The Swiss Franc and PRPFX

The big financial news this past week was the announcement by the Swiss National Bank (SNB) that it would drop its peg to the euro.  The SNB announced this peg in September 2011, where it would not let the franc rise against the euro.  The peg was set at 1.2 francs per euro.

In order to maintain this peg, it meant that as the European Central Bank depreciated the euro by creating money out of thin air, the SNB had to essentially do the same thing.  The SNB, over the last 3 years, has had to buy up euros, mostly with newly created francs.

While this temporarily helped exporters in Switzerland, it hurt all consumers in Switzerland by making things more expensive.

This past week was the final straw, as the SNB realized that it wasn't up to the massive monetary inflation that would be necessary to keep up with euro, particularly with the anticipation that the European Central Bank is about to announce a massive monetary inflation scheme.

It is good news for most of the Swiss that the SNB has dropped this ridiculous peg.  The franc has been an historically strong currency, but its reputation was evaporating quickly before this past week.

The announcement will mean several companies and investors will be severely hurt or bankrupt, but that is because they were betting on the continued peg.  The "carry trade" - where investors would borrow francs at low rates and exchange them for other currencies that pay higher rates - was a popular thing, but it will now mean a lot of pain for those who tried it and now have to convert back to francs.

The SNB never should have attempted its policy, as it can now see.  But at least it is abandoning this bad policy, even though it will hurt some people in the short run.


My favorite mutual fund is PRPFX.  It somewhat mimics the permanent portfolio that was advocated by Harry Browne.  I recommend that investors put a minimum of half of their financial assets in a permanent portfolio setup.

I say that PRPFX "somewhat mimics" the permanent portfolio because it does stray from the original formula.  My biggest criticism of PRPFX, especially over the last few years, is its holdings of Swiss francs.  About 10% of the fund's assets are invested in Swiss assets.

This doesn't make a lot of sense to me because gold is in the portfolio and is supposed to protect your portfolio from dollar depreciation.  You shouldn't need to invest in foreign currencies.

This was made worse in 2011 when the SNB announced its peg to the euro.  I don't understand why the managers with PRPFX kept Swiss francs as part of the portfolio.  It may as well have invested in euros, at least up until this past week.

Well, things have just gotten a bit better.  It is no surprise that PRPFX did well last week with the SNB announcement.  I still think the fund should get out of the franc, as it is really speculation to buy foreign currencies.  Again, the significant gold portion should protect your portfolio against massive inflation.

At least now I feel a bit more comfortable recommending PRPFX.  While it is still far from perfect (nothing is perfect), it is a good option for investors looking for wealth protection and growth, without having to buy the individual pieces of a permanent portfolio.  It also does the rebalancing for you.

I don't expect any more major announcements from the SNB, but the market will have to find the new exchange rate for the franc.  There may be some more volatility in the short run.

Overall, this is good news for people living in Switzerland.  It is also good news for those invested (or wanting to invest) in PRPFX.