During this period of extreme stock market volatility and credit market uncertainty, the case for a broadly diversified portfolio that avoids market valleys — and probably won't soar to market peaks, either — might be the recipe for a good night's sleep.
This is essentially the premise of one tidy $3.3 billion mutual fund, known as the
Permanent Portfolio (PRPFX). The eclectic fund, which San Francisco-based Pacific Heights Asset Management LLC launched in 1982, invests in everything from gold bullion and Swiss-franc-denominated assets to U.S. Treasuries and domestic blue-chip stocks.
"The basic premise is that the future is unpredictable, and we're trying to provide investors with a preservation vehicle," said Michael Cuggino, who has managed the fund since 1991. Year-to-date through last Thursday, the fund was down 16.5%, compared with a 19.6% drop for the average fund in the conservative-allocation category. The Standard & Poor's 500 stock index, meanwhile, was down 38.4%.
The Permanent Portfolio's three-year average return was 3.8%, which compares with an average decline of 2.2% for its peers.
The fund, which has a five-star rating from Morningstar Inc. of Chicago, finished each of the past six years in the top fifth percentile or better in the conservative-allocation category.
Mr. Cuggino said that the fund is designed and managed to be a core portfolio holding, and not something that investors should turn to in pursuit of big bets. "We're not trying to run a fund based on forecasting," he said. "We're giving investors diversification and a chance to protect their capital and grow their investments."
The general investment strategy begins with a top-down quantitative focus on six investment categories: gold, silver, Swiss-franc-denominated assets, U.S. and foreign real estate and natural resources, aggressive-growth stocks and high-quality fixed income, which includes U.S. Treasuries and corporate debt.
"Every asset class performs differently in different conditions, and that tends to produce lower volatility for the overall fund," Mr. Cuggino said. "We want the core of the fund to be comprehensive diversification."
Part of the initial top-down research process involves establishing appropriate allocations for the six asset categories.
The current weighting breaks down to 35% in Treasuries and corporate bonds, 15% in real estate investment trusts and natural-resources stocks, 15% in growth stocks, 15% in gold, 5% in silver, and in 15% Swiss-franc-denominated assets.
The investment strategy allows for a 10-percentage-point allocation fluctuation for each category, but once the targets are set, the idea is to shift to a bottom-up research process to find investments to fill each category.
"We think it's appropriate to have exposure to all of these assets in the portfolio," Mr. Cuggino said. "But the portfolio is designed to be quite disciplined, and we take tax efficiency seriously."
The portfolio turnover rate last year was an impressively low 37% — a rate that could be difficult to repeat during a time when more-active trading has become a means of survival for some funds. "I don't manage the portfolio to turn over, but the lower turnover is a result of the strategy," Mr. Cuggino said.
The growth stock slice of the portfolio typically includes between 30 and 50 companies, which range in size from small-cap to large-cap and can be based virtually anywhere in the world.
"What we're looking for is the best performers in each sector," Mr. Cuggino said. "We're looking at things like management tenure and experience, a company's market leadership and specific research and development efforts."
The natural-resources and
REIT exposure adds another 30 or more stocks to the portfolio for a total stock count of between 75 and 100.
The exposure to gold and silver is managed through investments in exchange traded funds or in some cases actual coins and bullion.
The fixed-income allocation, captured through investments in Treasuries and corporate debt, is designed to offer income and protection.
In the growth stock category, Mr. Cuggino is still a fan of San Roman, Calif.-based Chevron Corp. (CVX).
The stock is getting "beaten down beyond a degree that's justified," he said. Chevron shares closed Friday at $73.69, down 19.3% so far this year.
"The worldwide supply and demand for energy is still intact," Mr. Cuggino said. "This company pays a healthy
dividend, and the assets are not going out of style anytime soon, and when confidence comes back to the financial markets, a lot of the liquidity issues will disappear."
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
