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Fund Manager Remembers What Precipitated Permanent Portfolio

“If you start being too active in your management, you’re no different that anybody else,” says Michael Cuggino, manager of the Permanent Portfolio fund. “The targets have been there since day one,” and they’ll stay where they are, barring “structural changes.”

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Michael Cuggino, who has been part of the mutual fund the Permanent Portfolio for 20 of its 24 years, remembers what precipitated the need for the fund well.

“I remember the oil crises, sitting in the car, waiting in line for a half-hour to get gas. I remember stagflation. I remember the infamous magazine cover, ‘Are Stocks Dead?’ I remember $800 gold,” he says.

The fund, based on a non-correlated asset structure, was created by Terry Coxon, Harry Browne and Doug Casey in 1982 with the philosophy “wherever an investor turns, they’re losing,” Cuggino says. The targets are 20% in gold, 5% in silver, 35% in dollar assets, 10% in Swiss franc assets – non-correlation is the key; “the U.S. dollar is really in a secular trend downward in terms of unit value,” Cuggino says, and “the Swiss are very diligent about not printing too many francs” – and 15% each in real estate and natural resource stocks and aggressive growth stocks. The fund’s prospectus allows for a 10% tolerance in either direction in each of the targets.

“This portfolio was designed to preserve capital and provide low-risk growth over the long term,” he says. So far the fund has had only three down years in 24, and a 6.17% annualized return since inception. It’s also, as Cuggino says, very low risk, with a one-year beta of less than 0.2. In December, the fund was awarded a coveted five-star overall rating from rating agency Morningstar Inc., recognized as one of the top 10% of funds in its category over time.

Cuggino has been part of the fund, in some capacity, for two decades. Now the manager of all four funds in the Permanent Portfolio Family of Funds, and CEO of the funds’ adviser, San Francisco-based Pacific Heights Asset Management, Cuggino first encountered the funds as an auditor with Ernst & Young in his hometown, Boston. The Permanent Portfolio family was one of his first clients.

In 1991, he joined the fund family as co-manager, but his duties at the small firm went beyond the traditional job description of the fund manager. “I was writing marketing copy, trading, all sorts of things,” he says. “I knew the business in my sleep after a while.” Cuggino eventually bought out the fund’s founding partnership in 2003.

Though many portfolio managers claim they don’t attempt to predict the market, Cuggino may be one of the only ones that really mean it. “If you start being too active in your management, you’re no different that anybody else,” he says. “The targets have been there since day one,” and they’ll stay where they are, barring “structural changes” affecting a specific asset class, such as Switzerland abandoning the franc for the euro, or the discovery of a “mother lode” of gold that turns the gold market on its head.

That said, the Permanent Fund did miss out on one mother lode – that produced by tech boom.

“The reality is, maybe, but that’s exactly why we don’t want to make changes. Had I followed the advice, we would have changed the equity percentages right about the time the rest of the market was taking a couple of bad years off.”

In spite of missing out on the boom, Cuggino’s fund outperformed his Morningstar category, conservative allocation, during the late 1990s and early 2000s. “We had good years during the period, but not quite the years that a fully-invested equity fund would have had.” The fund returned 14.4% in 2002, when the S&P fell more than 20%, and has been in the top five percent of all conservative allocation funds since.

The fund has also enjoyed a recent surge in assets, rising from about $260 million before winning its fifth star to almost $400 million now. Cuggino says some of the new dollars are “just plain due to performance” – the fund is up more than 4% in 2006 – but he also thinks the uncertain market environment is driving investors to funds like his, “designed to protect you and protect your flank regardless of what’s going on” in the world and on Wall Street.

“People aren’t betting on high profile stocks, for the most part,” he says. “They’re being more diligent and discerning about their portfolios and diversification in general.” He intends to do the same.