A Permanent Portfolio by Any Other Name Still Leaves Me Uncomfortable

by: Roger Nusbaum

At the end of Alan Abelson's column there was some commentary from Michael (Dogs of Dow) O'Higgins and a portfolio he called MOAR which stands for Michael O'Higgins Absolute Return. Really this was a spin on the permanent portfolio concept. The original Permanent Portfolio was put forth by Harry Browne which called for equal weighting in equities (a broad domestic index), gold, long term bonds and cash.

The MOAR is a blend of of the Permanent Portfolio and the Dogs of the world which apparently means the worst performing developed market country funds. Per the Barron's article there would be 25% each in iShares Barclays 20 +Year Bond Fund ETF (NYSEARCA:TLT), in the iShares Barclays 7-10 Year Bond Fund ETF (NYSEARCA:IEF) and in the SPDR Gold Trust (NYSEARCA:GLD). IEF serves as a cash proxy. The other 25% goes into iShares Belgium Fund (NYSEARCA:EWK), iShares France Fund (NYSEARCA:EWQ), iShares Italy Fund (NYSEARCA:EWI), iShares Ireland Index Fund (NYSEARCA:EIRL) and iShares Spain Fund (NYSEARCA:EWP) with each getting 5%.

Although specifics were not given, the portfolio has outperformed "every major stock index, long-and-intermediate term bonds, gold, cash and inflation and done so with only a single down year."

There are a lot of these types of portfolios out there that "work" or otherwise get the job done over long periods of time but it is very difficult for me to be comfortable with this type of rules-based allocation. These types of things involve no forward looking analysis. The Dogs of the whatever relies to a certain extent on some sort of reversion and that is placing a lot of faith in something that simply should just work.

The other issue is that longer term Treasuries are expensive these days. They have been expensive for a while and there is no way to know how long they will stay expensive but if at some point they revert to normal the transition from expensive to fairly priced will be very painful for holders of ETFs where the holders are devoted to some sort of strategy that doesn't look forward.

To the extent avoidance is a key part of successful portfolio construction (I believe this to be a crucial concept) there is much to dislike, especially with all the European equity ETFs. For all I know the strategy could do very well yet again but a portfolio built on lousy fundamentals has much less margin for error. This doesn't have to be the worst thing in the world as long you you understand the fundamentals of what you're buying and the lack of financial underpinning.

Happy Patriots Day! Of course that means the Red Sox play at 11am local time as part of Boston Marathon Day.

The picture is of the "painted ladies" in San Francisco from a link that my brother sent with a bunch of pictures from back then.