Permanent Portfolio's Mix Excels in Tough Times
Michael J. Cuggino’s Permanent Portfolio mutual fund has stuck with the same asset mix for almost 30 years—a combination of gold, silver, the Swiss franc, stocks, and bonds meant to guard against inflation and recession. It hasn’t always been a recipe for success. For years the fund languished while investors chased surging stock and bond markets. At the end of 2001, after stocks had rallied seventeenfold over two decades, Permanent Portfolio had assets of $52 million. Ten years later, the fund is beating all rivals, and assets have surged to $15.6 billion. “This fund has been in the right place at the right time,” says Janet Yang, a Morningstar analyst. “The whole story here has been asset allocation.”
The Permanent Portfolio gained an annualized 10.5 percent in the five years ended Sept. 13, the best return among 2,153 balanced funds tracked by Morningstar, most of which divvy their assets among stocks, bonds, and cash. It was started in 1982 by Terry Coxon, who co-wrote Inflation-Proofing Your Investments: A Permanent Program That Will Protect You Against Inflation and Depression with Harry Browne the year before, as a way to put the advice book’s theories into practice. The goal was to use assets that rise and fall independently to allow investors to keep pace with inflation in any economic climate. “We wanted a way to deal with uncertainty,” says Coxon, who left the fund in 2003.
Cuggino, 48, joined the San Francisco-based fund in 1991 and became manager in 2003. He aims to keep 20 percent of its assets in gold, 10 percent in a blend of Swiss francs and Swiss government debt, and 5 percent in silver, with the rest in stocks and bonds (see chart, right). He rebalances the fund periodically to keep those allocations in line.
The fund couldn’t keep pace with the bull markets for stocks in the 1980s and 1990s. It gained an average of 4.4 percent annually in the 10 years ended Dec. 31, 1999, compared with 18 percent for the Standard & Poor’s 500-stock index, according to data compiled by Bloomberg. The trend reversed with the 2000-02 bear market. Permanent Portfolio averaged annual returns of 12 percent in the decade ended Aug. 31, 2011, compared with 2.7 percent for the S&P 500. Gold appreciated at a 21 percent annual clip and silver gained 26 percent a year over that period. Treasuries returned 5.5 percent a year, based on Bank of America Merrill Lynch’s Treasury Master Index. The Swiss franc more than doubled in value against the U.S. dollar.
Those gains put Permanent Portfolio in a precarious position: With so many of its assets at highs, the fund may find it hard to keep up the pace of recent gains and is vulnerable to a sharp fall. “I wouldn’t expect to make money with those assets unless something bad happens,” says Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, where he helps manage $55 billion. Cuggino has no plans to change the formula. “We don’t think human beings are good at predicting the future,” he says. Throughout his tenure he has ignored suggestions from shareholders in the fund and fellow investment advisers to alter the allocation of assets. Cuggino says he was advised earlier this year to cut his holdings of U.S. Treasuries because interest rates supposedly couldn’t go lower. The yield on the 10-year Treasury note has fallen from about 3.7 percent in February, sending prices 15 percent higher. Says Cuggino: “The historical results tell us that this fund will hold its own no matter what lies ahead.”