sales soared 30%.
We are excited about the fact that we can participate in this company's 25%
growth pace, which we were able to purchase for less than 14 times 1998
estimates, and which still possesses a P/E of less than 20. This participation
in the appreciation of the stock as Wall Street comes to fully grasp the dynamic
success of the company is exactly what we strive for!
Telxon, Dick Weiss
Telxon manufactures and integrates wireless and mobile transaction systems for
retail, distribution, transportation and manufacturing customers. Telxon's
subsidiary Aeronet is the largest manufacturer of spread spectrum transmitters
and receivers for wireless local area networks. These networks are becoming more
prevalent in many industries as corporations place more emphasis on inventory
management and customer tracking.
Under the leadership of new CEO Frank Brick, Telxon has undergone a
restructuring to cut costs and standardize its products. These moves are paying
off, as the number of products has been reduced from over 350 to less than 100
and overhead has been cut by $30 million. Additional consolidation will save
another $10 million going forward. More important, revenues should accelerate in
the second half of this year as new "thin client" products utilizing Java come
to market. Backlog continues to increase, and new products could grow to 30% of
sales in the year ending March 1999.
Our target price is $25, based on a conservative discount to the company's
estimated private market value. The Aeronet subsidiary alone is worth more than
$8 per share, and Telxon's earning power should exceed $1.25 by March 1999.
(initial purchase in Masters' Fund at 13 5/8)
10
<PAGE>
3COM Corporation, Spiros Segalas
3Com is one of the top two suppliers of data communications products, which
include both wide and local area network systems. With its recent acquisition of
US Robotics, 3Com has extended and solidified its reach into the network, from
the edge to the network's core. Worldwide sales, on a combined basis, were
roughly $5.6 billion for FY 97 (ended in May) and are estimated to reach around
$7.5 billion in FY 1997 (combined historical results with detailed revenue
breakdowns will be released in late July). Earnings per share (EPS) were roughly
$1.85 and are estimated at $2.50 for FY 1997 and FY 1998, respectively. Calendar
1998 EPS are estimated at $3.00. There is potential for upside surprises, given
that margins are at the lower end of the company's targeted range and several
new product cycles have begun. Several of the underlying markets in which the
company operates are growing in the 30% to 50% range, with the remainder tied
somewhat to PC unit growth. The total company is likely to grow in a range of
25% to 45% over the next three years.
3Com's traditional approach of "plug and play" when addressing its markets with
easy-to-use products extends into its current end-to-end systems solution
approach to the evolving integrated data/voice/video communications market. The
company's philosophy of putting intelligence in the end points of the network is
unique to 3Com and differentiates it from competitors. This is likely to be
beneficial when penetrating the fast-growing SOHO (small office/home office)
market and can lead to opportunities in the carrier/network service provider
market. The company's strong presence in the distribution and retail channels,
combined with its growing strength in the direct channel, positions it to be a
formidable competitor going forward. 3Com should do well in this industry, where
it has moved into a consolidation mode and where size, breadth of product and
relationships with key telephone equipment vendors will be paramount.
360 Degrees, Mason Hawkins
360 Degrees (XO) is a cellular phone company, the old Centel Cellular which was
bought and subsequently spun off by Sprint. By objective industry measures, XO
has one of the best management teams in the industry. Our $36-per-share
appraised value of XO is based on 10 times operating cash flow, a multiple below
several recent industry transactions and justified by our own assumptions about
industry growth. The main market fear about XO concerns the entry of Personal
Communication Services (PCS) into the wireless market. We believe this fear to
be overblown. Half of XO's markets are too rural to be built out, and in the
other half we believe the entire wireless market will be stimulated enough for
both types of competitors to prosper. The U.K. and Washington, D.C., are good
examples of markets where PCS results have been excellent; at the same time, the
existing cellular providers are not only surviving but have performed better
than in many markets where PCS hasn't yet arrived. There is not a "better mouse
trap" risk, i.e., digital vs. analog. Although cellular today is analog, within
a few years both cellular and PCS will be digital, and there will be no
difference apparent to the consumer. The real risk is in having a third
competitor in an industry that until now has been a legislated duopoly. But
recent reported numbers and the economics of running a network suggest that PCS
will require higher revenues per customer and will compete for the high end,
rather than wreck overall industry pricing. The entire wireless industry should
expand rapidly enough to provide plenty of room for cellular and PCS.
<PAGE>
What Makes a Great Stock Picker?
First and foremost, the Masters' Select Equity Fund is about pure stock picking:
six world-class stock pickers, running portfolios focused on a small group of
their favorite ideas. As the advisor to Masters' Select, Litman/Gregory Fund
Advisors draws on the expertise of our sister companies, Litman/Gregory &
Company, LLC, an investment management firm, and L/G Research, the publisher of
the No-Load Fund Analyst, a research-intensive investment newsletter. In both
companies we expend a great deal of energy on the study of stock pickers. For
more than 10 years, we've been intensively studying stock pickers from a
quantitative and qualitative perspective. Over that time we've formed some
strong opinions about what makes a good stock picker. Because these opinions
played a big role in the selection of the "Masters," we thought you might be
interested in an article that was published in the No-Load Fund Analyst, long
before we had the idea for Masters' Select. The following is a condensed and
edited version.
What It Takes to Be a Guru
Excerpted from the No-Load Fund Analyst, June 1995
For mutual fund investors, the search for the next Peter Lynch is eternal; and
what seems like a never-ending stream of articles in the personal finance
magazines fuels this obsession with superstar fund managers. Despite all the
coverage, not much attention is paid to what's behind the greatness or what it
takes for a stock picker to perpetuate top performance over the long term.
Because this is something we think about a lot, we'd like to share some of our
insights.
Our approach to evaluating fund managers melds the quantitative with the
qualitative. The numbers fascinate us. We want to know how a manager has done
relative to his or her peers in different market environments, and how
consistent the performance has been. We also want to know what's behind the
numbers. Did the manager make big sector bets or choose a few great stocks? But
while we closely examine the record of each fund we recommend, we are obsessed
with more than the numbers. We apply a qualitative overlay that we believe is
also critically important. Over the years our many conversations with fund
managers have given us insights into the common traits of great stock pickers.
This article outlines these traits.
12
<PAGE>
Common Traits Among Gurus
What do great stock pickers have in common? We apply three general criteria:
1 We look for great long-term record relative to style peers. The proof is in
the pudding, so the numbers have to be there. A long record raises our
conviction level that these managers really are superstars.
2 Exhibiting traits that our experience has taught us make great investors is
also critical. The traits we've keyed in on are based on years of insights
gleaned from talking to many top managers.
3 Finally, we are focusing only on managers, we believe can maintain their
guru status. That means we must have a high level of confidence that they
will remain focused.
What Makes a Great Stock Picker?
Stock pickers we have identified as "gurus" are extremely bright and work very
hard. But there's more. Despite huge differences among the great stock pickers,
including different investment disciplines, there are common elements that keep
popping up. These can be split into personal characteristics, which many
standouts in other fields including business and the arts also share, and
learned investment principles that govern their investment decisions.
Personal Characteristics
Passion: All the greats love what they do. When discussing their life's work,
they say things like "It's been a journey" and "Investing is in my blood." They
clearly find the work fascinating. Most are observers of the world, who glean
investment insights from their fascination with life. We believe that this
passion is critically important, because the investment business is incredibly
demanding. Such a highly competitive and information-intensive endeavor can
easily lead to burnout. And the huge wealth accumulated by successful investment
managers means great managers have to love their work to maintain the high level
of motivation after their financial independence is assured (as it no doubt is
for all our gurus).
Energy Level: Hand-in-hand with passion, is a high energy level. This goes
beyond just work ethic (although that's important too) to effectiveness. In this
very dynamic business, a high energy level is critical to figuring out what's
important, dealing with the unexpected, handling a multitude of issues and
ultimately maintaining productivity.
Obsessiveness: Casual knowledge is never enough for the great stock pickers.
This seems to be a universal trait. There is an obsessiveness about getting all
the information that might lead to better decisions. Foster Friess talks about
being an investment detective: His team scours every item on the income
statement in a quest to understand exactly what determines the earnings for each
company. Mason Hawkins is relentless in his quest to know management. Chris
Davis (Shelby Davis's son and now Selected American Shares manager) talks about
his dad sneaking in company visits when he was supposed to be dropping him off
at
<PAGE>
boarding school. In a business where lots of smart people are analyzing the same
information, a relentless effort to get the best information possible can make a
big difference.
Inner Strength: There are no wimps in this crowd. All the great stock pickers
have great confidence in themselves. This allows them to stand apart from the
crowd when their analysis says they should. They don't second-guess themselves
when there is no fundamental reason to. Confidence allows them to act without
being unduly influenced by a fear of being wrong, and it helps them maintain
perspective in bear markets. Exceptional inner strength is a precondition for
success in this business.
Independent Thinking: All the greats are also fiercely independent. They make up
their own minds, and it's difficult to shake them. There is no group-think or
index mentality in the bunch. It is interesting that most in this group
developed their investment approaches early in their careers and pretty much on
their own. Thus their independence has driven both their specific investment
decisions as well as the development of their investment processes. The ability
to think differently, along with the inner strength to have convictions and act
on them, is what allows the greats to channel their obsession, passion and
energy.
Skepticism: The great stock pickers tend to be skeptics. Shelby Davis talks
about separating the bluffers from the doers. These guys take nothing at face
value. Their obsessive nature drives them to get the information they need to
get past their skepticism and base decisions on conviction.
Self-Knowledge: These managers all know themselves. They manage their own
careers to enable themselves to focus on what they like to do and avoid what
they don't. This is probably one reason they aren't burned out. It may not be a
coincidence that most have almost total control over their work environments.
Dick Weiss's group has total autonomy within Strong. This gives them the control
they need to do what they want. Shelby Davis knows he's a loner and "probably
not a great team player." So although he has incorporated analysts' research
into his approach, he's pretty much worked on his own over the years. In recent
years, his sons have become very involved after working elsewhere.
Ability to Learn from Mistakes: Although the gurus are generally a stubborn
bunch, they do learn from their mistakes. While they hate mistakes, they are
secure enough to put success, which demands continuous learning, above their own
egos. They don't wallow in failure. If they make mistakes, they accept them,
learn from them and move on.
Gut-Level Optimism: With all the great stock pickers, there is an underlying
optimism that the world is not going to end and that their approach will
continue to work. Although this is not rare in the investment business, it is
worth noting that few successful stock pickers got that way by heeding doomsday
scenarios of serious bear markets. It's worth noting, however, the gurus'
attention to downside risk, which we discuss later in this article.
Drive to Win: All the greats are very competitive and have an incredibly strong
drive to win--to be the best. When asked about their goals, performance almost
always comes up first.
Rules to Invest By
Focus on the Knowable: The greats don't speculate on what might happen. They
don't waste time trying to figure out investor behavior. None uses technical
analysis in his approach. These investors have learned to focus intensively on
analyzing what is knowable. Part of this
14
<PAGE>
analysis is getting to know company management extremely well. They tend to view
the managers of the companies they invest in as partners, and, naturally, it is
essential to know a partner well. Because their analysis is not built on hope,
it is easier for them to have the conviction to take sizable positions and stick
with them even when they may not be doing well.
Think Long-term: None of the greats gets caught up in short-term thinking. They
refuse to evaluate their performance over the short term. Even Foster Friess,
who invests in a much faster-moving arena than the other managers we've
identified, emphasizes businesses with strong enough internal dynamics to
overwhelm macroeconomic factors. At the extreme, Shelby Davis talks about
generational investing, which includes an assessment of the long-term viability
of a franchise.
Be Very Cognizant of Downside Risk: All the gurus are keenly aware of risk.
Mason Hawkins, Dick Weiss and Jean-Marie Eveillard have their own valuation
methodologies and will buy only stocks that are selling at huge discounts to
their assessment of value. Shelby Davis focuses on the people and the balance
sheet--he wants to know that his boat can survive a hurricane. Though Sig
Segalas seeks good long- and short-term performance, he only invests in
companies he's comfortable holding for the long term. Even Foster Friess, who
invests in a much more volatile universe, is very cognizant of risk and stays
away from fad stocks. His team invests only when they think they understand the
company better than the market does. These guys don't guess.
Stick to Their Knitting: All the great managers know their strengths and
weaknesses. Each has complete faith in his process and doesn't deviate from it,
though the process itself is generally flexible enough to adjust on the margin
to changing opportunities. Still, one reason these guys haven't made too many
mistakes is that they stick to what they know.
Final Thoughts
Picking great funds requires more than looking for the best records. The numbers
tell us about the past. And, sometimes but not always, tearing the record apart
helps us answer the question Was it luck or talent? But in the end, the numbers
alone can't tell us for sure how much luck was involved in building the record.
To really raise our conviction level about future performance, we've got to get
a sense for whether the manager has what it takes to be great. In our opinion,
the most important characteristics are passion for the business, intellectual
independence and obsessiveness. All the greats have these traits, and we look
for them in managers. Of course, just because we are looking for them doesn't
mean they are easy to identify. It usually takes a number of interviews with a
manager to start to build our conviction level in our qualitative assessment.
It is also critically important to future success for managers to stay focused.
A number of great stock pickers' records have deteriorated as they became
distracted by the operating demands of a growing business. In order to
perpetuate greatness, managers have to keep their eye on the ball.
<PAGE>
Master Profile:
Shelby Davis
Following is a profile of one of the "Master" managers that run your Fund. We
will profile a manager in each future report to shareholders, until all the
"Masters" have been profiled. Going through the group alphabetically, we'll
start with Shelby Davis. The following was also excerpted from the June 1995
No-Load Fund Analyst.
SHELBY DAVIS has investing in his blood. He got an early start, working summers
for his father, who had started his own investment firm after being the
insurance commissioner for the State of New York. He went on field trips with
his dad and had visited almost all the big insurance companies before he ever
graduated from college. When he graduated from Princeton in 1958, he went to
work for the Bank of New York as a research analyst. There he got "good basic
blocking and tackling training." At the time, the bank was writing full-scale
reports on industries and selling them to trust departments all over the United
States. In five years Davis was head of research after rotating around a number
of industries.
Early on, Davis began to disdain short-term thinking and the focus on quarterly
earnings estimates. Davis's investment philosophy, like that of many others, was
influenced by Ben Graham. But his father also taught him to have a three- to
five-year outlook, to avoid trading and to talk to CEOs about earning power,
strategic plans, and hopes and dreams three years down the road. His dad had
told him the most important thing was to be able to "separate the bluffers from
the doers." Between 1958 and 1969, everything was roses: "We all thought we were
geniuses." In 1969 his fund, New York Venture (a load fund he still is involved
with, though his son Chris was recently named portfolio manager), was the
top-performing fund.
But that changed in 1970, when the fund was much closer to the bottom. For the
next four years, the fund bounced around and essentially made no money. The
1973-74 bear market proved that stocks could go down--way down--and stay down
for a long time. During this bear market, Davis went to see Ben Graham, who told
him that there were a lot of bargains and that cycles come and go. This period
turned out to be the greatest buying opportunity in a lifetime. Davis said he
did not do as well as he should have,
16
<PAGE>
however, because at the time he was just looking for cheap stocks and he didn't
understand franchise value, pricing control, balance sheets, use of cash flow
and the importance of shareholder-oriented management. But during these rough
years, he began to learn that all earnings were not the same and all "cheap"
stocks weren't really so cheap. Davis eventually became what he calls a "counter
puncher"--playing off short-term earnings trends and looking for temporarily
depressed or out-of-favor companies and industries.
Over the years Davis has learned two critical lessons: Pay attention to the
balance sheet as well as the income statement, and know the management. If
something starts to go wrong, he says, "You want to know the people." He views
himself as a part owner not an investor. It's the people who make up a company,
and bad people can ruin a good company.
Davis's emphasis on value-priced growth, high-quality franchises, common
senseand a disdain for fads makes his portfolio like a boat built to travel the
entire breadth of the ocean through all kinds of weather. Strong balance sheets
and good management are the weatherproofing that let Davis sleep at night. He
also refuses to buy obsolescence. He is not interested in "coffee stores,
discount chains, jewelry stores or one-product technology companies." On the
other hand, he likes financial stocks because money never gets old.
Though he is an investment maniac, obsessive about his work, Davis has not tried
to master the universe, but has concentrated on what he knows well, stubbornly
sticking to his discipline. He likens investing to painting and says he is not a
Picasso, turning out lots of paintings very fast, but a long-term investor who
sticks with slower yet sustainable growth companies that are easier to
understand.
Davis's love for what he does has been passed on to the next generation of
Davises. When his three kids were in college, he would pay them $100 for each
company report they would write up after going to a company meeting. His two
sons, Chris and Andrew, now work with him. Both worked at other places before
joining their dad, but are now full-blown portfolio managers and critical to the
family business.
Very few managers have consistently and significantly outperformed the S&P 500,
but Davis has. Behind his record is a continued love for the business and an
inner drive to succeed without conforming to the crowd. He also has an uncanny
ability to spot long-term trends and generational changes that he combines with
his keen sense of history to build a very successful thematic portfolio. His
conviction to stay the course has also been critical to his success. Finally, he
also believes what his dad told him: "Work hard and good things will happen."
With his passion for the business intact, and over 35 years of experience,
Shelby Davis is a rare combination of energy and wisdom.
<PAGE>
Statement of Assets and Liabilities--June 30, 1997 (Unaudited)
Assets
- --------------------------------------------------------------------------------
Investments in securities at market value (cost of $181,038,204) $203,132,019
Cash 5,179
Receivables:
Fund shares sold 313,752
Income receivable 293,140
Investment securities sold 1,699,839
Deferred organizational costs 102,953
Prepaid registration expense 33,207
- --------------------------------------------------------------------------------
Total assets $205,580,089
Liabilities
- --------------------------------------------------------------------------------
Payables:
Fund shares repurchased 5,691
Investment securities purchased 723,500
Miscellaneous 8,503
Accrued expenses 165,745
- --------------------------------------------------------------------------------
Total liabilities $903,439
Net Assets $204,676,650
- --------------------------------------------------------------------------------
Composition of Net Assets
- --------------------------------------------------------------------------------
Paid-in capital 181,416,382
Undistributed net investment income 546,444
Accumulated net realized gains 552,913
Net unrealized appreciation 22,160,911
Net Assets $204,676,650
- --------------------------------------------------------------------------------
Number of shares, $0.01 par value, issued and outstanding
(unlimited shares authorized) 17,751,672
Net Asset Value per Share $11.53
- --------------------------------------------------------------------------------
18
<PAGE>
Statement of Operations--For the period from December 31, 1996, to June 30, 1997
(Unaudited)
Investment Income
- --------------------------------------------------------------------------------
Income:
Dividend income $996,549
Interest income 649,042
- --------------------------------------------------------------------------------
Total income $1,645,591
Expenses:
Advisory fees 818,335
Transfer agent fees 86,471
Custodian fees 70,168
Administration fees 61,323
Miscellaneous expenses 50,555
Registration fees 12,056
Amortization of deferred organizational costs 11,336
Legal fees 8,301
Trustees' fees 7,440
Insurance fees 7,159
Shareholder reporting fees 6,943
Audit fees 5,952
- --------------------------------------------------------------------------------
Total expenses 1,146,039
Less: expenses paid indirectly (45,028)
Less: expenses reimbursed (1,864)
- --------------------------------------------------------------------------------
Net expenses 1,099,147
- --------------------------------------------------------------------------------
Net investment income $546,444
Realized and Unrealized Gains (Losses)
- --------------------------------------------------------------------------------
Net realized gain (loss):
Investments $554,483
Foreign currency transactions ($2,570)
Net unrealized appreciation on:
Investments 22,093,815
Foreign currency transactions 67,096
- --------------------------------------------------------------------------------
Net realized and unrealized gains 22,713,824
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $23,260,268
<PAGE>
Financial Highlights - For a share outstanding throughout the period (12/31/96
to 6/30/97)1 (Unaudited)
Net asset value, beginning of period $10.00
Income from investment operations
Net investment income 0.03
Net realized and unrealized gain 1.50
--------
Total from investment operations $1.53
--------
Less distributions
From net investment income --
From net realized gains --
--------
Total distributions --
Net asset value, end of period $11.53
--------
Total return(2) 15.30%
--------
Net assets at end of period (in 000s) $204.677
--------
Ratio of expenses to average net assets
(net of expense reimbursements and expenses
paid indirectly) 1.47%*
--------
Ratio of net investment income to average net assets 0.73%*
--------
Portfolio turnover rate 62.73%
*Annualized.
1. The Masters' Select Equity Fund commenced operations on December 31, 1996.
2. Not annualized for periods of less than one year.
Statement of Changes in Net Assets 12/31/96 to 6/30/97 (Unaudited)
Increase (Decrease) in Net Assets
- --------------------------------------------------------------------------------
Operations:
Net investment income $546,444
Net realized gain 552,913
Change in net unrealized appreciation 22,160,911
----------------------------------------------------------------------
Net increase in net assets from operations $23,260,268
Distributions to shareholders:
From net investment income --
From net realized gains --
----------------------------------------------------------------------
Total distributions --
Fund share transactions:
Proceeds from shares sold 189,634,630
Net asset value of shares issued on reinvestment of
distributions --
Cost of shares redeemed (8,318,248)
----------------------------------------------------------------------
Net increase from Fund share transactions 181,316,382
----------------------------------------------------------------------
Net increase in net assets $204,576,650
Net Assets
- --------------------------------------------------------------------------------
Beginning of period 100,000
----------------------------------------------------------------------
End of period $204,676,650
Change in Shares
- --------------------------------------------------------------------------------
Shares sold 18,549,293
Shares issued on reinvestment of distributions --
Shares redeemed (807,621)
----------------------------------------------------------------------
Net increase 17,741,672
20
<PAGE>
Notes to Financial Statements
1. Organization
The Masters' Select Equity Fund (the "Fund") is a series of Masters' Select
Investment Trust (the "Trust"), organized as a Delaware business trust on August
1, 1996, and registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end management investment company.
The Masters' Select Equity Fund is a fund that seeks to increase the value of
your investment over the long term by using the combined talents and favorite
stock-picking ideas of six highly regarded portfolio managers.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Fund.
Security Valuation--Portfolio securities that are listed or admitted to trading
on a U.S. exchange are valued at the last sales price on the principal exchange
of which the security is traded or, if there has been no sale that day, at the
mean between the closing bid and asked prices. Securities admitted to trading on
the NASDAQ National Market System and securities traded only in the U.S.
over-the-counter market are valued at the last sale price or, if there has been
no sale that day, at the mean between the closing bid and asked prices.
Securities and other assets for which market prices are not readily available
are valued at fair value determined in good faith by the Board of Trustees. Debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Board of Trustees determines that amortized cost does not
represent fair value. Cash and receivables are valued at their face amounts.
Foreign Currency Translation--The books and records of the Fund are maintained
in U.S. dollars. The value of securities, currencies and other assets and
liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest and foreign withholding taxes recorded on the Fund's
books and the U.S.-dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities resulting from
changes in the exchange rates.
Federal Income Taxes--The Fund intends to qualify as a regulated investment
company by complying with the appropriate provisions of the Internal Revenue
Code of 1986, as amended. Accordingly, no provisions for federal income taxes
are required.
Security Transactions and Related Income--Security transactions are accounted
for on the date the security is purchased or sold (trade date). Divided income
is recognized on the ex-dividend date, and interest income is recognized on the
accrual basis. Purchase discounts and premiums on securities held by the Fund
are accreted and amortized to maturity using the effective interest method.
<PAGE>
Realized gains and losses on securities sold are determined under the identified
cost method.
It is the Trust's policy to take possession of securities as collateral under
repurchase agreement and to determine on a daily basis that the value of such
securities is sufficient to cover the value of the repurchase agreements.
Deferred Organization Costs--Organization costs are amortized on a straight-line
basis over a period of 60 months commencing with the first full month after the
Fund's commencement of operations.
Distributions--Distributions to shareholders are recorded on the ex-dividend
date.
Accounting Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities on
the date of financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
3. Management Fees and Transactions with Affiliates
The Fund pays a management fee to its advisor, Litman/Gregory Fund Advisors, LLC
(the "Advisor"), at the annual rate of 1.10% of the Fund's average daily net
assets. The Advisor pays investment management fees to the six investment
managers. Total management fees incurred by the Fund as of June 30,1997, were
$818,335, of which $523,911 was paid to the investment managers, and $294,724
was retained by the Advisor. Management fees paid to the investment managers
represent 0.704% of the Fund's average daily net assets. Management fees
retained by the Advisor represent 0.396% of the Fund's average daily net assets.
The Advisor has agreed to reimburse the Fund for any ordinary operating expenses
above 1.75% of the Fund's average net assets. The Advisor reserves the right to
be repaid by the Fund if the expenses subsequently fall below the specified
limit in future years. This expense limitation arrangement is guaranteed by the
Advisor for at least the first year of the Fund's operations. After that, it may
be terminated at any time, subject to approval by the Board of Trustees and
prior notice to shareholders. Fee waivers and expense reimbursements are
voluntary and may be terminated at any time.
The Trust, on behalf of the Fund, entered into an Administration Agreement (the
"Agreement") with Investment Company Administration Corporation (the
"Administrator"). Under the terms of the Agreement, the Trust will pay an annual
fee, payable monthly and computed based on the value of the total average net
assets of the Trust at an annual rate of 0.10% of the first $100 million of such
net assets, 0.05% of next $150 million, 0.025% of next 250 million and 0.0125%
thereafter, subject to a minimum fee of $40,000.
Each unaffiliated Trustee is compensated by the Trust at the rate of $7,500 per
year.
4. Purchases and Sales of Securities
The cost of security purchases and the proceeds from security sales, other than
short-term investments, for the six-month period ended June 30, 1997, were
$258,780,291 and $91,924,280, respectively.
At June 30, 1997, the aggregate unrealized appreciation and depreciation of
portfolio security based on cost for federal income tax purposes was as follows:
Unrealized appreciation $26,044,202
Unrealized depreciation ($3,883,291)
------------
Net unrealized appreciation $22,160,911
<PAGE>
This report is authorized for use when preceded or accompanied by a prospectus
for the Masters' Select Equity Fund. Read it carefully before investing. Past
performance is not a guarantee of future results. Share price and returns will
fluctuate and investors may have a gain or loss when they redeem shares.
Statement and other information in this report are dated and are subject to
change. Litman/Gregory Fund Advisors has ultimate responsibility for the Fund's
performance due to its responsibility to oversee its investment managers and
recommend their hiring, termination and replacement. First Fund Distributors,
Inc., Phoenix, AZ 85018.
