Masters' Select Funds Quarterly Update

Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. To obtain the performance of the funds as of the most recently completed calendar month, please visit www.mastersfunds.com. The funds impose a 2.00% redemption fee on shares held less than 180 days. Performance does not reflect the redemption fee. If reflected, performance would be lower.

The performance quoted does not include a deduction for taxes that a shareholder would pay on distributions or the redemption of fund shares. Indexes are unmanaged, do not incur expenses, taxes or fees and cannot be invested in directly.

Gross and net expense ratios are per the Prospectus dated April 30, 2008. Through April 30, 2009, Litman/Gregory has contractually agreed to waive a portion of its advisory fees effectively reducing total advisory fees to approximately 0.97% of the average daily net assets of the International Fund, 1.08% of the average daily net assets of the Value Fund and 1.02% of the Focused Opportunities Fund. Litman/Gregory may voluntarily waive a portion of its advisory fee in addition to those fees that are contractually waived. Litman/Gregory has agreed not to seek recoupment of advisory fees waived. Through 4/30/09, Litman/Gregory has voluntarily agreed to waive a portion of its management fee to pass through any costs benefits resulting from sub-advisor breakpoints, changes in the sub-advisory fee schedules or allocations within the Equity Fund, the International Fund, the Value Fund, the Smaller Companies Fund, and the Focused Opportunities Fund.

Dear Fellow Shareholder,

The following comments were written in mid-October. If extreme market volatility continues, it is possible that some of the comments may become dated. However, we believe most are not time sensitive.

Stocks saw their slide intensify in September and then plunged in the first part of October, leaving us in the midst of one of the worst bear markets in the post-WWII period

Much has been written already about the excessive debt levels and the housing bubble that led up to this crisis. In this recent period, almost all classes of investment assets have declined in value as investors have shunned anything perceived to have any risk at all. We believe there have been three driving factors behind the decline:

First, the credit squeeze has caused real damage to the economy, resulting in reduced earnings expectations and lower business values. This is by far the biggest driver of the market decline.

Second, risk aversion has increased. When investors are in a risk avoidance mode their time horizon often truncates so that near-term capital preservation becomes much more important than long-term return opportunities. We believe this dynamic is in play.

Third, we believe the forced de-levering is causing dysfunction in the markets. We see this in the fixed-income market where municipal bonds and corporate bonds have suffered surprising losses that, to us, seem extreme relative to our read on their actual risk levels. And we see strange things in the equity markets as well. For example, there was a day in early October when the domestic small-cap market was up almost 5% and the large-cap market was down more than 1%. We can’t imagine a fundamental explanation for why those two markets should have a performance differential of that size on a single day. We believe the market dysfunction is driven partly, or perhaps largely, by hedge-fund selling. Hedge funds had become sizable players in the financial markets, and they are now suffering from redemptions (realized and anticipated), margin calls and short-selling restrictions. For these reasons, hedge funds are dumping assets. This selling may have contributed to the market dysfunction by driving demand for some stocks as short positions were covered, while simultaneously resulting in downward pressure on other stocks as long positions were sold.

The Outlook for Stocks and Masters' Select

Many investors are no doubt wondering whether maintaining stock allocations makes sense in the current environment. There is no longer a question about whether we will experience a recession and it appears that it could be a bad one. Moreover, with consumers less well off and less able to borrow, consumer spending growth will probably shrink and then be subpar for several years. We believe that this all suggests that corporate earnings will continue to decline in the short term, and later, when they begin to improve, it will take several years to get back to where they would otherwise have been. As noted above, this significant deterioration in the outlook for corporate earnings has been the primary driver of the decline in stocks. From this point we believe investors should focus on two key issues:

Issue 1: What is already priced into stocks?

Stocks prices reflect expectations about the future. When times are very good stocks often price in too much optimism. When investors have suffered through deep losses, stocks often price in too much pessimism. This is why Warren Buffet has famously said "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” With two huge bear markets in ten years and losses exceeding 40% over the past year as we write this, stock investors may be on the pessimistic side now. Indeed, on October 17th Buffet wrote in the New York Times “And most certainly, fear is now widespread, gripping even seasoned investors."

We believe there are many metrics which also shed some light on the appeal of stock now. Here are two based on the S&P 500 at 900:

Valuation: There are many ways to look at valuation and most suggest that stocks are attractively priced now. As an example, there is the price/earnings ratio (p/e) based on normalized earnings. Our calculation of normalized earnings takes average earnings over five years (the four preceding years and one year of forecasted earnings, which we have haircut significantly). Doing this smoothes out the ups and downs in annual earnings to adjust for cyclical effects. Based on our calculation this p/e is lower than it has been since 1985, 23 years ago. And at that time interest rates as measured by the 10-year Treasury were more than double current levels, creating more competition for stocks. By this measure stocks look cheap. And according to data from The Leuthold Group and updated by Litman/Gregory, today’s normalized p/e ratio is in the second lowest decile in the last 50 years. This means that more than 80% of the time over the past 50 years stocks sold at higher p/e ratios.

Reality Check:Do we think we are in the midst of a period that will be as bad as the Great Depression? We don’t. Government is now 20% of the economy now versus 3% then. Policy makers are not raising interest rates and tariffs as they did then, rather they are flooding the system with money. We have deposit insurance now and did not back then. There are safety nets now that didn’t exist back then. Banks are now being partially nationalized with capital injections to stabilize the financial sector. We do believe that a worse-than-normal recession is very probably in the cards but that we won’t see anything even remotely close to the 25% peak unemployment rate of the 1930s. So should stock returns be as bad as they were in the Depression era? We don’t think so and that has some implications for the next five years. The S&P 500 is already down 41% from March of 2000 when the tech bubble burst. From here, if stocks deliver a positive 3% real (over inflation) return over the next 4.5 years they will match the worst 13 years of real returns over the last century, which happened during the depression era period ended 1942¹. In that example, if inflation averages, say, 2% over the next 4.5 years, the nominal (actual) return for stocks would be 5% over that period, to match the worst inflation-adjusted 13-year return of the last century. We are not saying that we think this will happen, but this provides some context and, we believe, a good reality check and potential downside boundary for thinking about what worst-case stock returns might be over the next five years or so. Five percent isn’t an exciting return over the next 4.5 years but if we are right that this is a worst case, 5% doesn’t sound so bad. Based on our analysis, we believe it is likely that returns for stocks in general will be higher than this over the next five years and that individual stock-picking opportunities could be exciting. This “worst case” return is also consistent with the most negative returns we come up with when we use very pessimistic earnings assumptions in our own five year market forecasts.

Issue 2: How do stocks react in economic downturns? It is also important to remember that stocks typically bottom while recessions are in full force, not when they end. Moreover, we’ve reviewed studies by several independent research firms that note that the typical banking crisis (there have been a number over the past 100 years) has a severe economic impact and lasts for 2 ½ years on average. But the stock market typically bottoms at about the one year mark—right about where we are now if we date the start of this crisis in the fourth quarter of 2007.

With stocks down more than 41% from the levels of 8 ½ years ago, and for the reasons discussed above, it is possible that we are near a bottom though we can’t say that with any certainty. It is encouraging to know that Warren Buffet is buying. We also take comfort in hearing that so called “perma bears” like Jeremy Grantham and John Hussman now say that stocks offer good long-term value, as do our sub-advisors. Bob Rodriguez, is one Masters’ Select sub-advisor (on the Smaller Companies fund) who several years ago foresaw and publicly warned about the economic environment we are experiencing. He was among a small handful of investors who understood the risks. For several years he remained defensive in his own equity fund frustrating his shareholders who expected a more aggressive posture (he also held an elevated cash level in his sleeve of Masters’ Select Smaller Companies). Now vindicated, Rodriguez is finally finding good long-term value and cautiously buying. He recently emailed us the following comments “We are buying because we are of the opinion that these stocks are now discounting a very severe outlook. We have tried to determine what the downside risks are but we are operating in a new financial system where the boundaries have yet to be determined. The companies being selected have very strong balance sheets and are market leaders; therefore, we believe they will be survivors and thus, they will improve their competitive positions in this down cycle.”

We don’t know what the near term will bring in terms of stock prices, but we believe that from current levels, long-term investors are very likely to get satisfactory returns from stocks and very possibly do much better. Waiting until there is an “all-clear” sign will likely mean an entry point at higher stock prices which can make it much tougher to pull the trigger and ultimately get back into the market. As Buffet wrote in the New York Times article: “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

What About Masters' Select?

The Masters’ Select funds were hit hard in the third quarter. In this environment, Masters’ Select International held up better than its benchmark, advancing its strong record for long-term relative returns. This was not much consolation, though, in a very negative quarter. The domestic Masters’ Select funds underperformed their benchmarks, several by wide margins. Like you, we are very disappointed with the domestic funds’ performance. But even taking into account the very poor recent performance, Masters’ Select Equity has still out-returned its Russell 3000 benchmark over the past ten years and since inception. No one can predict the future, but looking ahead, we believe there are several compelling reasons to expect more in the future from the Masters’ Select funds:

The sub-advisors: The two oldest funds, Equity and International, have outperformed their benchmarks by clear margins over the past ten years (Equity by 1.67 percentage points per year compared to the Russell 3000 Index and International by an even larger 4.65 percentage points compared to the S&P Citigroup PMI Global (ex-US) Index). We believe the results reflect our high standards and the thorough due diligence that drives our sub-advisor selections and ultimately the active management skills of the managers. Though the other Masters’ Select Funds have not shared their success over their shorter lifespans, we believe that over the long term similar drivers of success are in place and will eventually contribute to their success. In the short term there are always variables that can have significant impact on relative performance and we can’t predict those. But if it is true that our core concepts of choosing skilled managers, allowing them to concentrate on their best ideas, and giving them flexibility to invest for the long term does lead to success, as we believe and as it has with the two funds that have been around the longest, then it follows that over longer periods all of our funds have the potential to experience that success.

Active management: As mentioned above, financial markets in general, including the stock market have been dysfunctional recently. Forced selling by hedge funds and others has caused prices of some stocks to move in ways that are unexplained by fundamentals. Bear market psychology has, we believe, exacerbated this dynamic. We believe this may explain the very poor recent performance by many stock pickers we respect, including many of the Masters. As we move past the period of massive forced deleveraging we believe that active management has the potential to add significant value in excess of index performance. This is the type of environment that we believe plays to the strengths of Masters’ Select.

Manager ups and downs:All stock pickers have ups and downs, even great ones. The good ones come back after their down periods. In those cases buying after a down period would have paid off handsomely. For example, in 1969, Warren Buffett liquidated a partnership he was running and suggested that his investors invest with the Sequoia Fund’s Bill Ruane. This was a great call by Buffett—Sequoia had a stellar record for the next several decades. However, the timing was bad. In the next four years Sequoia was down 1% while the S&P 500 was up 40%. This period encompassed the brutal 1973-1974 bear market. In the four years that followed, Sequoia was up 250% against 23% for the S&P 500. Investors who gave up on Sequoia after several years of poor performance would have suffered through the bad years and missed out on the spectacular ones, a particularly depressing outcome. Another example: around the same time, Buffett’s famous sidekick, Charlie Munger, a great investor in his own right, was running his own investment partnership. From 1972 through 1974 his partnership lost 50% of its value compared to a 21% loss for the S&P. However, over the entire life of the partnership (1962-1975) Munger’s partnership returned 14% (annualized) compared to 5% for the S&P 500. ²

Performance out of a bear market: Investor fear in bear markets tends to create attractive opportunities that skilled stock pickers can profit from as markets become more rational and investors move away from extreme pessimism. The two oldest Masters’ Select funds, Equity and International have been through two market declines. In the periods that followed, both funds added sizable amounts of return in excess of their benchmarks. The following table illustrates what happened in the periods that followed (the market declines ended on different days for the US and foreign markets):

1. The benchmarks for the Equity and International Funds are the Russell 3000 Index and the S&P Citigroup PMI ex US Index, respectively.

Final Thoughts

With the exception of Masters’ Select International, the Masters’ Select funds have not met our relative performance expectations in the last few years. That is particularly disappointing at a time when stock markets everywhere have been pummeled. We know that Masters’ Select will have significant tracking error and can underperform even over periods this long but the last few years have nevertheless been disappointing. However, we believe that the Masters’ Select funds will shine again because 1) The oldest funds have been successful with strong relative performance records over the long run and while this doesn’t guarantee future long-term performance we believe it is relevant information; 2) Though we have had a few instances where we recognized a mistake or where circumstances with a particular manager changed leading to the removal of a manager (for example, Bill Miller was replaced on Equity and Value in September) we believe, based on our extensive due diligence, that the funds’ sub-advisors are highly skilled stock pickers and this belief is further supported by our analysis of their long-term performance. 3) We continue to believe the concept of capturing each sub-advisor’s most compelling ideas with multiple managers contributing to overall fund diversification will again prove itself out over the long run.

We don’t know what the near-term might bring. It is certainly possible that the stock market and Masters’ Select may not have seen their lows. However, after a 40%-plus decline in stocks it makes sense that we are more optimistic about the return potential at these more attractive valuation levels. And after a very rough patch for some of the Masters’ stock pickers we believe that they are due for a rebound. Litman/Gregory employees and the fund’s trustees continue to be significant investors in the funds with $12.2million invested.

Opinions expressed are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

Mutual Fund investing includes risk, loss of principal is possible.

The fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company, and it may be obtained by calling 1-800-960-0188, or visiting www.mastersfunds.com. Read it carefully before investing

Each of the Masters’ Select Funds may invest in foreign securities. Investing in foreign securities exposes investors to economic, political and market risks and fluctuations in foreign currencies. Each of the funds may invest in the securities of small companies. Small-company investing subjects investors to additional risks, including security price volatility and less liquidity than investing in larger companies. Masters’ Select Value and Masters’ Select Focused Opportunities are non-diversified funds, which means that each respective fund may concentrate more of its assets in fewer individual holdings than a diversified fund. Though primarily equity funds, the Value and Focused Opportunities funds may invest portions of assets in securities of distressed companies. Debt obligations of distressed companies typically are unrated, lower rated, in default or close to default and may become worthless.

The Custom Equity Index is composed of a 70% weighting in the S&P 500 Index, a 20% weighting in the Russell 2000 Index, and a 10% weighting in the MSCI EAFE Index. The S&P 500 Index consists of 500 stocks that represent a sample of the leading companies in leading industries. This index is widely regarded as the standard for measuring large-cap U.S. stock market performance. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The MSCI EAFE Index measures the performance of all of the publicly traded stocks in 21 developed non-U.S. markets.

The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies as measured by total market capitalization, and represents about 98% of the U.S. stock market.

The Russell 3000 Value Index is a broad based index that measures the performance of those companies within the 3,000 largest U.S. companies, based on total market capitalization, that have lower price-to-book ratios and lower forecasted growth rates.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The S&P 500 Index is widely regarded as the standard for measuring large-cap stock performance, and consists of 500 stocks that represent a sample of the leading companies in leading industries.

The S&P Citigroup PMI global (ex US)Index is a broad based index that represents the largest 80% of investable companies in 52 developed and emerging market countries.

Indexes are unmanaged, do not incur expenses, taxes or fees and cannot be invested in directly.

Litman/Gregory Fund Advisors, LLC is ultimately responsible for the performance of the Masters' Select Funds due to its responsibility to oversee the investment managers and recommend their hiring, termination and replacement.

The Masters' Select Funds are distributed by Quasar Distributors LLC

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1. We use 13 years for the entire period because we are starting our count from the March 2000 market peak and tacking on our standard five year forecasting horizon, but "rounding" that down to March 2013 which is 4.5 years from September 30.

2. Neither the information contained herein nor any opinion expressed shall be construed as an offer to sell or a solicitation to buy any securities mentioned herein.