Jack Chee – Inside Retirement Conference Q&A

cheeJack Chee
Principal, Senior Research Analyst, Litman Gregory

Jack Chee joined Litman Gregory in 2000 and became a principal in 2011. He is co-portfolio manager of the new Litman Gregory Masters High Income Alternatives Fund expected to launch on September 28. Chee’s additional research responsibilities include asset-class analysis on the majority of fixed-income markets as well as the equity REIT market.

Question 1: Rates are still historically low – is this a good time to invest in an income-oriented alternatives fund?

Jack Chee: We built the Litman Gregory Masters High Income Alternatives Fund [MAHIX, MAHNX] because we believe it is, although short-term timing isn’t our focus since we are long-term investors. We are currently facing a challenging environment for traditional fixed income, with near historically low yields and higher interest-rate risk, but we believe there is strong rationale for the fund as a dedicated long-term/strategic holding. We believe there are good opportunities to generate higher income and returns and add diversification from managers with expertise in less traditional and/or less efficient areas of the financial markets.

Question 2: What makes this fund different?

Jack Chee: We wanted high levels of income, but not a swing-for-the-fences strategy. We selected opportunistic yet risk-conscious managers, who can take advantage of compelling opportunities but mitigate risk when prudent. This is consistent with how we think as investors. The managers are highly experienced and have been chosen based on our conviction in their strategy individually and how each contributes to the overall portfolio characteristics. Also, as noted above, each of the strategies accesses non-traditional sources of income that may not typically be owned by most investors.

Question 3: What is the role of this fund in a diversified portfolio?

Jack Chee: The fund can serve as part of an investor’s diversified fixed income allocation or as part of an alternative strategies allocation. Litman Gregory believes that owning the fund as a dedicated allocation to complement traditional core bond investments has the potential to generate higher returns over a full market cycle while adding diversification and mitigating interest rate risk.

Question 4: How do you expect the fund to perform in various rate (rising, flat, falling) environments?

Jack Chee: We expect the fund to be relatively insensitive to the direction of interest rates, due to the flexibility of credit managers to vary the amounts of fixed- vs floating-rate assets they own, the short-duration nature of collateral in the options strategy, and the more credit-sensitive nature (and flexibility to shift the portfolio) of the equity income strategy.

Question 5: What is the distribution schedule for this fund, and what is the expected mix of distributed dividend income (ie., qualified/non-qualified)?

Jack Chee: The fund will pay dividends monthly and capital gains quarterly. The majority of the distributions will be non-qualified. Income from option sales will be taxed at 60/40 long-term/short-term capital gains rates.