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.”