The Permanent Portfolio (PRPFX): An Interesting Alternative

Some of you may have heard of the Permanent Portfolio (PRPFX), an unorthodox mutual fund that bears more resemblance to a modern university endowment (such as the famous Yale endownment) than a traditional retail mutual fund.  What’s so unusual about it?  For starters, the fund has only half its assets in traditional mutual fund asset classes like stocks and bonds.  The other half is invested in gold, silver, real estate, Swiss francs, and commodities.  In other words, this is a fund you’d expect to do very well during periods of inflation.

Like any good portfolio, the managers of the Permanent Portfolio don’t attempt to predict future returns of various asset classes.  Rather, they maintain a fixed allocation diversified broadly between uncorrelated asset classes.  According to the fund manager, the Permanent Portfolio’s target allocation consists of:

• 20% - Gold
• 5% - Silver
• 10% - Swiss Franc Assets (governemnt bonds, interest-bearing accounts, etc)
• 15% - US and Foreign Real Estate and Natural Resource Stocks
• 15% - Aggressive Growth Stocks (high beta, fast growers)
• 35% - US Treasury Bills, Bonds, Notes, and other dollar-denominated assets

Over the decade ending March 31, 2008, the fund returned 9.38% per year before taxes with a standard deviation of just under 7%.  This compares quite favorably with the overall US stock market’s 5% return and standard deviation upwards of 9%.  Viewing the fund’s 10 year chart, it’s clear the fund did not participate in the great bull market of the late 90’s and the resulting bust.  In fact, most of its outperformance can be attributed to its stable performance after the tech bust and the recent gold and commodities bull market.

Although quite tax-efficient (it’s managed with an eye towards tax efficiency), the expense ratio is a somewhat pricey 1.11% so I wouldn’t want to allocate the majority of my portfolio to it.  On the other hand, its low correlation with stocks and bonds make it a good diversifier.  Futhermore, the fund is an excellent hedge against inflation and adverse geo-political events.  I could easily see allocating 10-20% of my portfolio to the fund.