The Permanent Aggressive Growth Portfolio (PAGRX) is not your typical aggressive growth fund.
Unlike the vast majority of “aggressive growth” investors, portfolio manager Michael J. Cuggino eschews frequent trading, momentum-oriented stock picking, and chasing short-term “hot” sectors. Indeed, the $34-million portfolio is highly concentrated and characterized by its long-term positions, low turnover, and emphasis on tax-efficiency. What’s more, it has also delivered outsized returns in-line with its “aggressive” mandate.
For the one-year period through June 30, Permanent Aggressive Growth gained 26.7%, versus a 5.4% gain for the average all-cap growth portfolio. For the three-year period, the fund climbed 14.4% annualized, versus a rise of 8.4% for its peers. Over five years, it registered an average annualized return of 4.7%, while similar funds dropped 5.0%. With a hefty 11.2% gain in the second quarter of 2005, Permanent Aggressive Growth ranked at the very top of all domestic diversified U.S. stock funds for the period.
Cuggino took over managing of all four Permanent portfolios that make up the Permanent fund family in January 1991. The four funds have about $370 million in assets, of which $260 million is parked in the better-known Permanent Portfolio (PRPFX). That fund invests in a wide variety of assets, including foreign and domestic stocks and bonds, as well as gold and silver bullion and coins. (See Michael Cuggino of The Permanent Portfolio in the Fund Manager Interviews section of Fund Advisor.)
Permanent Aggressive Growth invests in U.S. stocks of any size that Cuggino believes can deliver long-term profit growth exceeding that of broader equity markets. Most companies the fund invests in are in the mid- and large-cap space. It’s relatively rare for the manager to invest in either small- or mega-cap stocks. The fund generally holds between 30 to 50 securities, and is fully invested at all times.
By selecting stocks that consistently exhibit high earnings growth, Cuggino believes the fund can prosper regardless of how the broader markets perform. There are currently 37 holdings in the portfolio. Given its concentration and the approach, the fund demonstrates more volatility than its peers, characterized by its higher three-year standard deviation, a historical measure of the variability of a portfolio’s returns. So far, investors have been rewarded for the extra risk.
As of March 31, 2005, the fund’s ten largest holdings were Frontier Oil Corp. (FTO), 13.9%; Ryland Group Inc. (RYL), 11.4%; Autodesk Inc. (ADSK), 4.6%; Amgen Inc. (AMGN), 4.0%; Harley-Davidson Inc. (HDI), 4.0%; Genzyme Corp. (GENZ),4.0%; Costco Wholesale Corp. (COST), 3.7%; Air Products & Chemicals Inc. (APD), 2.9%; Parker-Hannifin Corp. (PH), 2.8%; and Illinois Tool Works Inc. (ITW), 2.8%. They accounted for 54.1% of the fund’s assets.
“We want broad diversification by sector, and we start by looking at 12 to 15 industry sectors that we think can outperform the general markets over the long term,” Cuggino said of his stock picking. “But we are neither momentum investors, nor we do play ‘hot sectors.’ We pick individual stocks on a bottom-up basis, buy them at a reasonable price, and then expect to hold them for a multi-year period. Moreover, if we have a high conviction in a company, we will give it a heavy weighting in the portfolio.”
Stocks of companies in the fund typically possess, among other things, seasoned management teams, strong finances, dynamic R&D departments, exposure to new and emerging consumer markets, and a track record of successfully executing their business plan. “Our investment methodology combines both quantitative and qualitative aspects,” he noted.
The fund features a microscopic one-year turnover of 1.9%, versus 114.2% for its peers, although Cuggino concedes that annual turnover would more realistically fall in the 20% to 25% range. The manager’s emphasis on tax-efficiency also helps keeps turnover down.
“As long as the story is intact, we will hold onto a stock even if it goes through a short-term rough patch,” Cuggino said. “However, we will consider disposing of a holding if, for example, it continually misses earnings targets, or suffers declining revenues and market share.”
One of Cuggino’s recent outright sales, Wellman Inc. (WLM), a small specialty-chemical producer, was replaced in the portfolio by a more attractive growth company in that sector, Crompton Corp., which recently acquired Great Lakes Chemical Corp. and changed its name to Chemtura Corp. (CEM).
“Wellman’s finances were deteriorating and their business was going nowhere, and so we lost patience with them,” he explained. “By contrast, Chemtura appears to be in an ‘active growth’ mode with a new management team and shored up finances.”
Cuggino’s top two holdings, Frontier Oil and Ryland Group, presently account for more than 25% of the fund’s assets and are both long-term holdings.
Frontier, which has almost tripled in value since the year started, is benefiting from high crude oil prices. The Houston-based company, Cuggino said, efficiently refines ‘sour crude’, while most of the industry focuses on ‘sweet crude,’ which is easier to refine and produce. “Since energy supplies are tight and demand is high, Frontier’s niche service becomes very valuable,” he said. “The spreads between sour and sweet crude have risen, greatly benefiting this company. As long as we have this shortage of energy — and the supply/demand mismatch — the energy sector is a place investors need to be in.”
Cuggino’s other major energy stock, Parker Drilling Co. (PKD, is a small-cap oil servicing firm, buoyed by increasing expenditures on oil exploration.
Ryland, a Southern California-based homebuilder, has a geographically-diversified portfolio of development projects all over the nation. “This is a well-run company with a management team firmly in place for a while,” Cuggino said. “They’re smart about re-investing, they don’t hesitate to enact share repurchases or dividend increases. Their backlog keeps increasing. They also have a successful financing arm, which is accretive to their core construction business. In this relatively low interest rate environment and a growing economy in the U.S., people will likely continue to buy new homes.”
Despite the heavy positions in Frontier and Ryland, Cuggino believes each can appreciate even further.
The manager also likes the biotech sector, reflected by the presence of Amgen and Genzyme among the fund’s top ten holdings. But unlike many biotech companies, Amgen and Genzyme boast a nice pipeline of products and generate substantial revenues. The fund also includes Biogen Idec (BIIB) as part of its biotech exposure. “Over the long-term, we think a dynamic industry like biotechnology will outperform the broad market,” Cuggino said. “No doubt that it’s a volatile sector, but with such high R&D budgets, a lot of innovation and creativity, biotech can blossom, especially given the country’s aging demographics.”
Within the tech sector, Cuggino is particularly bullish on software. “The micro-chip sector is already in an upswing, but software has not yet gotten that bump yet,” he said. “Corporate spending on software products and upgrades on business development software systems has not picked up yet from the pre-9/11 period.”
Going forward, the manager sees some great potential in stocks of software companies. Permanent Aggressive Growth presently holds Autodesk, Symantec Corp. (SYMC) and Computer Associates International Inc. (CA).
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