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A little wind got taken out of the sails of the market's bulls last week, with the Dow Jones Industrial Average ($INDU) finishing lower every day. One fund that didn't notice was Permanent Portfolio (PRPFX).
Welcome to a home for your serious money -- the money you can't afford to lose. Launched in 1982 as an antidote to that most dreaded of economic conditions, stagflation, Permanent Portfolio has lost money in only three years, mostly recently 1994.
It sailed through the post-2000 tech-crash turmoil like it didn't happen, racking up double-digit gains in three of the past five years. This year, as of Nov. 1, it's ahead 11.4%.
If you could afford a numbered account in a Swiss bank -- and because of six- or seven-digit minimums, you probably couldn't -- this is how your money would be managed. The approach is absolutely immune to fashion.
"We're 20% gold, 5% in silver, 10% in Swiss-denominated assets, like government bonds, 15% in U.S. and foreign real estate and natural resources, 15% in U.S. growth stocks and 35% in U.S. Treasurys and high-growth corporate bonds," says manager Michael Cuggino.
His turnover ratio last year was 1%, implying an average holding period for his securities of 100 years. The name "permanent" was not lightly chosen.
Morningstar stopped covering this fund in the mid-1990s, warning that it would lag in that raging bull market, as indeed it did. But today Morningstar accords it five stars, its top ranking, and reports that it has performed among the top 5% of similar funds over the past one, three, five and 10 years. By no coincidence, the word "stagflation" has begun creeping into investors' vocabularies, such as in this column by my colleague Jim Jubak.
Despite last week's tempest, I remain mildly bullish, and I'm certainly not a gold bug. But Permanent Portfolio is the answer to this perpetual question: What if I'm wrong? Like many a poor schmo, I blundered through the bear market without a shred of self-doubt, and my personal portfolio was skinned alive. If only I'd had this fund tucked away like the life preserver it is designed to be.
The hazards of playing it safe
"That's the whole idea behind Permanent Portfolio," says Cuggino, who was in high school when the fund was designed but has managed it for the past 15 years. "We don't believe we can accurately predict the future, so for that core part of an investor's holding, we believe that rather than basing (decisions) on forecasts and predictions, they should base it on accepting a wide range of alternative asset classes."Designing a contrarian investment portfolio is a lot harder than it sounds. At the same time Permanent Portfolio was being launched, the fund now known as Gamco Mathers (MATRX) was being transformed from a traditional growth to an anti-stagflation portfolio.
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Gamco Mathers' manager, then and now, Henry Van der Eb Jr., was traumatized by the bear market of the 1970s and recast his fund for defense. Today it is 89% cash, with the balance in a handful of stocks such as CACI International (CAI, news, msgs) and New York Community Bancorp (NYB, news, msgs).
Over the past three, five, 10 and 15 years, Gamco Mathers has ranked dead last in Morningstar's conservative-allocation group, the same fund classification that includes Permanent Portfolio. These are funds that hold at least half of their assets in cash and bonds. In the past year, Gamco Mathers has risen to the 98th percentile, two notches above the worst.
Van der Eb is also a heavy trader; Morningstar pegs portfolio turnover at 149%. Because of its small asset base, $32.3 million, Gamco Mathers' expense ratio is a punishing 2.14%, which is nearly half as much as Van der Eb is able to earn on his cash. Permanent Portfolio is not large, with assets of $657.5 million, but its expense ratio is 1.35%.
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