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Portfolio > Portfolio Construction

Michael Cuggino of the Permanent Portfolio

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Quick Take: In addition to the stocks and bonds you would expect to find in an asset allocation fund like the Permanent Portfolio (PRPFX), its portfolio features gold and silver bullion and coins.

The fund’s wide variety of assets, which include foreign and domestic equities and Swiss fixed-income securities, is intended to preserve and increase shareholders’ money while guarding against risk from things like bear markets or economic downturns.

Under Michael Cuggino, its portfolio manager since 1991, the fund has stayed ahead of similar funds lately, and over the long run. It was up 6.8% this year through September, versus a gain of 0.2% for the average asset allocation fund. On an annualized basis for the five and ten years ended in September, the Permanent fund returned 10.2% and 7.6%, respectively, versus 2.1% and 7.2% for its peers.

Cuggino’s fund also is less volatile than others in its category, as illustrated partly by its beta, a measurement of sensitivity to changes in the market. The fund sports a reading of 0.06, versus its peers’ 0.56, as well as a low standard deviation relative to similar funds.

The Full Interview:

What does the Permanent Portfolio invest in?

A better question might be what doesn’t it invest in?

The $199-million fund holds U.S. and foreign stocks and bonds, and gold and silver bullion and coins. The equities, which account for 30% of its holdings, include shares of natural resources and real estate companies, and what portfolio manager Michael Cuggino terms “aggressive growth” stocks.

The mixture is intended to maintain and fatten gains while keeping risk from sour markets or geopolitical developments to a minimum. The asset classes aren’t correlated, so weakness in one segment of the fund can be offset by strength in another, Cuggino says.

“We believe that an investor, to be properly diversified and protected, needs to have exposure to all these different groupings,” he says.

Permanent Portfolio’s fixed-income investments consist of Swiss government bonds, which make up 10% of its assets. Another 35% is in U.S. Treasurys and investment-grade corporate bonds.

In picking the 60-100 stocks that go into the fund, Cuggino looks for growing, financially sound companies whose stocks seem reasonably priced. He favors businesses with strong balance sheets, leading industry positions and seasoned managers. For his more conservative stocks, Cuggino likes companies that pay dividends and buy back their shares. He leans towards medium-sized and large companies, but he can buy small ones as well.

The fund manager initially targets industries he thinks will prosper, then hunts for good looking companies in the sector.

Late last year, Cuggino began buying Williams-Sonoma (WSM), a home products retailer he reasoned would do well if the U.S. economy picked up and left shoppers with more disposable income. In addition, the company features well-known brands, like Pottery Barn, and has demonstrated an ability to increase sales and open new stores profitably, he says.

Over the course of this year, Cuggino says he has been adding to his stake in Sanmina-SCI (SANM), a contract manufacturer of computers and other electronic products. The company stands to benefit if, as he expects, consumers and corporations increase spending on technology, Cuggino says.

One of the fund’s top holdings is Phelps Dodge (PD), a copper miner that Cuggino says has been a strong performer this year as it has gotten a boost from rising commodity prices. Also, Phelps has lowered its production costs as copper has become more expensive, which in turn has enabled it to improve its operating margins and cash flow, Cuggino says. Although the stock has run up recently, “we still think it has a long way to go,” he says.

In the third quarter, the fund’s performance was aided by its energy stocks, which were helped by rising oil prices. Cuggino cites ChevronTexaco Corp (CVX) as a winner. Elsewhere in the sector, he had stakes in BP p.l.c. ADS (BP), and Devon Energy (DVN).

Another strong contributor to the fund’s returns between July and September, Cuggino says, was home builder Ryland Group (RYL). Cuggino likes the company because it operates in many parts of the country.

“They’ve done a very good job in investing in the right areas, in building affordable homes that people want,” he says of the company. “They constantly have a very good backlog” of orders.

Cuggino thinks stocks of energy and housing companies can keep on posting gains for a while.

Although oil prices are high now because of supply concerns and speculation, he believes that even if they dropped to the low to mid-$30s, energy companies could still make profits.

Home builders, he maintains, can stay on a roll if the economy continues to strengthen and interest rates increase only gradually.

Cuggino will sell a company if its financial fundamentals go into a long-term decline, and he’ll trim positions in stocks that start to get expensive. But once a security enters the fund it’s likely to hang around. That’s illustrated by the fund’s low turnover, which clocked in at 23.2% last year, compared to its peers’ 83.4% reading.

One reason he doesn’t sell often, Cuggino says, is because he tries to keep the fund tax-efficient by holding down capital gains distributions.

Contact Bob Keane with questions or comments at: [email protected].


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