This Red-Hot Fund Could Suddenly Turn Cold
Seeing the compelling results, investors have poured into the fund. Permanent Portfolio's assets climbed from $333 million in 2005 to $17.2 billion now. But the new shareholders are not likely to be pleased with their investment. After enjoying an epic hot streak, the fund seems likely to be faced with a period of mediocre results. The problem is that the fund depends heavily on Treasuries, precious metals and Swiss francs -- assets that could be peaking after long rallies.
As the name suggests, Permanent Portfolio is designed to protect shareholders over the decades under a variety of harsh conditions. To accomplish the mission, portfolio manager Michael Cuggino maintains a rigid strategy. As protection against recessions and deflation, he always keeps about 35% of assets in Treasuries. To guard against inflation, the fund has 5% in silver, 10% in gold, and 15% in real estate and natural resources stocks. About 10% goes into Swiss francs, a rock-solid currency that often rises when the dollar falls. The fund also has 15% in growth stocks that should shine when the economy expands.
While the formula has proved ideal for the unsettling markets of the past decade, there are many indications that the good news may be ending. During the past month, the fund lost 1.6% and trailed 98% of its peers. Most portfolio assets sank -- and nearly all of the holdings seem overpriced and susceptible to more losses.
The biggest loser lately has been gold. During the past month, precious metals funds dropped 13.4%. That represented a sizable turnaround from the showing of recent years. During the past decade precious metals funds returned 18.7% annually, ranking as the top-performing category tracked by Morningstar. Frightened by volatile stock markets, investors retreated to gold, and prices reached record levels. But in recent weeks, the gold price has softened as investors became more confident about the economy and shifted to stocks. If the economy keeps growing, investors may continue moving away from gold. Eventually precious metals could fall back to normal levels, causing big losses for Permanent Portfolio.
Another weak holding lately has been Treasuries. During the past month long government funds lost 2.6%. Part of the losses occurred after the Federal Reserve made clear that it did not plan to make any more Treasury purchases under its quantitative easing program. Since 2008, the Fed has bought more than $2 trillion of Treasuries and other securities. That has helped to boost prices and lower yields. If the Fed stays off the playing field, bond prices could sink sharply.