A fund for recession and recovery

Permanent Portfolio protected a big chunk of its investors' money during the downturn. Now it's ready for a recovery.

By Katie Benner, writer-reporter

NEW YORK (Fortune) -- Very few of the esoteric funds touted during the last boom protected investors from the severe downdraft of 2008, but some stumbled far less than others.

One of those that fared better was the Permanent Portfolio fund, which has Morningstar's top-notch five-star rating. The fund fell 8.4% in 2008, versus a severe 38.5% drop in the S&P 500 index (SPX). And despite its down year, the fund has a five-year annualized return of 6.6%.

"Our investors are very pleased with the fund's performance because our strategy helped limit their downside," says Michael Cuggino, manager of the $3.2 billion Permanent Portfolio fund.

"We protected a good chunk of investor capital, which will make it easier to go positive again; and we've seen net inflows this year." Just a year ago, the fund was at $2.5 billion in assets.

Here's how the Permanent Portfolio strategy works: The fund divides its assets between gold and silver, commodities and Swiss bonds, Treasuries, stocks, and real estate.

The idea is that these investments provide safe havens in times of duress (as precious metals did in 2008), as well as a chance for some upside when equities markets come back to life. Treasuries and other short-term, AAA-rated bonds generally provide stability when markets are bouncing around a bottom.

"In a time when all asset classes became correlated and went to zero, last year was a great stress test of our strategy," says Cuggino.

Talking about stocks with Fortune, Cuggino says the themes his fund likes now include a return to global growth and a recovery of the financial services sector.

The stocks that usually lead the market of a recession include commodities and large-cap techs, he says. "As growth picks up, production ramps up and so does demand for raw materials, metals, energy, and technology upgrades." For this reason Cuggino is also looking at transportation companies.

As for the financial sector, he believes that banks have an opportunity to post good earnings going forward. The business of banking is to borrow at a low rate and then lend the money out for a higher rate, and right now these institutions can basically borrow at zero. "There is tremendous earnings potential," he says, "and over the long term, their earnings will help them offset any write-offs they must take."

While Cuggino is hesitant to declare that a turnaround is near, he does believe the cycle will inevitably turn, and that many severely beaten down names will turn too.

Here are five stocks Permanent Portfolio likes now:

State Street (STT, Fortune 500):"They seem to have quantified their downside risk and don't have much exposure to real estate or mortgages. They provide administrative and custodial services to large institutional investors, and as those investors see net asset values grow, State Street's fee revenue should grow, too. Plus they've restructured and had layoffs, so they consolidated their business in the down market."

Charles Schwab (SCHW, Fortune 500): "In the discount brokerage space, Schwab is the leader. It provides services to retail investors -- investors who have lost a lot of value and are looking for advice about what to do going forward. Schwab has the vast resources to help that mass-market manage assets."

FedEx (FDX, Fortune 500): "Transportation companies have been suffering because of the recession, but when growth and the overall level of commerce resumes so will the need to move goods. It might be early to get into this name now, but we have seen some recovery in the economy, and the stock price has taken a beating."

Intel (INTC, Fortune 500): "Chips are at the heart of everything in technology and Intel has the resources and liquidity to take advantage of everything from R&D to marketing.

Symantec (SYMC, Fortune 500): "In the software space we like network and security software because we see steady demand for their products. The company has worked through its integration problems from the Veritas acquisition and is are getting back into growth mode." To top of page

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