Sometimes the best defense -- and offense -- is a well-diversified portfolio.
Investors don't need to dust off their
Stock Trader's Almanac
to know that fall is traditionally a scary time for stocks. Even the most inexperienced trader knows that the month of October has suffered a pair of market crashes while September has seen more than its share of gut-wrenching swoons.
This year, however, the annual autumn angst arrived early, as volatility -- measured by the VIX -- has nearly doubled since the middle of July. As a result, many unnerved investors have been searching for shelter ahead of a seasonal storm that may, or may not hit.
"We are coming up to the part of the year which has traditionally been tough for equity markets, and this year we have some new challenges, such as credit and housing worries," says Michael Cuggino, portfolio manager of the $1.1 billion
Permanent Portfolio fund, in a recent
interview with TheStreet.com TV. "Diversification definitely is the key when such uncertainties abound."
Want more? Check out TheStreet.com TV video. Gregg Greenberg interviewed Michael Cuggino, manager of the Permanent Portfolio fund.
Spreading risk is certainly an area in which Cuggino is well-versed. His fund maintains strict target weights in several asset classes: 35% of the fund is in U.S. bonds, including Treasuries and short-term, high-grade corporates; 25% in gold and silver; 15% in global real estate and natural resources stocks; 15% in large-cap U.S. stocks; and 10% in Swiss government bonds.
And while Cuggino's asset allocation may seem like he's preparing for the end of the world (or at least a nasty recession), he's actually been making his investors a whole lot of money with a lot less risk, proving the point that it pays to diversify. The fund is up over 5% year to date and has returned 13% annually over the past five years. The fund's beta is half the market's, according to fund tracker
Furthermore, he is still bullish despite the seasonal and subprime fears frightening investors.
"In the long term, the positives outweigh the negatives," says Cuggino. "Corporate profits are still strong and the U.S. economy is still growing, albeit slower. The credit crisis won't pull us into recession, and instead of dragging us down, the worldwide economy -- including emerging markets -- is pulling us up, which is a reversal from past financial crises."
Speaking of the worldwide economy, Cuggino asserts that the weak dollar is a positive for U.S. multinationals with big international operations. As a result, the equity portion of his portfolio sports names like
, which he says has been "mercilessly beaten down into a great buying opportunity."
An expanding global economy also benefits energy companies in Cuggino's opinion, especially because the "need for energy in both the U.S. and emerging markets has become insatiable." His energy holdings include
, and with an annual turnover of 7%, he's likely to hold onto these names for a long time.
Of course, a sagging dollar does not only benefit exporters looking to sell their widgets in China, India and Russia. It also boosts Cuggino's hefty gold position, and because he buys bullion and bars instead of futures and exchange-traded funds, he literally has vaults full of the stuff.
"The dollar is under pressure, no two ways about it," says Cuggino. "And in light of the world's central banks pumping money into the system after the recent subprime jitters, plus the potential for multiple rate cuts by the
, gold is likely to resume its trek higher."
The fund also owns Swiss bonds and non-U.S. commodity stocks like
as a currency hedge. But don't tell Cuggino his fund is little more than a capital preservation fund or even a mattress under which to stash valuables to wait out the stormy season.
"While people often characterize us as a 'rainy day' fund, it's worth pointing out that we do more than just preserve capital," says Cuggino. "We've made our investors a lot of money these past five years. We just allow them to sleep better at night in the process."
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.