Permanent Portfolio Aggressive Growth tops in quarter

By Jonathan Burton, MarketWatch

SAN FRANCISCO (MarketWatch) -- Only an optimist would call any investment "permanent," but Michael Cuggino is giving shareholders in his mutual fund good reason to stick around.

Cuggino's Permanent Portfolio Aggressive Growth Fund /zigman2/quotes/206656411/realtime PAGRX -0.49% rose 11% in the second quarter, powered largely by a concentrated mix of oil and home-building exposure. The performance put the $33 million no-load fund atop all diversified U.S. stock funds in the period, according to preliminary data from research firm Lipper Inc.

"Aggressive growth" conjures an image of a high-octane portfolio with a trading-obsessed, momentum-driven manager. Not so for Cuggino, who runs Aggressive Growth with the deliberate, long-term approach that guides his larger Permanent Portfolio Fund /zigman2/quotes/205061618/realtime PRPFX +0.06% .

As an investor who attempts to outperform the Standard & Poor's 500 Index on a tax-efficient basis, Cuggino isn't aiming for a quick hit. He keeps a three- to five-year horizon for the 37 mostly mid- to large-capitalization stocks in Aggressive Growth, and lately the fund's annual turnover -- a measure of buying and selling activity -- averages a sedentary 2% of assets.

"We don't get overly wrapped up in quarterly earnings or short-term characteristics," Cuggino said. Watch interview with Cuggino

What does capture Cuggino's attention is whether a company dominates its rivals. He scours more than a dozen industry groups for investments, screening for companies with a strong commitment to innovation, research and new markets. His confidence level rises when management demonstrates a firm grip on finances and an ability to execute on its vision.

In fact, many of Cuggino's investments don't fit the stereotype of a high-flying growth stock. Even its two largest holdings as of May 31 -- a 15% position in oil refiner Frontier Oil Corp. and a 12% position in home builder Ryland Group Inc. -- joined the portfolio a couple of years before energy and real estate became hot sectors.

"We want to see a track record of producing something successfully that can be sold in the marketplace," Cuggino said. "They may not have the label of a growth stock, but their earnings and operating metrics demonstrate that they're a good growth story."

Tamer times

Cuggino's longer-term results with his fund have also told a good growth story, albeit with a few sharp stumbles. Aggressive Growth managed a tiny gain in both 2000 and 2001, but faltered in 2002 with a 25% loss that landed it near the bottom of its midcap-blend peers, according investment-research firm Morningstar Inc. Its worst quarter came that year -- a 21% slide from July through September.

Since then, the portfolio has steamed ahead. The fund's three-year annualized 14.3% return puts it in the top 22% of its category. Over the past 12 months, its 27% gain outpaces all but 2% of its rivals.

Still, some of Aggressive Growth's investments test shareholders' patience, such as Wall Street giant Morgan Stanley . The brokerage, which represented 2.1% of the fund as of May 31, lost 7.9% in the past three months amid uncertainty about its leadership.

"It's clearly a stock that's in turmoil," Cuggino said. "But they've got the raw material within the firm to produce, and they're on the right track. They've clearly underperformed other firms in the sector, which makes it an interesting opportunity because I do think they will get their house in order."

On Thursday, Morgan Stanley attempted to put some of those questions to rest, naming John Mack chairman and chief executive. Mack, whose career includes almost three decades at Morgan, immediately outlined four strategic initiatives for the investment bank. See full story.

Another portfolio holding with deep management issues is Walt Disney Co. /zigman2/quotes/203410047/composite DIS -0.93% . The entertainment and media conglomerate, a 1.7% fund position, has tumbled 12% over three months, but Cuggino said he believes in the company's global brand power.

"Disney is a good long-term holding," he added. "Disney's performance over the last year has done very well as the economy has picked up. People are going to be spending more on entertainment and leisure."

In a quarter where large-cap growth stocks shined, Cuggino's fund fended off main challengers Matthew 25 Fund /zigman2/quotes/207275418/realtime MXXVX -0.38% , which gained 9.7%, and CMG Small Cap Fund /zigman2/quotes/203462885/realtime COSCX -0.10% , up 9.5%.

The Aggressive Growth portfolio gained substantially from its focused investment in Houston-based oil refiner Frontier Oil, which soared 62% in the three months through June 30. The fund also rode Calabasas, Calif.-based Ryland Group's 23% quarterly surge.

At the moment, Cuggino isn't making any major changes.

"Clearly we've benefited from two hot sectors," he said. "Energy and housing, both of them have risks right now, but both have enough evidence that they're going to keep performing. Energy prices continue to be high. We have a structural imbalance between supply and demand."

Such favorable conditions also exist in real estate, he added.

"Home-building companies keep selling what they're producing," Cuggino said. "As long as the interest-rate environment is favorable and demand continues like it has been, housing is going to outperform."

That said, Cuggino is watching for weakness in these market leaders.

"Nothing grows to the sky," he said. "At some point there probably will be some sort of correction."