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Profits from a Permanent Portfolio
05/28/2014 10:00 am EST
Michael Cuggino, president of Permanent Portfolio Funds offers an overview of his investment strategy and his outlook for the economy, Fed policy, and the stock market; he also discusses some of the top holdings of his aggressive growth portfolio.
Steven Halpern: Joining us today is Michael Cuggino, president and portfolio manager of the Permanent Portfolio family of funds, which has assets under management of about $8.5 billion. How are you doing today, Michael?
Michael Cuggino: Very well Steve, thank you.
Steven Halpern: And thank you for joining us. First off, could you tell our listeners about the Permanent Portfolio group of funds and its overall investment strategy?
Michael Cuggino: Yes, we’re a mutual fund family based out in San Francisco and we manage four distinct and separate investment portfolios, each its own mutual fund.
Our most well-known fund, the Permanent Portfolio (PRPFX:US), is an all weather, multi-market, multiple asset strategy product designed to preserve and increase purchasing power over the long-term.
We also manage an Equity portfolio, the Permanent Portfolio Aggressive Growth Fund (PAGRX:US). That is designed to beat the broad US equity market. It’s a fairly focused fund, 30 to 50 names, diversified among a broad sector of industry groups and it’s designed to produce long-term tax efficient return.
We manage an unconstrained or flexible bond portfolio called the Permanent Portfolio Versatile Bond Fund (PRVBX:US), designed to produce income while minimizing risk. It’s our conservative take on unconstrained bond investing.
We don’t get into some of the more risky areas of the fixed income market, but stay more conservative. The idea being that there’s a market for investors to not go too far out on the risk spectrum, but still receive a yield better than cash or shorter term products in that portfolio.
Our final fund is the Permanent Portfolio Short-Term Treasury Portfolio (PRTBX:US), which is a short-term treasury vehicle. Obviously, in this environment, yields aren’t that great.
They’re insufficient to cover the cost of running the fund, but in the longer-term, I think, as interest rates go up and Treasury yields go up, it could be a convenient vehicle for shorter-term investment needs.
Steven Halpern: Now, what is your overall outlook for the equity markets looking forward?
Michael Cuggino: Well, I think if you look at the S&P 500 (SPX) over the last five years, it’s been up, I think, about 21%, or so, on an average annualized basis, not to mention that it was up 32% or 33% last year and, for the last couple years, almost 50%.|pagebreak|
So, I think that stocks right now are fairly valued. If you look at corporate earnings on the S&P 500 and you apply a 15 to 16 multiple on earnings so that you’re getting roughly where the S&P is trading right now, you know, the high 1800s, and so, I think that stocks are neither cheap nor expensive.
Some sectors and some stocks certainly are expensive. Some are cheap, but the overall market is fairly priced. I think, where we are in the cycle, investors should temper their expectations, in that, I can’t say right now that the next five years of equity performance are going to equal the last five.
The last five years were built on an oversold condition after 2008, a lot of cost cutting, where companies were squeezing profits out of every revenue dollar that they could and the next real dynamic move in the equity market, I think, is going to be caused by topline growth and dynamic economic growth, neither of which I really see at the moment.
I think stocks are a reasonable investment. Dividend yields are supportable by earnings, but I think investors should temper their expectations from the last five years.
Steven Halpern: Now, how close do you follow the Federal Reserve, and based on any expected actions, what impact would you see ahead for interest rates and the economy?
Michael Cuggino: Well, I mean, clearly, at some point, interest rates are going to go up and the Federal Reserve is going to continue to pull back. I think the big question is when.
Depending on who you talk to—and there’s a lot of smart people on all sides of the debate—it could be anywhere from the end of this year through the next several years.
The real parlor game is determining when that’s going to happen, and also, whether market interest rates are going to wait for it to happen.
You know, the Fed controls short-term rates, but it doesn’t control market rates, or longer-term rates, and market rates sometimes can move very volatile, like we saw last summer and there’s no guarantee that market rates are going to sit tight while the Fed or the other world central banks decide what they’re going do.
That’s a real fear for us, in that, volatile interest rate moves can really offset portfolio planning and investments so, I think, investors need to think about it.
But, at the moment—while they’re pulling back on quantitative easing, and that’s a positive—they’ve been very vocal about stating that until unemployment declines further, until they get a real sense of economic growth, they don’t anticipate raising rates any time soon.
I think investors need to be aware that it’s coming, position portfolios accordingly. We tend to be high quality and relatively short in duration and we see that as mitigating interest rate risk when this move does happen so that’s where, sort of, we would be on the fixed income cycle, but investors do have different views on it.
Certainly the Fed plays a huge role and will do so going forward and a lot of us are trading—whether it’s equities or bonds—as much on what the Fed and policy makers are doing as we are on fundamentals of the investment that we’re working with, so it’s an interesting environment right now.|pagebreak|
Steven Halpern: Now, given this overall outlook, is there a suggested allocation that you would recommend?
Michael Cuggino: Well, as always, it depends on the investor's risk profile, their capital needs, their payout needs, etc., so we manage four strategies.
Obviously, for a growth investor who’s not concerned about equity prices being high, that thinks we’re going to enter a period of prolonged growth, equities would be a great place to go. The more equities you have, the better for that scenario.
For investors that are nervous about not knowing what’s going to happen, that are worried about what impact the Fed is going to have, or interest rates are going to have, or geopolitical issues, we would recommend a diversified approach, which more mirrors our Permanent Portfolio.
That approach would include a mixture of equities and bonds, US and non-US. It would include allocations to real estate, natural resources commodities, precious metals, and non-US fixed income, and currency such as the Swiss franc. That would be for a more conservative investor who’s a little bit more worried.
For an income investor, like I said, we would advocate higher quality and relatively low duration. Our versatile bond fund is currently at about a duration of six years or so, six or seven years. It’s about two-thirds to three-quarters high quality investment grade bonds and it’s returning, I think, as of yesterday, a little bit over 5%.
You’ve got that sort of return for an income investor, so it really depends on the profile and what you’re looking for as an investment and where you see the world at the moment.
Steven Halpern: Now, before I let you go, I’d like to ask specifically about one of your four funds, which is the Permanent Portfolio Aggressive Growth Fund. It currently rates in the top 3% of its category and I was hoping maybe you’d be kind enough to highlight some of the top holdings in the fund for our listeners.
Michael Cuggino: Sure. Like I mentioned,that fund is an equity portfolio. It’s designed to be fully invested in US stocks, go anywhere, multi-cap and not own that many names, so you get more bang for your buck, if you will, from each name in the portfolio.
I mean, it owns probably 30, I think it owns, like, 40 names or something right now and its spread across multiple industries. It’s designed to beat the broad market and you can see that in its holdings.
So, you see a number of names and a variety of industries there so it’s not just loaded up on momentum stocks, or value stocks, or stocks inbetween.
There’s a variety of investments and a variety of industries and it’s our take on the 30 to 50 best in equity ideas we have that we want to hold for a three to five year period, at least, and grow the portfolio with very little turnover on a tax efficient basis going forward.
Steven Halpern: Well, we really appreciate you taking the time today. Thank you for joining.
Michael Cuggino: Thanks for having me, Steve.
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