To protect against periods of deflation and high stock market volatility, the fund keeps about 35% of assets in U.S. Treasuries. It holds roughly 10% in the Swiss franc to protect against the weakening U.S. dollar.
Management also allows for some possibility of future growth in traditional stocks, so it allocates about 15% of assets to shares of high-quality growth companies like
. The mining firm
Freeport-McMoran Copper & Gold
and oil and gas producer
are examples of the energy and natural resources stocks in the portfolio.
Real estate holdings include firms like the multi-family apartment real estate investment trust
and the commercial property REIT
Between high-quality growth stocks, REITs and energy/natural resources stocks, equities currently make up about $5.5 billion, or 32% of the overall portfolio (very close to the goal of 30%). Of that $5.5 billion, just 2%, or $110 million, is in European equities -- but only those of the United Kingdom, not the countries hardest hit by the debt crisis such as Greece and Spain. A mere 1% ($55 million) is in emerging markets, mainly Latin America, which is in good shape economically.
Notably, despite Switzerland's economic strength relative to other European countries, the Permanent Portfolio's 10% allocation to the Swiss franc may not be as good as a weak dollar hedge as it has been in the past. This is because Switzerland's central bank has been working to prevent further appreciation of the Swiss franc. It has vowed to continue doing so to avoid the adverse effects a stronger franc might have on the Swiss economy, such as weaker corporate profits and reduced domestic manufacturing ultimately leading to higher unemployment.
Risks to Consider:
Despite being perceived as safe, many alternative investments are risky -- especially now that they've seen such long run-ups such as gold and REITs. With government bond yields at all-time lows, even U.S Treasuries could take a pretty nasty tumble if interest rates rise.
Also, if the economy improves, then the fund could suffer big losses because investors might ditch alternative investments en masse and start piling back into stocks.
Action to Take:
The Permanent Portfolio's approach has paid off nicely in what has been a generally nasty economy since the financial crisis of 2008. Indeed, the fund has delivered 7.5% a year during the past five years, compared to annualized losses of 0.3% for the S&P 500. Its expense ratio of 0.7% is reasonable.
Going forward, the fund could keep soundly beating stocks if the economy deteriorates further, as so many investors fear. But it's hard to tell whether the economy will improve anytime soon because we're basically in a holding pattern economically.
So my solution is to cover your bases by being diversified, holding traditional and alternative investments in proportions that are appropriate for you. For exposure to alternative investments, the Permanent Portfolio is clearly a top-notch choice.
Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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