Friday, March 2, 2012

Permanent Portfolio

Amidst the past few years of turmoil, Harry Browne's Permanent Portfolio is an interesting case. Browne is an investment manager, author, and two-time Libertarian Presidential candidates (for some reason a whole lot of investment managers are Libertarian). The Permanent Portfolio is composed of four equally weighted components: stocks, bonds (long-dated Treasuries), cash (short-term Treasuries), and gold (bullion). The Permanent Portfolio is currently available to the public in two forms: Michael J. Cuggino's Permanent Portfolio mutual fund (PRPFX) and Global X's Permanent ETF (PERM). Of course, one can certainly build one's own permanent portfolio using individual securities and ETFs. As least from PRPFX's perspective, the lost decade was hardly a lost decade. It returned a respectable 164% for the period 2002-2011. That isn't to say that there wasn't some volatility along the way. During the depths of the crisis from June 2008 to February 2009, the portfolio experienced the maximum drawdown of 19.6% (though max quarterly loss was only 6.86%). Cuggino's execution emphasized Swiss sovereigns (in Swiss francs so there is some currency exposure) alongside US Treasuries. For the growth component, he overweights energy, miners, and REITs.

PERM does not have enough of a track record to gauge performance. It is an ETF of ETFs, so there is some inefficiency there. There are no Swiss assets in PERM, but there is a slight overweight on natural resources. Rebalancing occurs annually. All this is for an annual fee of 0.49%. Investopedia has a custom portfolio of ETFs that supposedly replicates Cuggino's fund. This portfolio includes FXF (Swiss franc currency exposure) and EWL (a Swiss equity ETF) as safe-havens. I can see the case for FXF, but EWL has far too much volatility to be a safe haven. The main weakness of Investopedia's replication strategy is the overuse of very illiquid specialized ETFs such as the Precious Metal Basket GLTR and Hard Assets Producers (HAP). More liquid alternatives have lower operating expenses and smaller bid-ask spreads.

Since the Permanent Portfolio is really a buy and hold kind of strategy, operating expenses matter a lot. PRPFX comes in at 0.77%, but the assumption is that the active management (i.e., stock picking) adds value. The prospectus reports only about 9% turnover, so there is not too much trading going on (trading which incurs expenses).

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