Q:  How would you describe your investment philosophy and the core beliefs that drive your investment decisions? A : Our investment philosophy is based on the belief that nobody can consistently and accurately predict the future. Everyone will be right once in a while but, typically, most people will be wrong more often than they are right. Recognizing that weakness in human nature, we put the emphasis on discipline, diversification, and process. In other words, we rely on the factors that you can control versus the unpredictable future and the ‘superstar manager’ concept. Our specific investment decisions are based on a combination of factors. We are not a quant shop, and we don’t employ a specific strategy, such as arbitrage, IPO investing, or a focus on large-cap value, for example. We may invest anywhere and we consider our investments from a more global perspective than most other managers. At the end of the day, we believe that you invest to make money - to protect your capital and add to it. The style boxes, the various sub-sectors, and the strategies are secondary. As a result, we have a ‘total return’ viewpoint in investing. We manage four no-load different mutual funds and each of them has a different strategy and a different investment objective. The common features of all the funds, however, are a conservative approach, a focus on long-term returns, and tax efficiency. Our philosophy is probably best illustrated by our flagship product, the Permanent Portfolio, which is a targeted asset allocation fund. The other three portfolios have fairly focused investment objectives. Q:  What is the Permanent Portfolio investor profile? A : The fund is based on the premise that the future is unpredictable, and that most investors want a core holding that seeks risk aversion. They may take some risks here and there but, for a good part of their capital, they want preservation and a chance for growth at low risk. Only the investors, who can tolerate a very high risk level, should subject their assets to economic bets and predictions. But even they seek a relatively safe place for the core part of their portfolios. The Permanent Portfolio was developed in 1982 as a result of the economic environment at that time. The dollar left the gold standard in the 1970s; there was double-digit inflation; prices of gold and silver soared. We had a bearish stock market, despite a couple of bear market rallies. Investors didn’t know what to do and even if they did nothing, they were still losing purchasing power to inflation. The Permanent Portfolio was designed to combat that mentality and to provide protection and gains, despite the feeling that the future is unpredictable. Although the current environment is very different from the one in late 70s and early 80s, there are certain attributes that have reemerged in the last several years, such as the focus on commodities, the rise in gold prices, the decline in the U.S. dollar, etc. Right now we suspect that the economic growth is slowing, and that overall inflation, including food and energy, is becoming an issue for the first time since that period. I am not saying that the two periods are comparable, as the U.S. economy is in much better shape now and doesn’t need the same degree of structural change. Of course, we cannot ignore certain issues and fool ourselves with low core infl ation fi gures. But the common feature between the two periods is investor sentiment. In the 1990s, when investors were unwisely putting all their money in technology stocks, there was a little appreciation for what we do. Disciplined and diversifi ed investing was very unfashionable. But when the party ended, people watched their brokerage accounts come crashing down, often to lower than the initial levels. So, many investors started to appreciate diversifi cation and a more conservative attitude with the core of their money to avoid getting trapped in a similar shortterm trend. This has been a major part of investor sentiment in this decade. In managing the Permanent Portfolio, the short-term anomalies are exactly the time when our discipline comes into play. We don’t get carried away with short-term activity, despite the pressure from investors. The fund is not about outperforming strong market inequities, because only one-third of it is in equities. There are more aggressive funds for more aggressive investors, but I don’t think that anyone should bet all his assets on a single asset class like stocks, or a single trend, such as technology. This fund is based on a comprehensive asset allocation model that seeks to provide capital preservation in any environment and the ability to profi t from multiple outcomes in the future. Q:  How does that philosophy translates into an investment strategy and process? A : The Permanent Portfolio is a longterm investment vehicle, focusing on after-tax returns, and diversifi ed across six different asset categories. Since rebalancing is an inherent part of an asset allocation fund, we have embedded the tax effi ciency within that model, while still being disciplined with respect to asset allocation. The holdings of the fund are combined into six different asset classes—gold (20%), silver assets (5%), Swiss Franc denominated assets (10%), stocks of U.S. and foreign real estate and natural resource company stocks (15%), U.S. aggressive growth stocks (15%), and U.S. Treasuries and high-grade corporate bonds (35%). The percentages represent the target weights for each asset class. In addition, we have a band of 10% on either side of our target, and when we deviate outside of those targets, we’d typically re-balance to our targets. That approach allows us to stay disciplined and tax effi cient, while maintaining fl exibility to actively manage the fund. Every time you trade, you generate a turnover, and there is a commission or spread cost. Therefore, it isn’t very useful to balance to the exact target every day, because you would drive up commission costs, turnover, and short-term capital gains. The idea of the trading bands is to provide fl exibility and to help us avoid over-trading the shareholders’ accounts. Another reason for that approach is that we recognize that there might be short-term anomalies in the marketplace that we want to take advantage of. Being overweight or underweight in equities or gold is often quite reasonable, while the trading bands make sure that we still remain close to the target and don’t lose our discipline. It is a way to stay true to our strategy and to keep the portfolio manager from getting too caught up in short-term events, while still allowing the fl exibility to take advantage of shortterm market anomalies. Q:  Do you develop a global investment view to build your diversifi cation model? A : Yes, I have a view, and that view comes into play when I manage within our bands. In fact, managing the Permanent Portfolio is a pretty comprehensive exercise because you have to watch simultaneously many different asset classes and understand how they react in the global space and against each other in the short, intermediate, and the long-term. That’s the challenge of managing this portfolio. We definitely have opinions and keep ourselves well informed to be able to react to global trends and events. The difference with other managers is that we wouldn’t overreact and throw the portfolio into a short-term trend, which turns out to be a bad long-term bet. It is the process that is prominent in our strategy, not the ‘superstar manager’ concept. Q:  Could you briefly describe the strategies of the other three funds that you manage? A : The other three funds employ more focused strategies. The Aggressive Growth Portfolio is a U.S. equities fund, designed to beat the broad U.S. stock market as measured by the S&P 500. It is a very focused fund, with 30 to 50 names, but it is diversified across a dozen different industry groups. It has the ability to invest in any capitalization size, because we recognize that certain types of stocks may outperform in certain environments. Similarly to the Permanent Portfolio, it provides a long-term view, tax efficiency, and diversification within equities. The idea of this fund is to invest in 30 to 50 great long-term growth stories that we can hold for years and eventually sell at a large, favorable capital gain. The Treasury Bill Portfolio invests strictly in short-term U.S. Treasury securities. In that fund, we manage investments like a money market fund, and the goal is to provide higher return on the cash while still having access to it at any time. The fund also has tax advantages because, unlike other money market funds, the Treasury Bill Portfolio retains its daily investment income, only paying a dividend once a year. Until then, the increase in the share’s value is not taxable until it is redeemed, so the gains can accumulate with limited taxation. The other fixed income product, the Versatile Bond Portfolio, is an ultrashort, high-grade corporate bond fund, which invests in bonds with a maturity of less than two years and maintains a S&P credit rating of A or better. It seeks to provide better yield than a Treasury money market fund for a minimal degree of additional risk. The fund is designed to go out further on the yield curve, but not too much. It is also diversified across different industry groups, but in bonds only. Q:  What are the investment risks that you perceive and how do you mitigate them? A : We believe that risk mitigation should be part of the process, not a separate strategy. At the macro level, you have to account for the economic and geopolitical threats, the monetary policy, both in the U.S. and abroad, and for the interplay between the various central banks and currencies. We operate in a global economy, and the Permanent Portfolio invests in stocks and bonds on a global basis. Precious metals and commodities are a global asset that transcends monetary and national boundaries. They have a value to everyone, regardless of the currency and the specific economy, so approximately 30% to 50% of the portfolio has international implications. Our policy is to stay away from investments that are too risky. We tend to avoid countries or currencies that are unstable politically or economically, because we don’t think that the potential return is worth the risk. We’d leave these investments to more aggressive strategies. The investors, who use our portfolios as an anchor to their investments, may go out and invest a bit in such emerging markets, but this is not what the Permanent Portfolio is about. We may play the emerging markets theme in an indirect way. For example, we have invested in the ADRS of BHP Billiton, a diversified Australian and South African mining and natural resource company. There is a stable government in Australia, a free market economy, and low political risk but, nevertheless, the company participates in many emerging markets. We have held BHP Billiton for quite a while as it represents a play on the global economic growth story, the need for infrastructure and development of emerging market countries. We believe that this is a multi-year cycle and we’re in the middle of it. That example illustrates our approach of minimizing risks at the macro level, while still trying to capture some of the return.