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A Look Inside the Permanent Portfolios
04/29/2015 10:00 am EST
Michael Cuggino manages two funds for the Permanent Portfolio family; one designed to grow and maintain long-term capital and one focused on aggressive growth. Here, he discusses the funds' goals and highlights some current portfolio holdings: a social media leader, a mining outfit, an asset manager, and a biotech play.
Steven Halpern: Our guest today is Michael Cuggino, portfolio manager for the Permanent Portfolio Family of Funds. How are you doing today, Michael?
Michael Cuggino: Very well, Steven, thank you.
Steven Halpern: Could you share your current outlook on the financial markets and perhaps touch on your overall view for the economy and interest rates?
Michael Cuggino: Yeah, I think right now we are in a period of…we’re in the early stages of a monetary policy directional change, obviously, from a period of easy money, zero interest rates, to likely rising rates or higher cost of capital going forward.
You know, the degree to which, and how aggressive, and the timing, are all in question and that’s what’s creating all of the short-term volatility, so far, here in 2015.
When you couple that with the stronger dollar in the US vis-à-vis the other—the world’s other—major currencies and potentially weakening economic activity in the US.
In Q4 of 2014 as well as likely Q1 of 2015, you get into questions of how sustainable and how robust US growth is and to what degree it’s going to be impacted by sluggish international growth and when you mix all that together you have potential risk in corporate earnings.
We’re starting to see that in Q1 already, which could drive equity multiples higher and likely make a correction—or at least a pause—in equity prices more likely, putting into question the returns equity investors have seen in the last five or six years, or so.
There’s a lot of volatility, so far, this year and it’s caused by real issues out there. The resolution of which, I think you get many informed opinions on both sides of the question on that one.
Steven Halpern: So, let’s look first at the Permanent Portfolio Fund (PRPFX). Can you tell our listeners a little bit about the overall strategy and the long-term goals behind the fund?
Michael Cuggino: Sure. The objective is to preserve and increase purchasing power, value, or an asset base, over the long-term and at a rate greater than inflation, so it’s a preservation of purchasing power type concept, to beat inflation concept, and absolute return concept.
We do that—the premise of the fund—is that human beings are not very good at predicting the future, whether it’s in football games, or sporting events, or investments, and so most of the time we’re going to be wrong whether it’s getting the timing wrong, getting the idea wrong, or both.
Although, we’re always going to be right once in a while, and so, for the being right once in a while, speculating is fine, but that should be a different part of your asset allocation or your portfolio planning.
Permanent Portfolio deals with that part of your portfolio that you don’t want to subject to forecast risk or prediction risk. You don’t want to worry about what the Federal Reserve is going to do, the stock market, or global politics, or economies, or whatever.
We accomplish that by, rather than relying on human beings to predict things, we have a broad array of diversification and multiple asset classes all the time, so that an investor doesn’t have to pick and choose which asset class they think is going to outperform.
There’s a broad mix that don’t correlate to each other necessarily, so that overall, that smoothes out overall portfolio volatility and produces a return over time that—hopefully—exceeds inflation and grows purchasing power and an asset base. The objective is long-term in nature. It’s tax-efficient in nature and it’s designed, not necessarily to trade short-term volatility, short-term trend, but grow, preserve, and maintain capital over the long-term.
Steven Halpern: So, perhaps you could highlight a few specific stocks that might best represent the types of holdings in the Permanent Portfolio Fund.
Michael Cuggino: Sure. I’ll give you two stocks, and I’ll also give you gold for example, and I’ll start with gold. We have an allocation to gold as an alternative currency. It’s obviously not very popular right now as an asset class. We think it’s probably building a base and it’s been in a trading range since the broad sell-off two years ago.
We see it as an alternative currency, a hedge against inflation, a hedge against uncertainty, a hedge against the geopolitical issues and strife around the world, and so, as a component of somebody’s wealth strategy, it should be included, whether or not it’s a short-term trade. That would be one asset class, totally separate and distinct from stocks and bonds.
One investment that would come to mind on the stock side would be Facebook (FB). Obviously, a very well-known name. In technology, it’s a classic, early stages growth story, a big and tangible asset, multiple ways to monetize that asset, growth in revenues and earnings, and cash flow, not a lot of balance sheet risk on it, so we like that for the longer-term.
Another name that would come to mind—another, sort of, down and out sector at the moment—would be Freeport McMoRan (FCX). The story there, their primary businesses are in copper and energy.
Obviously, both areas have been beaten down over the last year or so, which makes the valuation point, or the entry point here, very attractive for a long-term investor.
A supportable dividend—by earnings—and a likely rebound in the long-term, where we think that despite the stronger dollar trade at the moment, which has been impacting the share price there.
We think that in the longer-term, the global economy is going to grow and the need for commodities, like energy, like copper, that demand is going to exceed supply and gradually move those prices back up over time. Again, you have to have a strong stomach for that one, but it makes sense for a long-term investor.
Steve Halpern: Now you also offer the Permanent Portfolio Aggressive Growth Fund (PAGRX) and those were the higher risk level. Can you give us an overview of this fund and its strategy?
Michael Cuggino: Yeah, the Aggressive Growth Portfolio is an all-cap, multi-cap core equity holding. It would be designed for that purpose in an investor’s portfolio.
An investor might have other satellite equity investments around it, but it’s a core holding diversified among 30 to 50 names at all times, designed to beat the S&P 500 and designed to be diversified among, say, a dozen or so different industry groups all the time, so it’s not taking big sector bets and a limited amount of industry sectors, but it’s designed to be a broad equity fund to provide broad exposure to the overall market.
Our view, obviously stocks are important and it’s designed to be more. Its an all-stock, fully invested portfolio.
We seek tax efficiency in that portfolio as well, so we don’t trade as much as we invest typically over a three- to five-year or more time horizon and it’s a concentrated portfolio in that it’s typically only got 30 to 50 names, or so, diversified across a dozen industries in an all-cap format.
It primarily skews mid- to larger-cap, but it does have holdings in the smaller mid-cap areas and so it’s designed to be a broad equity holding with a number of different names and a number of different industries.
Steven Halpern: So could you highlight a couple of names that might be current stand-outs within that fund?
Michael Cuggino: Yeah, I would say we also own Facebook in that portfolio for obvious reasons, the growth story in a growth portfolio. We also own Freeport McMoRan in it for the same reasons.
This is common to some degree, although, it’s not a specific issue in our portfolios—where the growth sleeve of the Permanent Portfolio may have a lot of similarities to this Aggressive Growth Portfolio—but they’re not the same funds and they’re not designed to be the same funds.
One new name in the Aggressive Growth Portfolio we didn’t talk about is Janus Capital (JNS), a financial services asset management firm. Our view is that whether they’re successful in having Bill Gross build out the fixed income business or not, there’s an emerging story there where fund performance has been better in some of their products.
They’re building out an alternative asset base as well as an equity base which they’re primarily known for. There’s margin expansion potential as some of their performance incentives—and the lack of achieving those—roll out of their advisory contracts and they’re able to realize more on their advisory fee revenues. They look to be possibly growing assets under management again.
Another supportable dividend by earnings at about 1.75%, so you’re getting something equivalent to, let’s say a little less than a 10-year Treasury yield in an asset management business with some growth potential, so it would be a name that would make sense.
Another name that we own in that portfolio would be Amgen (AMGN), obviously, a larger biotech firm reported very good earnings yesterday and they’ve got a multitude of therapies that are very profitable, high margin business and biotechnology is a growth industry.
Some valuations have been stretched lately, but it’s a dynamic, growth industry and one we want to be a part of.
Steven Halpern: Well, thank you so much for taking the time. It’s always a pleasure to talk with you.
Michael Cuggino: Anytime, Steven. Thank you.
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