As a financial professional, I ask a lot of people for their views on the stock market, economy and where they think we're headed. Not surprisingly, no one says we're on the cusp of another big bull market. In some cases, they say things have gotten better and the economy could very gradually improve in four or five years.
But the response I get most is something to the effect of, "The economy is in bad shape now and it's going to get worse -- much worse. And there's no end in sight to the gloom."
At this point, the conversation often turns to alternative investments. These includes metals, commodities and real estate -- segments investors tend to favor in a down economy for the perceived safety and ability to maintain value. Of course, there are many ways to invest in them. But to help simplify things, I've found an attractive "all-in-one" fund geared toward investors who are bearish on the economy.
It's called the Permanent Portfolio (Nasdaq: PRPFX), a $17-billion dollar open-ended mutual fund that focuses on gold and silver, mining stocks, and shares of real estate companies and natural resource producers. Because of this, the fund is a fine one-stop shop for the most popular alternative investments. Potential investors might also find comfort in the fact that the fund has limited direct exposure to Europe and, by extension, its debt crisis.
Because management believes it's impossible to predict price movements for any asset, it sticks as close as possible to a predetermined asset mix (the fund's strategy since its Dec. 1, 1982, inception). This includes allocations of about 20% to gold, 5% to silver, and 15% to real estate and energy/natural resources stocks. 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 FedEx Corp. (NYSE: FDX) and Walt Disney Co. (NYSE: DIS). The mining firm Freeport-McMoran Copper & Gold (NYSE: FCX), and oil and gas producer Apache Corp. (NYSE: APA) 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 (REIT) AvalonBay Communities Inc. (NYSE: AVB) and the commercial property REIT Boston Properties Inc. (NYSE: BXP).
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 any time 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.