David, I 100% with your rant regarding PRPFX, but I found the concluding portion of your analysis disappointing:
"Second, a permanent portfolio has a negative correlation with interest rates. That is, when interest rates fall – as they have for 30 years – the funds return rises. When interest rates rise, the returns fall. Because PRPFX was launched after the Volcker-induced spike in rates, it has never had to function in a rising rate environment. Third, even with favorable macro-economic conditions, this portfolio can have long, dismal stretches. The fund posts its annual returns since inception on its website. In the 14 years between 1988 and 2001, the fund returned an average of 4.1% annually. During those same years inflation average 3% annually, which means PRPFX offered a real return of 1.1% per year.
And, frankly, you won’t make it to any longer-term goal with 1.1% real returns."
It is true as you noted that PRPFX has never had to function in a rising rate environment. However, the returns of Harry Browne's PP {25% invested in each of stocks, LT bonds, gold/precious metals, and cash} from 1970-1979 can be determined. I don't have the exact numbers {hopefully someone can supply them), but annual returns for this period were approximately:
S&P 500: 5.5%
LT Bonds: 4%
Gold (London Fix): 25%
Cash (30-day T-bills): 6%
PP: 10.5%
Inflation: 7%
Secondly, the fact that PRPFX couldn't keep up with the S&P 500 from 1988-2001 when stock market returns were "steroid-enhanced" by leverage, derivatives, and Fed pumping is probably (as Bill Gates loved to say) more of an feature than a bug.
Comments
The evidence for a negative correlation between interest rates and a Permanent Portfolio (about -.16) comes from the Considine analysis, which I provided the link to. He has rather better credentials than I do and made what seemed to be a valid argument.
I wasn't particularly complaining about the ability of the Permanent Portfolio of make a 100% equity portfolio; long-term simulations point to returns closer to a traditional 60/40 hybrid. My only argument is that you can't depend on the Portfolio to outperform its long-term projections (Considine and Bernstein seem to agree on projected nominal returns around 6%) and you might need to endure the same long, grinding bear market in its asset classes that stock investments have in theirs.
Mostly a "look carefully before you leap" sort of note.
David
FYI, at the end of 2008 the Crawling Road blog had a look at PP returns from the 1970's on at http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/#comments
Crawling Road's analysis has the PP annual return from 1974-2008 at over 9%, just behind the Total Stock Market's annual return yet with much less volatility.
Considine seems to be saying the coming next few years will see high inflation and rising interest rates, so LT bonds will fare poorly. That makes sense. However, he also seems to think gold will not fare well. He ascribes the interest in gold of the past decade or so as the product of a fear of investing in equities. He ignores the interest in gold that has arisen from concerns over U.S. dollar debasement. Bernstein's article did note, "During the nine years between 1973 and 1981, inflation ran at an annualized 9.22%; the TPP returned 12.06% versus only 6.35% for the conventional portfolio, which also had a higher SD to boot."
But we know the current environment is kind of an AOS (all options stink) one. If the U.S. dollar remains the "best looking horse at the glue factory", then inflation may not really get boiling as soon as it's expected. LT bonds may fare better than Considine expects.
We have used PRPFX for a long time as a core holding in client accounts. Yes, Mr. Cuggino has not had to operate in periods of rising interest rates. But I would be very hesitant to suggest he is incapable of structuring the fund's bond holdings to reduce interest rate exposure. He has already shortened duration over the last few months. And gold, adjusted for inflation, is still below its 1980 price level. Does that mean $2,000 per ounce is around the corner? No, but it tells us that it could have a long ways to go, especially given all the uncertainties in the world, and the fact that many central banks (especially China) are selling dollars and buying gold.
As with any fund that has done well over the last 5-10 years, investors would be wise to capture gains (not get out of these funds, but at least reduce exposure to original investment dollars). That, in itself, could help to reduce potential downside risk.