By Philip van Doorn, MarketWatch
Stock market turmoil underlines the idea that you should be diversified beyond index funds
In the long bull market that ended this month, investors gravitated toward passively managed index funds because the fees were low and the market as a whole kept rising. Why pay a 1% management fee when you could ride the wave for next to nothing?
The coronavirus crisis is a reminder that prudence and diversification beyond stocks can have their advantages.
The counter-argument to broad stock index funds, such as the SPDR S&P 500 ETF (SPY), was that careful selection of stocks and allocation across asset classes could lead to much greater safety, with competitive performance over long periods. As the passive approach kept working for more than a decade, the counter-argument seemed to weaken.
Here's a chart that can provide some food for thought:
The S&P 500 Index set a closing high Feb. 19, followed by a 29% decline (with dividends reinvested) through March 16, as the coronavirus continued to spread.
Meanwhile, the Permanent Portfolio , the Plumb Balanced Fund and the First Eagle Global Fund fared better.
A total return comparison in the space of less than a month is hardly ideal -- these portfolios are managed for the long haul. But it still illustrates how different active approaches may be more appropriate for you based on your investment goals and risk tolerance, for at least part of your portfolio.
Here are long-term comparisons for the funds with the S&P 500, along with the MSCI World Index (in U.S. dollars), which is a more appropriate benchmark for the First Eagle Global Fund:
Fund or index Total return - 2020 through March 16 Total return - 1 year Average return - 3 years Average return - 5 years Average return - 10 years Average return - 15 years Average return - 20 years Average return - 25 years
Permanent Portfolio Class I -16.3% -8.9% -0.3% 1.2% 2.6% 4.7% 6.2% 5.9%
Plumb Balanced Fund -18.7% -11.5% 4.2% 4.3% 6.6% N/A N/A N/A
First Eagle Global Fund Class A -25.0% -18.1% -3.9% 0.1% 4.5% 5.7% 8.6% 9.0%
S&P 500 Index -25.8% 13.8% 2.1% 4.9% 9.7% 7.0% 4.5% 8.6%
MSCI World Index (U.S. dollars) -27.5% -17.2% -0.5% 2.1% 6.3% 5.2% 3.7% 6.5%
All returns are after expenses, but don't reflect sales charges, if there are any.
It's fascinating to see that with this year's decline, the S&P 500's three-year average annual return is now a paltry 2.1%. Only the 10-year average return is in line with the historical average of 10% for very long periods.
-- The Permanent Portfolio is the most conservative of the three funds, with capital preservation as a main goal. So it's not surprising to see its long-term returns lagging the S&P 500 for most periods. (It is ahead of the S&P 500 for 20 years.)
-- The Plumb Balanced Fund is unusual for a fund in its category, as its manager, Tom Plumb, focuses on growth stocks for 80% of the portfolio, with U.S. Treasury securities making up most of the remaining 20%. (Balanced funds typically focus on more conservative value stocks.) This fund's three-year average return is double that of the S&P 500, although it has lagged for longer periods.
-- The First Eagle Global Fund is also managed with capital preservation as one of its goals. It has trailed the MSCI World Index over the past 10 years, but has been well ahead for 15-year, 20-year and 25-year average returns.
Here are comments from the managers of all three funds, along with summaries of their investments.
"Honestly this feels like September and October of 2008 to me -- the degree of volatility, the odd swings in asset classes," Michael Cuggino, the president of the Permanent Portfolio Family of Funds in San Francisco, said during an interview on March 16. He has managed the Permanent Portfolio since 2003. "We keep telling our clients that diversification works over the long term. Over the short term we are subject to volatility as much as anybody," he said.
The $1.9 billion Permanent Portfolio is designed for long-term performance in any economic environment and continually follows a "non-leveraged multi-asset class investment strategy."
Here's the fund's asset-class allocation as of Dec. 31:
Here are the fund's top 10 holdings as of Dec. 31, which made up 50% of the portfolio:
Share of portfolio
Gold Bullion 13.30%
Gold Coins 9.20%
Silver bullion 5.87%
2.00% Swiss Confederation bonds maturing April 28, 2021 3.89%
2.25% Swiss Confederation bonds maturing July 6, 2020 3.81%
Texas Pacific Land Trust 3.14%
U.S. Treasury Bonds, 5.25%, maturing Nov. 15, 2028 2.97%
US. Treasury Bonds, 6.00%, maturing Feb. 15, 2026 2.90%
Freeport McMoRan US:FCX 2.72%
Facebook, Class A US:FB 2.66%
Plumb Balanced Fund
Tom Plumb, CEO of Wisconsin Capital Management and manager of the Plumb Balanced Fund, believes the technological trends that propelled the broad U.S. stock market over the past decade will only be magnified by the coronavirus crisis. The fund has $95 million in assets and is rated five stars (the highest rating) by Morningstar.
"You are going to continue to see simulation technology, AI [artificial intelligence], so many things that are more efficient and adding to ways people can work separately. You will see more things on the cloud, more video conferencing and less travel," he said during an interview March 16.
He sees Nvidia (NVDA) (which is held by the Plumb Balanced Fund), Advanced Micro Devices (AMD) and Intel (INTC) as solid long-term investments through the continuing tech trend. He added: "Companies like Adobe (ADBE) have had an incredible run for their business model, and it will continue to accelerate. People will file documents electronically."
He also said: "If you don't own Mastercard (MA) and Visa (V), I think you should be stepping in and buying them."
Here are the top 10 equity holdings of the Plumb Balanced Fund as of Dec. 31:
Company Ticker Share of portfolio
Visa Inc. Class A US:V 3.2%
Mastercard Inc. Class A US:MA 2.9%
Microsoft Corp. US:MSFT 2.7%
Lockheed Martin Corp. US:LMT 2.5%
Alibaba Group Holding Ltd. ADR US:BABA 2.4%
American Express Co. US:AXP 2.4%
WEX Inc. US:WEX 2.4%
Discover Financial Services US:DFS 2.4%
Amazon.com Inc. US:AMZN 2.4%
PayPal Holdings Inc. US:PYPL 2.3%
Source: Plumb Funds
First Eagle Global Fund
Back in September (), Kimball Brooker of First Eagle Investment Management said: "What you don't own in a portfolio can be more helpful than what you own."
Brooker is the deputy head of First Eagle's global value team and a manager of the $37 billion First Eagle Global Fund, which has a four-star rating from Morningstar. During an interview on March 13, he said "some sectors that we don't really own at the moment have been finding themselves in trouble, such as the banks in Continental Europe or the banks in China, which are now having to deal with a reset of their own and global rate environments."
"What is helpful to us is not owning businesses with too much leverage and owning businesses with a reasonable level of predictability," he added.
When asked if the fund had made any early moves after word of the coronavirus was out, but before the February stock rout or oil-price collapse, Brooker said: "What tends to happen and what has kept us out of trouble is there are always pockets of the market filled with euphoria. Usually those are too expensive for us, so we avoid getting into trouble."
Here's the fund's broad asset allocation as of Feb. 29:
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March 18, 2020 07:34 ET (11:34 GMT)
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