The Permanent Portfolio concept was introduced by Harry Browne (a libertarian presidential candidate). Harry divided the economy into four basic environments and recommended one specific asset class for each of the four economic environments. See below for a breakdown.
|Economic Environment||Asset Class||Percent of Portfolio|
|Deflation||Long Term T-Bonds||25%|
There are two ways to invest directly into the permanent portfolio concept. The Permanent Portfolio mutual fund (MUTF:PRPFX) run by Michael Cuggino, and the new Permanent Portfolio ETF (NYSEARCA:PERM). PRPFX and PERM are managed differently. We will examine their holdings based on each of the four economic environments.
Neither PRPFX nor PERM matches the original Permanent Portfolio concept of a simple 25% allocation to Gold. PERM comes closest, with 20% of assets in Gold, and 5% in Silver. PRPFX has the same allocation as PERM, with the addition of 10% of assets in Swiss Francs. See below for an asset breakdown:
|Gold - 25%||Gold - 20%||Gold - 20%|
|Silver - 5%||Silver - 5%|
|Swiss Franc - 10%|
PERM's inflation portfolio will outperform the original permanent portfolio to the extent that Silver outperforms Gold. PRPFX will outperform PERM and the original permanent portfolio when Swiss Francs are outperforming Gold and Silver.
The inflation portion of PRPFX is a passive bet that the Swiss Franc will outperform Gold and Silver when comparing PRPFX to PERM and the original Permanent Portfolio. PERM is a passive bet that Silver will outperform Gold relative to the original Permanent Portfolio. The biggest difference between PERM and PRPFX is that PERM will hold ETFs or ETCs of Gold and Silver, while PRPFX holds Gold and Silver bullion and Gold coins.
Deflation & Recession
Deflation and recession are lumped together due to PRPFX's mixed bond portfolio. We will analyze deflation and recession together here for simplicity but ideologically they are separate.
|LT Treasuries- 25%||Dollar Assets - 35%||LT Treasuries- 25%|
|Cash - 25%||ST Treasuries - 25%|
PERM exactly matches the original permanent portfolio's allocation to long term treasury bonds. PERM has substituted short term treasuries with maturities less than 3 years for cash. This gives PERM a slightly higher yield than the original permanent portfolio, while maintaining the spirit of the cash holdings.
PRPFX has a lower allocation to deflation and recession holdings, implementing just 35% of the portfolio versus 50% for the original permanent portfolio and PERM. The Swiss Francs held in the inflation portion of the portfolio help explain this differential as they could be added to the cash portion of the portfolio instead of inflation. PRPFX holds treasury securities of varying lengths and corporate bonds. The addition of corporate bonds will cause this portion of PRPFX's portfolio to outperform PERM and the original permanent portfolio when corporate bonds are doing better than US treasuries. It will underperform when the reverse is true.
The prosperity allocation in the original permanent portfolio is 25%. PERM stayed with the original 25%, while PRPFX holds 30% in prosperity related stocks. We assume real estate and natural resource stocks to be part of the prosperity portfolio, although they should offer inflation protection as well due to the nature of their businesses.
|US Stocks - 25%||Growth Stocks - 25%||US Large Cap - 9%|
|Real Asset Stocks - 15%||US Small Cap - 3%|
|International - 3%|
|US Real Estate - 5%|
|Nat. Resource - 5%|
In the table above, real asset stocks are both US and international real estate and natural resource stocks. The primary difference between PERM and PRPFX is that PERM embraces indexing and holds broad market ETFs while PRPFX employs fundamental analysis to select their securities. The biggest differentiator between PERM and PRPFX will be the ability of the PRPFX investment team to outperform market indexes with their stock selections. Additionally, PRPFX has a 15% allocation to real estate and natural resources stocks, while PERM has a 10% allocation.
PERM and PRPFX follow the same underlying philosophy; invest for different economic regimes. They have slightly different target allocations. Their primary difference is active versus passive management. PERM invests primarily using ETFs, while PRPFX holds individual securities. The better long-term investment depends upon PRPFX's management team to add value beyond the simple allocation guidelines of PERM. Unfortunately, PERM has not been around long enough to create a historical performance comparison.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.