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PRPFX: Michael J. Cuggino, Portfolio Manager, Permanent Portfolio Family of Funds, Forbes Interview
"While in bonds you’re getting that yield because of high bond prices with little potential of further capital appreciation, with equities you’re being paid a bond-equivalent yield and then some to wait for more robust economic growth, P/E multiple expansion and future capital appreciation. So from an investor’s standpoint, the risk/reward proposition continues to be very favorably biased towards equities."
Mr. Cuggino is most assuredly much sharper than any investment knife at this house. I am also in agreement that this house prefers to find growth of global economies going forward.
Mr. Cuggino notes the following in quotes:
"Thirdly, many investors continue to sit on the sidelines with investable cash, which means that additional liquidity will eventually come into the stock market over time as people become more comfortable with our economic performance and/or if economic growth continues at a more rapid pace going forward. That liquidity would likely result in multiple expansion and higher stock prices."
>>>>> I don't know who these investors on the sidelines may be, and will presume he is noting the retail investors; as in we here at MFO. A few trinkets of thoughts. Many retail investors remain via 401k's and related. I also know from my own personal diggings, that while this group of retail investor remains in place; they have also scaled back their %'s of monies to this area. Other stuff like food, fuel and related is drawing more of the take home income. I am also aware of some in this group who have taken loans against their 401k's; and others who are retired; tapping their IRA's and related for needed monies to help support other family members who are having cash flow problems. This does not take into account others who will begin (5 years away) some amount of required withdraws from many sheltered accounts. As to a large money area of the retail investors group being those already retired; I do not have a high expectation that many in this group will be throwing large sums of their retirement acct's. back into the equity arena; aside from the % they may already have invested. Like it or not; the boomer group does have access to or control a vast amount of investment monies.
"Wallace Forbes: So you think this is going to entice some of the people who have liquidity get back into the stock market?
Cuggino: Correct. Right now the stock market’s gains have been based on lower trading volumes and not a lot of excitement among average investors. Investors still feel burned by prior moves in the stock market and prior sell-offs, whether it was 2008 or earlier in the decade – 2000 or 2002 for example. It’s not a sexy asset class right now, if you will, among mainstream investors. When that excitement comes back into the market, you will likely see multiple expansions. In the 1980s and 1990s, stocks traded at multiples in the high teens. Right now they’re trading at multiples in the low-to-mid teens. There’s room for expansion there."
>>>>> As noted, I suspect the prior "excitement periods" may have been enough for many of the older folks. These folks , who understand, that they are not getting much from a CD and related, and not staying up with inflation; may likely prefer this to getting a big whack again. If and when numbers indicate a massive flow from retail investors back into equities, this house will be on guard to unload the same. As to the 80's and 90's. From August 26, 1982 through October 31, 2007 one could dollar cost average into just about any equity area and have a hugh monetary gain smile upon the face. Now and today, keeping most of one's money; let alone making a positive return, is real work, in my opinion. Its not August 26, 1982 through October 31, 2007 any longer and this is part of the shaping of what will become the " new normal".
"Forbes: So you think that there is a fair possibility that we’re going to get those higher multiples back?
Cuggino: Yes, as more investors get interested in stocks again.
And then, fourthly – and it’s more of a wild card here – depending on the outcome of the elections and the actions or inactions of Congress and the Presidency, equity prices could go up further."
>>>>> I prefer that he is correct and that a long and winding road back to real growth of economies is in place. I will maintain, barring white or black swan events that this house will find what the "new normal" may be at the year 2019. All bets are off, if the Mayan calendar predictions causes no holiday season this year...:):):)
We'll muddle along with our boring portfolio, knowing that we have our legs spread astride the sharply pointed fence top of investing just below our crotch; with each foot placed precariously on pillars made from the word "if" and, of course, not wanting to fall onto the fence.
Perhaps PRPFX should be this house's current challenge for return measurement.
Just my inflation adjusted 2 cents, which today is not worth much, eh?
I too was surprised at his focus on equities when PRPFX is a four pillar fund. No mention of his gold/silver positions. No mention of his ability to navigate out of LT treasuries as interest rates rise. No mention of his alternative investment in Real Estate. For a fund manager who runs a fund that is designed to ebb and flow with the movement of the swans he sure spent a lot of time encouraging investors to buy equities. Would this type of equity investor even consider PRPFX? Kind of strange.
Reply to @bee: No desire here to become a cheerleader for Mr. C. However, I agree with your criticism that the interview was narrow in scope, so am linking another interview in which Cuggino addresses the bond position. David wrote a thorough (scathing?) critique of Mr. C & PRPFX in his April 1 commentary which I've also linked.
First, here's PRPFX's breakdown of investments, near as I can determine, at beginning of year.
Gold: 20%
Silver: 5%
Swiss Franc assets: 10%
U.S. & foreign real estate and natural resource stocks: 15%
For yourself, of which I believe you already know; and also in particular for others reading this thread, I surely hope my tone about PRPFX was not taken wrongly. I only placed my own counter questions and thoughts about equities and a few what and why thoughts; as this was the main theme of the interview. Bee, thank you for the linked story; as we all need to continue to attempt to gain insights into all aspects of investments. In line with your thoughts regarding the interview. Asking a manager about his/her thoughts about equity investments for an equity style portfolio may be enough questions. I would expect a growth and income fund manager to be asked questions about both bonds and equities. While I am pleased that the interview took place; it should have been a five part series to cover such a diverse fund.
The bell toning the death of the bond bull market is not currently ringing a loud warning. I continue to search to vast wealth of knowledge about such things from the gurus of Wall St. and have not found anyone who can provide the month and year of the event. Morgan Stanley rang the bell really loud in the spring of 2010 and later noted that they kinda didn't get that just right. Keep in mind; that there will be a rollover period for some types of bonds in a rising rate environment where some pricing may be lost (depends upon an active manager skill set), but that as the yield moves higher some types of bonds will again have more buyers and likely in particular from large pension funds and insurance companies. This is my best "guess". As to a diversified bond portfolio.......why not, if it fits one's investment style. Our mix of bond funds covers pretty much all areas; especially if one digs down into the holdings, which cover a lot of ground.
Reply to @bee: He is not supposed to get out of Treasuries. He is supposed to hold gold, silver, treasuries, swiss frank all in pretty fixed allocations and rebalance when they get out of their allocation proportions. So, that leaves him with stock picking in Real Estate, Natural Resources and other aggressive growth stock sleeves of his portfolio.
Looking at his Aggressive Growth stock fund, his stock picking ability seems to be average. So, the allocation and maintaining the allocation is the key part of success of PRPFX
Reply to @fundalarm and investor (similar comments):
Both of your comments makes sense from a mandate standpoint...I lost site of that. LT Treasuries are foundational to the funds strategy and I appreciate you both pointing that out.
If I could restate my comment I would put it this way...My hope is that a manager might incorporate strategies that minimize risk with each of their investment mandates. So, for example with LT treasury risk, a manger might use a duration & laddering strategy with treasuries. My thought here is that a manager should be captaining the ship around the rocks. In a rising interest rate environment (when it happens) requires navigating even if the goal is to maintain a particular non-correlated asset.
I am not a bond expert but it seems to me that the trip up the interest rate ladder often is a lot faster and abrupt than the trip down. As part of the FED's QE strategies the US government/FED has supported LT treasuries and has also "twisted" their way out of Long term treasury positions. It seems to me that the US will need real economic growth (my bet is a healthy housing market) before there is a interest rate rise. Housing has a multiplier effect on the economy and until it is back on healthy legs that multiplier could continue to be negative. So, I get the value of LT Treasuries in uncertain times.
Would love to hear what both of you and others think.
I wonder how often PRPFX re-balances its fixed assets and it's portfolio in general?
I would like to follow his stock picking more closely. It's hard to follow daily with PRPFX because often the top 25 holding listed on M* are treasuries and metals. I assume his aggressive stock fund, PAGRX, would be a proxy for at least his aggressive stock picks but, not his real estate and natural resource investments.
Reply to @bee: The short answer is that this manager will not and should not 'navigate' interest rate risk of the porfolio. Longer missive: the premise of the "Permanent" asset allocation is to have at least one asset class that performs well in any state of the world, including depression. this is passive asset allocation which you either agree with and buy the fund or don't. the portfolio is rebalanced to target periodically -- i assume at least quarterly. if your position is that the interest rates will rise, you should be investing in floaters, high yield, short duration or outsource to a manager whose views are in agreement with yours -- such as Fuss or Gross who manage their portfolio ACTIVELY and could probably be trusted to navigate the fixed income markets more than many individuals. Here, however, LT treasurys are to stay as they are negatively correlated with equities and commodities. Another use for LT Treasurys, no matter what the environment, would be for an investor to match its assets to its liabilities. Such investors are usually pension plans and insurance companies.
Reply to @bee: I think his approach is more about asset allocation than what his equity picks are since that's what this fund is all about. I just reduced or eliminated the fund and reallocated the $$$ to fixed income. I am 78 and retired and have owned the fund about 5-6 years.
Comments
Mr. Cuggino notes the following in quotes:
"Thirdly, many investors continue to sit on the sidelines with investable cash, which means that additional liquidity will eventually come into the stock market over time as people become more comfortable with our economic performance and/or if economic growth continues at a more rapid pace going forward. That liquidity would likely result in multiple expansion and higher stock prices."
>>>>> I don't know who these investors on the sidelines may be, and will presume he is noting the retail investors; as in we here at MFO. A few trinkets of thoughts. Many retail investors remain via 401k's and related. I also know from my own personal diggings, that while this group of retail investor remains in place; they have also scaled back their %'s of monies to this area. Other stuff like food, fuel and related is drawing more of the take home income. I am also aware of some in this group who have taken loans against their 401k's; and others who are retired; tapping their IRA's and related for needed monies to help support other family members who are having cash flow problems. This does not take into account others who will begin (5 years away) some amount of required withdraws from many sheltered accounts. As to a large money area of the retail investors group being those already retired; I do not have a high expectation that many in this group will be throwing large sums of their retirement acct's. back into the equity arena; aside from the % they may already have invested. Like it or not; the boomer group does have access to or control a vast amount of investment monies.
"Wallace Forbes: So you think this is going to entice some of the people who have liquidity get back into the stock market?
Cuggino: Correct. Right now the stock market’s gains have been based on lower trading volumes and not a lot of excitement among average investors. Investors still feel burned by prior moves in the stock market and prior sell-offs, whether it was 2008 or earlier in the decade – 2000 or 2002 for example. It’s not a sexy asset class right now, if you will, among mainstream investors. When that excitement comes back into the market, you will likely see multiple expansions. In the 1980s and 1990s, stocks traded at multiples in the high teens. Right now they’re trading at multiples in the low-to-mid teens. There’s room for expansion there."
>>>>> As noted, I suspect the prior "excitement periods" may have been enough for many of the older folks. These folks , who understand, that they are not getting much from a CD and related, and not staying up with inflation; may likely prefer this to getting a big whack again. If and when numbers indicate a massive flow from retail investors back into equities, this house will be on guard to unload the same. As to the 80's and 90's. From August 26, 1982 through October 31, 2007 one could dollar cost average into just about any equity area and have a hugh monetary gain smile upon the face. Now and today, keeping most of one's money; let alone making a positive return, is real work, in my opinion. Its not August 26, 1982 through October 31, 2007 any longer and this is part of the shaping of what will become the "
new normal".
"Forbes: So you think that there is a fair possibility that we’re going to get those higher multiples back?
Cuggino: Yes, as more investors get interested in stocks again.
And then, fourthly – and it’s more of a wild card here – depending on the outcome of the elections and the actions or inactions of Congress and the Presidency, equity prices could go up further."
>>>>> I prefer that he is correct and that a long and winding road back to real growth of economies is in place. I will maintain, barring white or black swan events that this house will find what the "new normal" may be at the year 2019. All bets are off, if the Mayan calendar predictions causes no holiday season this year...:):):)
We'll muddle along with our boring portfolio, knowing that we have our legs spread astride the sharply pointed fence top of investing just below our crotch; with each foot placed precariously on pillars made from the word "if" and, of course, not wanting to fall onto the fence.
Perhaps PRPFX should be this house's current challenge for return measurement.
Just my inflation adjusted 2 cents, which today is not worth much, eh?
Take care,
Catch
Hi Catch,
I too was surprised at his focus on equities when PRPFX is a four pillar fund. No mention of his gold/silver positions. No mention of his ability to navigate out of LT treasuries as interest rates rise. No mention of his alternative investment in Real Estate. For a fund manager who runs a fund that is designed to ebb and flow with the movement of the swans he sure spent a lot of time encouraging investors to buy equities. Would this type of equity investor even consider PRPFX? Kind of strange.
First, here's PRPFX's breakdown of investments, near as I can determine, at beginning of year.
Gold: 20%
Silver: 5%
Swiss Franc assets: 10%
U.S. & foreign real estate and
natural resource stocks: 15%
Aggressive growth stocks: 15%
U.S. T-bills, bonds & other
USD assets: 35%
Interview Feb. 2012 http://seekingalpha.com/article/316970-interview-with-michael-cuggino-preserving-long-term-capital?source=feed
David Snowball Commentary April 2012 http://www.mutualfundobserver.com/2012/04/april-1-2012/
http://www.etftrends.com/2012/04/guggenheim-cio-generational-bull-market-for-bonds-is-over/?utm_source=iContact&utm_medium=email&utm_campaign=ETF Trends&utm_content=
Dear MFO: what are your thoughts going forward? a diversed bond portfolio?
Thanks Hank
For yourself, of which I believe you already know; and also in particular for others reading this thread, I surely hope my tone about PRPFX was not taken wrongly. I only placed my own counter questions and thoughts about equities and a few what and why thoughts; as this was the main theme of the interview.
Bee, thank you for the linked story; as we all need to continue to attempt to gain insights into all aspects of investments. In line with your thoughts regarding the interview. Asking a manager about his/her thoughts about equity investments for an equity style portfolio may be enough questions. I would expect a growth and income fund manager to be asked questions about both bonds and equities. While I am pleased that the interview took place; it should have been a five part series to cover such a diverse fund.
Take care,
Catch
The bell toning the death of the bond bull market is not currently ringing a loud warning. I continue to search to vast wealth of knowledge about such things from the gurus of Wall St. and have not found anyone who can provide the month and year of the event. Morgan Stanley rang the bell really loud in the spring of 2010 and later noted that they kinda didn't get that just right.
Keep in mind; that there will be a rollover period for some types of bonds in a rising rate environment where some pricing may be lost (depends upon an active manager skill set), but that as the yield moves higher some types of bonds will again have more buyers and likely in particular from large pension funds and insurance companies. This is my best "guess".
As to a diversified bond portfolio.......why not, if it fits one's investment style. Our mix of bond funds covers pretty much all areas; especially if one digs down into the holdings, which cover a lot of ground.
Take care,
Catch
Looking at his Aggressive Growth stock fund, his stock picking ability seems to be average. So, the allocation and maintaining the allocation is the key part of success of PRPFX
Both of your comments makes sense from a mandate standpoint...I lost site of that. LT Treasuries are foundational to the funds strategy and I appreciate you both pointing that out.
If I could restate my comment I would put it this way...My hope is that a manager might incorporate strategies that minimize risk with each of their investment mandates. So, for example with LT treasury risk, a manger might use a duration & laddering strategy with treasuries. My thought here is that a manager should be captaining the ship around the rocks. In a rising interest rate environment (when it happens) requires navigating even if the goal is to maintain a particular non-correlated asset.
I am not a bond expert but it seems to me that the trip up the interest rate ladder often is a lot faster and abrupt than the trip down. As part of the FED's QE strategies the US government/FED has supported LT treasuries and has also "twisted" their way out of Long term treasury positions. It seems to me that the US will need real economic growth (my bet is a healthy housing market) before there is a interest rate rise. Housing has a multiplier effect on the economy and until it is back on healthy legs that multiplier could continue to be negative. So, I get the value of LT Treasuries in uncertain times.
Would love to hear what both of you and others think.
Thanks Investor,
I wonder how often PRPFX re-balances its fixed assets and it's portfolio in general?
I would like to follow his stock picking more closely. It's hard to follow daily with PRPFX because often the top 25 holding listed on M* are treasuries and metals. I assume his aggressive stock fund, PAGRX, would be a proxy for at least his aggressive stock picks but, not his real estate and natural resource investments.
Thanks.
I think his approach is more about asset allocation than what his equity picks are since that's what this fund is all about. I just reduced or eliminated the fund and reallocated the $$$ to fixed income. I am 78 and retired and have owned the fund about 5-6 years.