http://www.permanentportfoliofunds.com/ ... ts_new.htm
It's somewhat interesting to overhear the call with analysts and advisors who follow the fund — many who have no clue about how the Permanent Portfolio actually works. Cuggino spends a lot of time explaining the targets while everyone keeps wondering how the targets were determined.
Here are some interesting highlights from the most recent call (April 20, 2011):
Those were just a few highlights. Click the link above to read the entire call.Robert Rosa, Wells Fargo Advisors
Thank you for taking the call. Real quick, how much gold are you holding? Bullion? Coins? Eagles? Maples? And are you storing your gold here in the U.S. or offshore, and if it is offshore, what percentage and why?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Thanks for the question, Robert. We’re approximately at or near our target percentage with respect to our gold holdings, and we do own the bullion directly, as well as American Gold Eagles and Canadian Maple Leafs. They are stored in Comex depositories in the United States.
Robert Rosa, Wells Fargo Advisors
Nothing offshore?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Not at this time.
Robert Rosa, Wells Fargo Advisors
What would make you take the gold offshore?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
It’s always out there as a possibility to diversify our custodial relationships, although at this time, I don’t perceive any increased risk to our holdings to necessitate doing that. And I don’t know – obviously, having some offshore versus onshore from a diversification standpoint may be beneficial, although I don’t think it’s a kneejerk reaction that’s absolutely beneficial. It results in more administrative burden; it results in more difficulty because the assets are that much further away administratively, and you are subject to potential rules and regulations outside the U.S. which could have an impact on those holdings. We constantly weigh those issues in light of where we hold the gold as well as those issues and as they pertain to the U.S., but we’re constantly assessing those issues in light of the storage facilities that we have.
Jeff Bright, Bright Financial Advisors
I love your fund; my clients love your fund. I did have one question. I know that you have a big capacity. Have you ever had any thoughts of closing your fund?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
It’s a question that any prudent manager needs to ask from time-to-time and certainly we’ve asked it. The one thing that I think separates us from closing the fund at this point, and I think allows us to continue to scale, although I think we will also continue to ask the question periodically, is that the asset classes that we play in are very large and very liquid. Typically, when you see a fund close it’s because the investment universe is limited or the liquidity of that investment universe if limited. I think in all of our asset classes that’s not true. So as a result, I think we’re able to scale and have continued to scale along the way. Now, that question needs to constantly be asked and answered in the affirmative, otherwise, I think you have an obligation to consider closing it or potentially closing it. So we’ll continue to think about it. But the one thing that separates us from funds that do close is the liquidity and breadth of our asset classes, and I think that helps us. Now, having said that, you can’t argue with the fact that let’s say certain debt issues and let’s say certain equity issues because of the size to be able to move the needle of the portfolio, sometimes size prices you out of certain investment opportunities, especially in say a micro cap or a small cap sector in equities. It may be sort of smaller bond issue. That’s a fact of life and it’s up to us as managers to get around that structural issue with growth and continue to put up good numbers. I think the way that you get around it is ultimately is performance. So far the performance has measured up as we’ve grown.
Harold Clichman, LPL Financial
Yes, Mike, thanks for the call. I’m new to the fund this year, and there is one suite of it that I don’t have a firm grasp of why it’s in the fund and that is the Swiss-denominated assets. So I’d like to know what the logic is behind putting them into this portfolio and then what you are doing now that the franc has had such a huge appreciation over the last year.
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
The idea behind it is Permanent Portfolio is primarily U.S. investors. We wanted a non-U.S. currency hedge, I guess, to the dollar, if you will, in the portfolio. The Swiss franc combines the best risk reward proposition that we felt was out there. The balance of a higher asset currency, a lack of will to increase the volume of that currency, the limited amount of government spending, the privacy rights and those issues – all of those played a part. Now, you pay for that in terms of yield sometimes – and a lot of times – but it presents the best risk reward that we felt was out there for an offset to the dollar. We still feel that way.
The Swiss franc definitely had a good year last year, and it’s continued that run so far this year. I would attribute it to concerns in Europe as well as concerns on the dollar. Again, I don’t see that changing anytime soon. The Swiss franc is a little bit more levered to Europe because most of its closest business partners and such are based over there and deal in euros, so it bears watching. There have been some reports on the health of Swiss banks and those sorts of things, so we keep an eye on those sorts of issues. But net/net, the Swiss currency continues to be a very well performing currency with a lot of political protections and risk protections built into itself. That’s why we own it.
Harold Clichman, LPL Financial
Okay. And do you have a way of hedging against its decline?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Well, we typically are a long-only portfolio and we are an asset allocation fund, so risk management, to some degree, is rebalancing. We continue to look at those issues.
James Aughenbaugh, Morgan Stanley/Smith Barney
Thanks for doing the call. Can you discuss what we should expect with regard to tax efficiency and distributions, especially with the gold position?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Sure. As a general rule we try to minimize taxable distributions as much as possible to produce the best after tax return we can. Having said that, we are a mutual fund and mutual funds are subjected to an arcane regimen of taxation, which all mutual funds have to follow and we’re no different. So it’s probably too early in the year. We’re in mid-April now, our fiscal year is January 31, so we’re not even done with our fiscal first quarter yet, so it’s a little premature to be able to talk about expected distributions.
James Aughenbaugh, Morgan Stanley/Smith Barney
In the past, you’ve been very tax efficient. I’m just trying to get my arms around how you’ve done that, especially with gold being taxed as a collectible.
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Well, managing gains and losses and managing gains and losses of commodities versus other things and timing, those are primarily how you manage gains and losses. That’s what we do.
James Aughenbaugh, Morgan Stanley/Smith Barney
You’re trying to be as tax efficient as possible?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Yes. It’s one of the things that we consider in our investment process as well, the tax effect of making a trade. So it’s one thing we think about. I’m not sure all money managers do that.
James Aughenbaugh, Morgan Stanley/Smith Barney
Certainly not all. The other question I had was you had gold in gold coins. Can you talk about why you have gold coins as well?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Primarily diversification. The gold coins that we own are standard one ounce American Eagle’s, Canadian Maple Leafs. They’re not collectibles. They’re not like an 1890 buffalo coin, that kind of thing. There’s none of that in it. They’re fungible, one ounce gold Eagle’s minted by the U.S. Mint and they’re easily tradable and that sort of thing. The reason we own a combination of coins and bullion is for diversification of ownership and flexibility. It’s easier to sell a few coins sometimes than having to sell a 400 ounce bar or 1000 ounce bar or a 100 ounce bar. So there’s some flexibility in owning the coins.
Joel Teknorth, Teknorth Oxen & Associates
Is there any process that you have in the fund for reexamining and changing every so often the fundamental charter which dictates the asset allocation?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
There’s no formal process, I would say, artificially. It’s the policy and the targets are fundamental and they’re based on sort of years of study and analysis of various pricing in multiple markets when the fund was created. So the one thing we’ve traditionally tried to avoid – and we haven’t changed the target since 1982, although that’s not to say we never would – the one thing that we’ve tried to avoid is changing the targets purely based on market trading phenomena or short-term trends. Ten years ago, when the U.S. stock market was booming and not a lot of people were interested in diversification of assets back then, but the few that were were always asking me, “Why don’t you increase your stock allocation, because you can’t beat the S&P 500, you only have X percent of stocks?”? And I’d say, “Yes, exactly. That’s by design. We don’t want to get involved in moving with those trends.”?
More recently, I heard the same question expressed as a function of treasuries. God, that treasury allocation, it’s kind of high for me, I’m concerned about it, did you ever consider changing your fundamental policy and knocking that down? I think you could probably say that about any asset class and changing the fundamental policy.
What we don’t want to do is change it based on those characteristics, though, because markets tend to move and come back and we don’t want to be moving along with the market. That makes us no different than anybody else.
On the other hand, structural issues would matter. We did some thinking back when the Swiss were considering adopting the euro and having the Swiss franc cease to be, should we have a currency? If so, which one? What currencies are out there? Should we have a basket of currencies? We sort of asked those questions to potentially replace the Swiss franc or not. So that’s an example of thinking about it in a more structural way.
If we suddenly discovered that gold was as plentiful as water tomorrow, the entire market dynamic of gold would change. So would it still make sense to own 20%? I don’t know the answer to that, but that would be a structural change in the dynamic of that market and that asset class.
So over time our view would be that asset classes have a personality, they have characteristics that ebb and flow with short-term market conditions, but they’re relatively germane to the nature of that asset class. So we’re trying to not make moves based on short-term trading.
Paul Rutkowski, Merrill Lynch
Hi, Mike. Appreciate what you guys are doing. My question was in relation to gold. Typically we’d use gold to hedge against equities and maybe equities to hedge against gold.
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Not lately.
Paul Rutkowski, Merrill Lynch
Not lately, exactly, which leads me to my question. It used to decouple and certainly the last few years it’s not decoupling. Does that continue and what are your forecasts for that scenario?
Michael Cuggino, President & Portfolio Manager, Permanent Portfolio
Like I said, assets over long periods of time tend to have a characteristic about them that doesn’t change. Although in the short-term you could have a lot of trading anomalies. I view the high correlation with equities and gold right now as being somewhat of an anomaly.
Gold is a chameleon as an asset. Depending on how people feel about it, it tends to trade off of certain other assets at certain times. There’s periods where it trades off the euro or the dollar or the price of oil or the price of silver. I wouldn’t say it’s trading off the price of equities right now, but I would say that what you’re seeing is the effect of loose money inflating a lot of asset classes, and two of those asset classes happen to be equities and gold. So to me, the correlation that we have right now is unusual, but it’s also a function of the unusual monetary policy that we have.
