Tuesday, June 26, 2012

Performance Review of PRPFX

I am a big proponent of the permanent portfolio, as described in Harry Browne's book Fail-Safe Investing.  I believe it, or something similar to it, should be the rock of everyone's portfolio.  It should be your safety, even though nothing is entirely safe in this world.  It should be your home base.

The permanent portfolio is simple.  It is made up of gold, stocks, long-term government bonds, and cash (or something similar to cash, like a money market fund).  These should be weighted approximately equal at 25% each.  If one asset class strays too far outside of a range, then the portfolio should be rebalanced to get you back to an approximate 25% each.

An alternative to the permanent portfolio itself is a mutual fund.  The trading symbol is PRPFX.  It is designed similar to the permanent portfolio.  In fact, it is called the permanent portfolio fund.

I like PRPFX because it is simple and also because it keeps you disciplined.  It doesn't tempt you to speculate and favor one asset class over another.  That can be very tempting to do in today's environment.  My suggestion is that if you think we will see big inflation in the near future and you think gold and silver will do really well, then speculate in gold and silver investments outside of your permanent portfolio portion.

I also see a downside to PRPFX.  I have discussed this before.  I don't like that it strays from the originally suggested permanent portfolio, particularly with its investments in Swiss francs.  PRPFX has the following target percentages:

20% in gold
5% in silver
10% in Swiss franc assets
15% in stocks of U.S. and foreign real estate and natural resource companies
15% in aggressive growth stocks
35% in dollar assets

I have never really liked the portion in Swiss franc assets because the gold portion is already there to protect you from a depreciating U.S. dollar (assuming you are an American and investing dollars).  While the Swiss franc has historically been a strong currency, it is still a fiat currency.  This was shown last year when the Swiss central bank announced that it would peg the franc to the euro.  This has been part of the reason that PRPFX has struggled recently.

In 2011, PRPFX went up just 2.13%.  This was during a time of relatively low price inflation, but it is still a poor performance considering that the U.S. economy was not officially in a recession during that time.  PRPFX went down 8.36% in 2008.  It was the only down year in the last 10 years.  In some ways, this was its strongest year, at least relative to everything else.  Stocks and gold took a big fall in late 2008, although bonds did fairly well.  PRPFX did its job in 2008 in the face of a recession.  It followed with really strong years in 2009 and 2010, both up about 19%.

As of this writing, the year-to-date performance for PRPFX is flat.  This means you have actually lost a little bit of money to price inflation.  The 5-year average return is still almost 8%, which is considerably good in this economic environment.

In conclusion, I don't like the Swiss francs in PRPFX, and the mutual fund has not performed all that well in the last year.  However, unless you go through the trouble of setting up your own permanent portfolio (which I think you should), then PRPFX is still probably the next best alternative.  There is a lot of uncertainty in the economy right now and it is hard to say if we will go into a recession, depression, or inflation, or maybe all of the above.  Keep your money as safe and sound as you can.

3 comments:

John (Ad Orientem) said...

I concur with most of your points. Ironically I just posted on the permanent portfolio on my own blog a couple of hours ago. PRPFX is in my view the best 2nd choice out there. The 4x25% is the optimum choice but there are people who just don't want to deal with investing but who understand the need to have money salted away. PRPFX serves those people quite well.

The asset allocation in PRPFX actually reflects one of Harry Browne's earlier incarnations of the PP. It is weighted towards inflation and harry was a farily big inflation hawk through most of his life. I think it took him a while to embrace the need for equal weighting for deflationary hedges. But PRPFX is weighted with inflation in mind and it is underweighted in dollar assets. That is one reason why it underperformed the 4x25 PP back in 08 but it also has out performed the 4x25 PP for most of the decade because the dollar was relatively weak during that period.

Swiss Francs were originally put into PRPFX because Harry thought that this was the closest thing to a sound money currency in the world. The Swiss Franc was the last currency to abandon links to gold which it did only in 2000.

To my mind PRPFX has two problems. First it is an actively managed mutual fund that charges fees and expenses about 3x higher than what you would pay using a 4x25 PP. Those fees will seriously detract from your long term returns. The second problem is it's underweighting in the dollar for deflation. This can probably be cured by taking perhaps 10% and putting that into EDV which a bit like long term treasuries on steroids.

I guess that in conclusion PRPFX is best in breed if you must go with a managed mutual fund. Over the long term your not likely to get burned too badly. And in the event of a nasty inflation you will almost certainly outperform the 4x25 PP. But if we are heading into a deflationary depression, and I think that a reasonable argument could be made to that effect, PRPFX will not hold up that well.

Unknown said...

I'm just curious about something. Does this mean that you put 100% of your investments into PRPFX?

LIBERTARIAN INVESTMENTS said...

John: Thanks for the addition to my post. I generally agree with all of your points. I think the PP still has a slight bias towards inflation, but not as much as PRPFX. However, I think this is good because you want to get bigger returns during inflationary periods so that your real returns are steady.

For the second commenter, I do not put 100% into PRPFX. I don't put everything into the PP either. I like to speculate a little. But I do use PRPFX for convenience, particularly in my 401k.