When it comes to selecting investment managers, the advisors at Litman Gregory are seen as among the most serious thinkers in the RIA space. For decades, they produced research in a newsletter called The No-Load Fund Analyst, now LitmanGregory Advisor Intelligence, which rivaled Morningstar for its depth if not its breadth.

Since 1996, the firm has been packaging high-conviction ideas from the best managers they can find into a series of multi-manager strategy funds they call the Masters funds. Managers include names like Bill Nygren, Chris Davis, Jeffrey Gundlach, Matt Eagan and David Herro.

So when Litman Gregory announced the rollout of its Masters High Income fund in late September, it caught the eyes of many advisors. Simply put, the fund has four sleeves and is designed to produce the mid- to high-single digit returns of high-yield bonds with significantly less risk.

Like other advisors, executives at Litman Gregory are acutely aware of investors’ need for income and they have been waiting to craft a multi-manager fund that achieves this problem while preserving capital. “We expect the fund to generate income and returns competitive with high-yield bonds over a full-market cycle/credit cycle, but with less downside risk and less volatility than high yield (on the order of half to two-thirds the risk),” said Jeremy DeGroot, chief investment officer at Litman Gregory. “Our fund will certainly be more diversified across a much broader investment opportunity set, incorporating different asset classes and fixed-income sectors/segments than a traditional high-yield fund.

“In our Litman Gregory RIA client accounts, we use the High Income Alternatives fund as a long-term strategic allocation—as part of our diversified fixed-income allocation—that complements our traditional core investment-grade bond exposures and other income-oriented investments. It could also be used to diversify and replace some of an investor’s existing dedicated high-yield bond allocation or traditional equity-income allocation,” DeGroot continued.

Litman Gregory has selected four managers to run four separate sleeves. Ares Management will oversee an alternative equity income sleeve that invests in MLPs, mortgage REITs, BDCs (Business Development Companies) and, if opportunities present themselves, closed-end funds. This sleeve will represent about 15 percent of the fund’s total assets. At present, it is generating a return of about 9 percent.

For the credit value sleeve that will contain 32.5 percent of fund assets, Litman Gregory has tapped Brown Brothers Harriman to run a flexible, capital preservation strategy. Jack Chee, senior research analyst at Litman Gregory, says Brown Brothers will select about 80 securities with a focus on non-mainstream, asset-backed securities and bonds rated just above or below the triple-B crossover point, where value can often be found.

Guggenheim Partners is running the fund’s multi-credit sleeve. It will enjoy the widest opportunity set and not be constrained by traditional style boxes. “We’ve become impressed by their asset allocation capabilities," DeGroot said. This sleeve will also hold 32.5 percent of the fund’s assets.

An option-income sleeve managed by a team at Neuberger Berman that writes collateralized put options on U.S. equity indexes will be the fourth component of the fund. Most options will be sold at levels about 2 percent out of the money. DeGroot compares this strategy to “selling insurance without the deductible.”

Litman Gregory is reserving the right to tactically vary the wieghtings. However,, DeGroot says the fund is more likely to rebalance through new asset flows than overweight or underweight various sleeves.