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July 11, 2006, 11:59 p.m. EDT

Playing at the Margins of a Great Formula

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By John Kimelman

AS MONEY MANAGER OF PERMANENT PORTFOLIO , Michael Cuggino is a bit like a driver who's at the wheel of a Formula One race car in a field filled with souped-up Chevies and Dodges.

While his skills as a stockpicker count for something, he's really benefiting from a tried-and-true, quarter-century old asset-allocation model that predates his tenure at the mutual fund.

By investing in a wide variety of mandated assets -- including natural-resources stocks, growth stocks, precious metals, U.S. bonds, and even Swiss bonds -- in more or less fixed weightings, the portfolio has generated steady positive returns, even in bear markets. ( See asset-allocation targets below.)

Along the way, the Permanent Portfolio /zigman2/quotes/206656411/realtime PAGRX -2.67% , which has a five-star Morningstar rating, has been lauded as a relatively cheap way for investors to obtain the same type of results offered by some of the best "absolute return" hedge funds. The mutual fund, for example, made respectable gains in 2000, 2001 and 2002 -- down years for U.S. stocks -- all without shorting a single security.

When Barron's Online interviewed Cuggino two years ago (see Electronic Q&A, " Seeking Stability With Volatile Assets," July 13, 2004) Permanent Portfolio boasted a three-year-annualized return at the time of 13.8%, according to Morningstar.

Looking back today, the fund has delivered a three-year annualized return of 13.7%. That's consistency!

While this fund is primarily a play on a great asset-allocation formula, Cuggino also bets at the margins on individuals stocks and bonds.

He's currently bullish about a wide variety of investments, including Phelps Dodge, an apartment real-estate investment trust (REIT), and even Walt Disney, a stock that he believes is firing on many cylinders in the post-Michael Eisner era.

Barron's Online : While your fund has performed remarkably well, it seems that a mildly sophisticated investor could create a portfolio like yours -- with its well-known, fixed-asset weightings -- without needing somebody like you to do it for them. Am I right?

Cuggino : Well, I'm watching the markets and I'm adjusting things, and that's something that the average investor doesn't have the time or the interest in doing. [Editor's Note: Though the fund has established asset-allocation targets, Cuggino is allowed to deviate from those targets, give or take a few percentage points, based on his views of valuations and market conditions.] This is an actively managed fund.

Q: I know that natural resources is an asset requirement of the fund. What's your favorite commodity stock right now?
A: Phelps Dodge (ticker: PD).

Q: That was one of your favorite stocks two years ago, and it's had a great run for most of that time.
A: Well, it continues to be a very good play. And if you look at what is going on in the copper markets since that time, it has been all good. I believe it is going to continue to be a good, solid, long-term holding. They pay a good dividend. They've done buybacks. And if they are successful in the recent business combination they announced, I really like what they've done because they've remade themselves, they've diversified their product line into other base metals such as nickel.

A: Yes. There is still potentially a possibility of some of the other spurned suitors for the other two companies getting back in. So it is not over until it's over.

Q: So, let's say the merger doesn't work out, and Phelps Dodge has to continue operating without the benefit of that merger. Is it still worth buying?
A: I still think it is a good buy simply as a play on copper demand worldwide.

Permanent Portfolio Fund Facts
Assets : $559 million
Style : Conservative Asset-Allocation
Expense Ratio : 1.35
Load : None
Portfolio Turnover : 1%
Yield : 0.65%
Fund's Fixed Asset-Allocation Targets Sources: Permanent Portfolio, Morningstar
US : U.S.: Nasdaq
$ 54.77
-1.50 -2.67%
Volume: 0.00
Sept. 23, 2022
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