'Extreme' Diversification Pays Off for Funds

When Michael Cuggino started managing Permanent Portfolio in the 1990s, some journalists thought the fund seemed like an odd grab bag. Cuggino holds a broad collection of assets, including gold, Swiss francs, Treasuries, growth stocks and real estate investment trusts.

During his early years at the helm, Permanent Portfolio lagged competitors who loaded up with soaring technology stocks. But Cuggino's fund has proved ideally suited for the harsh markets of recent times. For the decade ending in August, Permanent Portfolio returned 10% annually, more than 5 percentage points ahead of the S&P 500, according to Morningstar. While the S&P dropped 11.4% in the first eight months of 2008, Cuggino's fund gained 1.8%.

"We are designed for conservative investors who want to preserve their assets and achieve some growth," says Cuggino.

Academic researchers have long urged investors to spread their bets. Broad diversification can help to limit losses in downturns, the researchers have argued. Cuggino follows the academic advice -- and takes it to an extreme. His fund is one of a small number of extreme diversifiers that go well beyond holding a narrow collection of stocks or bonds. As the academics have promised, the broad funds have proved resilient in the market downturn.

Much of Permanent Portfolio's success can be attributed to its careful selection of assets that complement one another. For example, the fund's gold holdings sometimes rise when stocks are falling. Swiss francs may climb when Treasuries dip. During the fund's history, each asset in the portfolio has suffered more than one bear market. But there has never been a time when all the assets have dropped at once. That explains why the fund has not recorded a losing year since 1994.