• Michael Cuggino's fund outperformed the S&P 500 over the past year, gaining 28%.
• PAGRX's success is due to its unique strategy, he says, focusing on quality growth firms.
• The fund screens stocks for factors including strong pricing power, earnings growth, and valuation.

Michael Cuggino, manager of the Permanent Portfolio Aggressive Growth Portfolio (PAGRX) is BI's Investor of the Month for February.

While his fund has slipped over the last week as the market has faced a few macroeconomic challenges, it was off to a hot start in February, rising 9.5% through the 18th. And on a trailing 12-month basis, it's smashing the S&P 500, returning 28% versus the index's 17%.

It's par for the course for Cuggino's fund. Gaining an average of 13.28% a year over the last decade, he's outperformed the S&P 500's annualized 13.1% returns over that time. Last year, Cuggino notched a 44% gain versus the benchmark's 25%.

How has he generated the impressive alpha? Cuggino attributes his success to the independent nature of the fund. It doesn't set out to track particular indexes, and it doesn't look to invest along any particular theme.

"Sometimes managers will look at the S&P 500 ratings and go, 'Well, transports are 6%, so I'm gonna go to 7% transports or 3%. We don't do that," he said. "We kind of throw those weightings out and do our own."

Instead, it simply seeks to identify quality growth firms.

It does this, Cuggino said, by screening for firms with strong pricing power, earnings growth, revenue growth, who their management team is, what their total addressable market is, and whether or not its valuation sits at a reasonable level relative to other stocks in its industry.

That formula has resulted in a high level of exposure to the tech sector at 38% of the fund, but also in stocks across several sectors. So while PAGRX's performance has been in part due to the Magnificent Seven tech giants leading the market, it's also gotten help from a smattering of different sectors, including industrials, consumer cyclicals, and communication services.

Below are the fund's top 10 holdings, their performance over the last 12 months, and their weightings.

The AI trade has given PAGRX a boost over the last couple of years, and Cuggino sees it continuing to drive returns. But he also acknowledged that risks for a reversal in the rally are growing amid high valuations and geopolitical uncertainty.

"The longer you go without a correction or a consolidation makes one more likely, I think, at some point during the year," Cuggino said.

In that scenario, he'll be looking for energy and materials to pick up the slack, given their recent underperformance.

"I think you've got to be careful, and the way you be careful is invest in areas that maybe haven't kept up," he said. "I think if you're patient, you have some room there."

Cuggino's fund has a 5.06% weighting to the energy sector and a 12.77% weighting to materials. Funds like the iShares U.S. Basic Materials ETF (IYM) and the Vanguard Energy ETF (VDE) offer broad exposure to these trades.

Those considered for BI's Investor of the Month include managers of US-listed mutual funds or ETFs, those whose funds have outperformed peers in a given month, and those whose funds are outperforming a benchmark index (in most cases this will be the S&P 500) on a trailing 12-month basis. Leveraged funds are not considered.