The OG Alt?

Remember the Permanent Portfolio (PRPFX) mutual fund? It's been a while since we talked about it. I got a quarterly email from them in my day job inbox and thought we could revisit it and find some context for the fund in our recent discussion about evolving portfolio management.

The fund is influenced by the Permanent Portfolio devised by Harry Browne 40-ish years ago. The Browne version statically allocates 25% each to stocks, long bonds cash and gold. PRPFX is clearly influenced by that but the allocation is not static. Per the current fact sheet, as of June 30th it allocated 32% (benchmark = 35%) to domestic bonds of varying types, 20% (20%) in gold, 17% each (15% bench for both) to "aggressive growth stocks" and "real estate and natural resource stocks," 8% (10%) in Swiss franc assets and 5% (5%) in silver. All those are rounded in case it doesn't exactly equal 100. 

So influenced by Browne but not the same and not static. As we always try to assess, what does that mix look like, is it a proxy for something else, what role can it play in a diversified portfolio? 

 

The chart compares it to the S&P 500 and Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio. For two years it tracked closely to VBAIX and the chart captures that it has gone down less than VBAIX in the bear market, maybe helped this year by gold and some of the resource stocks. I included the S&P 500 in these charts, not to benchmark to the index but because how much we are or are not diversifying away from 100% equities is what this exercise is all about.

 

For eight-ish years it lagged VBAIX pretty badly probably for underweight exposure to plain vanilla stocks. I would note that for several years toward the left side of the chart the fund tracked closely to gold so maybe it was very overweight gold back then, but not sure about that. 

Could PRPFX be some sort of proxy for Aggregate Bond Index funds? It's got a lot in bonds and cash.

 

Well....no.

Here's something though. It looks a lot like AQR Diversified Arbitrage Fund (ADAIX) which combines convertible arbitrage, merger arb and event driven. ADAIX is an alt that is intended to not really look like stocks, more like absolute return with less volatility than equities. 

 

The beta of each fund is essentially the same and the standard deviations are close but not identical. They clearly correlate to each other. PRPFX has a correlation to the S&P 500 that been hovering close 0.75 for a while per ETFReplay. It doesn't have data for ADAIX but it has to be close to that of PRPFX. So it tracks the S&P 500 but with much less volatility I'd say. 

So back to the title, it might be an alt much like other multi-asset funds. It's not going to keep up with equities and hopefully will go down less in bear markets as has been the case this year. If those last two sentence are correct, maybe that's a top down observation. What about the bottom up? Do you want that much in gold and bonds? If someone wanted 5% in gold then a 20% allocation to PRPFX would give them that as well as 6% of their bond allocation. They could then blend that 6% with bond exposures from other funds or it could simply be viewed for the alt effect it should give to the portfolio as described above.

I question whether bonds have now transitioned to become a source of increased two way volatility in a way that we haven't seen in ages, certainly not my time in markets which goes back to the mid-80's. The general effect has favorable attributes in my opinion but I do not want to rely on an alt strategy that assumes bonds will behave like they always have in case how they used to behave changes as I think it might.