2012 Permanent Portfolios Performance Review And Outlook

by: MyPlanIQ

Now that the dust of 2012 has settled, it is time again to review how popular permanent portfolios performed in 2012:

Ticker/Portfolio Name 2012 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
SPY 16.0% 16.2% 130.1% 10.7% 56.8% 2.7% 3.9% 6.8% 26.8%
Permanent Global Portfolio ETF Version 5.6% 4.2% 54.6% 7.6% 81.7% 6.7% 53.6%
PRPFX 5.5% 4.4% 58.4% 8.1% 87.0% 7.2% 53.1% 10.1% 84.1%
VBINX 10.6% 11.0% 169.0% 9.0% 85.5% 4.6% 24.2% 6.9% 47.7%
Harry Browne Permanent Portfolio 5.5% 4.5% 85.7% 9.0% 143.4% 7.1% 85.5% 8.4% 103.1%
PERM* 2.3%*

*: PERM's inception date is 2/9/2012

NOTE: 1yr, 3yr, 5yr and 10 yr numbers are up to 1/8/2013.

AR: Annualized Return

Harry Browne's permanent portfolio consists of the following 4 assets:

  • 25% US Equities (SPY or VFINX)
  • 25% Gold (GLD or IAU)
  • 25% (Long Term) Treasury Bonds (TLT or IEF or VUSTX)
  • 25% Cash

See here for its long term performance.

PRPFX is a mutual fund that models Barry Browne's permanent portfolio concept but has more asset exposures in each of the 4 major asset classes.

PERM is a new ETF that extends equity exposure to include international stock exposures. Since it has incomplete history in 2012, we also include a portfolio Permanent Global Portfolio ETF Version we maintain that adds Vanguard Europe Pacific ETF VEA and Vanguard Emerging Market Stocks VWO to the aggressive growth stock category. Each of VTI, VEU, VWO is allocated 5% of the portfolio. Note the portfolio allocates 10% in natural resources (BATS:IGE) and 5% in REITs (NYSEARCA:IYR). For more information, see the description.

The performance of these permanent portfolios lagged behind Vanguard standard balance index fund (VBINX returned 11% in 2012). The performance was affected by Long Term Treasury Bonds 's 2.4% and Gold 's 6.6% returns in 2012.

Going forward, we make the following observations

  • U.S. Equities: with recovery firming, this asset class can yield higher return in 2013. However, there are many concerns for stock valuation and in general, anemic global economic growth.
  • Treasury bonds: long term bond rates are historically low and it is hard to imagine how farther they can go lower (bond price has an inverse relationship with bond yield). However, if deflation pressure persists, this asset class can still deliver positive returns. What is more, they serve as a disaster hedge when risk asset markets experience serious downside. A short to medium term bond funds such as SHY or IEI might be preferred.
  • Gold: gold historically serves as an inflation hedge. The major concern is that gold has risen so much (in the last 10 years, annualized return 16%) that it is ahead of the forthcoming inflation. Gold is better treated as inflation expectation hedge instead of actual inflation hedge.
  • CASH: this is the worst asset class that delivers no return. Some short term high grade investment bonds (such as VCSH or BSV) or bank loans might be good candidates for this asset class at the moment.

While it might make sense to tweak fund exposures in each asset class to accommodate prevalent economic and market conditions (for example, shift bond exposure to shorter term duration or maturity), investors should remember that permanent portfolios are designed for all weather conditions. Historically, investors are proven wrong again and again for their strong hunch on asset class outlooks. These portfolios should be treated as an anchor in one's overall investments.

Disclosure: I am long GLD, TLT, SPY, VWO, IYR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.