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"Permanent" Picks: The Case for Diversification
11/23/2015 10:00 am EST
Michael Cuggino, portfolio manager for the Permanent Portfolio Funds, uses a multi-asset approach to investing, emphasizing the importance of diversifying across stocks, bonds, gold and currencies.
Steve Halpern: Our special guest today is Michael Cuggino, president and portfolio manager of the Permanent Portfolio family of funds. How are you doing today, Michael?
Michael Cuggino: Very good, Steve, yourself?
Steve Halpern: Very good, thanks for taking the time. First, could you share a brief overview of your current outlook on the markets and perhaps touch on your view of the US economy and interest rates.
Michael Cuggino: Well, the markets, I think, are going to go sideways here in the near term towards the end of the year. I think the big run that people were expecting towards the end of the year happened in October where we came off the really large August lows and since that time we’ve been treading water a little bit.
I think that’s caused in part due to stocks being more in a, investors recovering some value from the August sell-off, but also the uncertainty relating to when and if and by how much and all of those questions relating to the Feds moving the short-term Fed funds rate at some point here.
Now that they missed the window in September and October, a lot of investors are speculating on December, and I think you can make an educated case one way or the other on whether they’re going to do anything in December but there is a sentiment that certainly the economy is strong enough to withstand it.
I’m of the view personally that they probably should have normalized monetary policy and interest rates a couple of years ago at least so in my view it’s long overdue and I have never quite seen so much drama around a 25 basis point rate increase irrespective of what they do going forward so that’s where we are right now.
Steve Halpern: Now, many people look at your funds with safety in mind. Could you also explain how geopolitics might affect the investing landscape now and how the current troubling and tragic events in Europe might impact investing decisions?
Michael Cuggino: Well, yeah, our portfolio, our Permanent Portfolio is designed on investing in a wide variety of asset classes to both seek growth and also to seek to protect downside risks for investors in multiple scenarios in either case so it allows the investor to not have to try to predict markets. That’s the thinking behind it.
What that means is a lot of times you don’t know a market’s reaction in one or more asset classes caused by geopolitical events. You can speculate but you don’t know for sure and so that sort of a multi-asset strategy provides the investors some comfort knowing that their risks are spread around.
It’s a less volatile type of investment overall, the fund as a whole and it guards against unknowns and uncertainties including geopolitical events, so I mean for example, recently here, the terrorist attacks in Paris, I don’t know what impact that’s going to have on markets.
I mean if freedom is curtailed than you can envision free trade being curtailed, business drying up both here and in Europe so those could be some implications for disruption in the Middle East, for energy is always an issue when you’ve got terrorist activity going on.
You’ve got anemic growth or lack of growth in many emerging markets. What effects that have on markets here can be speculated but it’s something that by having a diversified approach you do tend to or you can minimize risk for some of these uncertainties.
Steve Halpern: Let’s look a little closer at that investment approach and let’s start with that Permanent Portfolio Fund (PRPFX). Could you tell our listeners a little about your overall strategy and your long term goals behind the fund?
Michael Cuggino: The goal is to produce, maintain, and grow purchasing power over the long period of time so that means basically growing at a rate that exceeds inflation by as much as we can do that, given our disciplined multi-asset strategy.
We invest in a wide array of assets, stocks and bonds, US and non-US commodities, stocks, precious metals, gold and silver, Swiss franc-denominated assets, typically the Swiss government bonds and Swiss currency, harder assets stocks as well growth stocks so there’s a lot of diversification, oh and dollar assets, which are short-term high-grade corporates and Treasuries of varying maturity.
The idea behind it is that all these asset classes respond differently to various economic and geopolitical stimulus, if you will, and while some data points may be negative for certain of these asset classes, others may be positive so these assets are all working sort of against the grain with each other at all times and any one of them can be considered a volatile asset in many cases.
Think longer-term bonds or stocks, or even say gold, but when you put them in one portfolio they all tend to reduce the overall volatility of the portfolio so it’s designed to be a less volatile vehicle that spreads an investor’s bets around, seeking protection on the downside and also seeking more often than not upside growth in a variety of markets without having to predict them.|pagebreak|
Steve Halpern: Now, I know you’ve explained that you have a widely diversified portfolio but perhaps you could highlight a few specific ideas that might best represent some of your favorite current holdings in the fund.
Michael Cuggino: Well, sure, I mean I would probably start with gold. I think everything in our portfolio is a favorite for different reasons there; all the asset classes are my children so to speak, right? You love them all but for different reasons, just like your children are different people.
Gold, I think, it’s been a beaten-down asset; it's down probably 8%, 9%, 10% this year but it’s a component of wealth creation and maintenance and growth because not only in the US but worldwide we continue to devalue currencies, paper money, and gold over the centuries has acted as a hedge against; it’s been a form of currency and it’s a hedge against paper money and the devaluation of paper money.
It’s a hedge against inflation risk. It’s a hedge against uncertainty. All these things people lose confidence in the economic and financial system. Gold is a safe haven or stable haven for that so even though conventional wisdom says well with the Fed raising interest rates and market interest rates going to go up the opportunity cost to hold gold goes up and you can get better yields elsewhere.
All those arguments are true in space but I think in real life economic conditions are more nuanced than that, and I think if you are taking a position that the economy is strong enough to raise interest rates, then you are likely going to have some sort of inflation or pressure at some point and that will erode money and you’ll want some gold to keep pace with that.
Similarly real estate and commodity stocks act in a similar way. Commodity stocks being much more cyclical is tied to economic performance but they do have a harder asset component. Real estate, obviously, has a harder asset component as well and is not really tied to stocks and bonds.
Growth stocks: The natural state of the US economy is growth. It has been typically for a very long time and I don’t see that changing despite ups and downs in economic and business cycles but we want growth in the portfolio and a good solid investment plan, diversified plan should incorporate a provision for growth through common stocks as well.
Our view is that all these assets classes, they’re all necessary for an investor to be properly diversified in their financial health and that’s why we have such a strategy.
Steve Halpern: Now you also offer the Permanent Portfolio Aggressive Growth Fund (PAGRX). We only have a minute but perhaps you could highlight how this differs from the Permanent Portfolio Fund and what type of risk tolerance would be required for somebody to consider this.
Michael Cuggino: Very simply, our Aggressive Growth Portfolio—PAGRX—is a stock fund. It’s all stocks, all the time. It’s fairly concentrated it invests at about 30 to 50 names diversified across at least a dozen industry sectors so it’s not going to be over weighted in one sector but it’s fully invested at all times, incidental cash holdings from time to time to put money to work but the idea is that you are in stocks all the time.
It takes away the risk of the portfolio manager being out of the market at the right or wrong time. Studies have shown that a lot of stock market gains and declines actually happen in very quick burst sometimes.
And if you happen to be out of the market during those periods of outperformance as short as they may be you may lose a lot of return over the long term so again it takes the forecasting thing out of the equation, human beings not accurately predicting the future.
If you’re fully invested in equities all the time you’re going to be there all the time when you get the bump in value and remember that over time equities have outperformed generally a lot of—most if not all—other asset classes.
So having a full exposure for an equity investor in a portfolio like this takes away manager risk, keeps you invested in the stock market and at all times in a diversified portfolio of fairly concentrated names seeking growth, seeking aggressive growth.
Steve Halpern: Again, our guest is Michael Cuggino of the Permanent Portfolio Funds. Thanks for your time today.
Michael Cuggino: Thanks, Steve.
Visit Permanent Portfolio Funds here…
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