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Aug. 17, 2017, 5:09 p.m. EDT

Fear Trump, North Korea or an expensive stock market? This fund plays defense

The Permanent Portfolio might serve as a good hedge for a portion of your investments

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By Philip van Doorn, MarketWatch


Getty Images
Stock investors would breath a lot easier if both of these men were smiling.

If you are an investor who seeks to protect assets during a time of international uncertainty and what might be the late stage of a bull-market cycle, the Permanent Portfolio’s asset allocation might appeal to you.

There’s no shortage of reasons to be nervous, from President Trump’s war of words with North Korea and beyond, which worries MarketWatch columnist Howard Gold, to heady valuations that could be undone in the blink of an eye, as Mark Hulbert points out.

One way to play defense while still aiming for a return that is much better than cash is by investing some money in a diversified mutual fund that has relatively low exposure to stocks.

The $2.6 billion Permanent Portfolio /zigman2/quotes/205061618/realtime PRPFX -0.64%  is typically about 30% invested in stocks. It’s manager, Michael Cuggino, who is based in San Francisco, explained during a telephone interview that the fund’s objective is to greatly reduce price volatility through diversification, while providing a return in excess of inflation. So it’s not designed to outperform a stock index, such as the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.02% . It’s meant to serve as a hedge for a portion of your portfolio.

Here’s the fund’s asset breakdown as of June 30:

Here are the fund’s 10 largest holdings, among all asset classes, as of June 30:

Investment % of portfolio
Gold coins 11.9%
Gold bullion 9.7%
Silver bullion 5.4%
U.S. Treasury Bonds, 6.000%, maturing Feb. 15, 2026 4.6%
U.S. Treasury Bonds, 5.250%, maturing Nov. 15, 2028 4.6%
Facebook Inc. Class A 4.5%
Swiss Confederation Bonds, 2.000%, maturing April 28, 2021 4.1%
Swiss Confederation Bonds, 2.250%, maturing July 6, 2020 4.1%
U.S. Treasury Bonds, 6.250%, maturing Aug. 15, 2023 3.9%
Freeport-McMoRan Inc. 1.8%
Source: Permanent Portfolio Family of Funds

The S&P 500 trades for 20.7 times the past 12 months’ earnings. Valuations by this measure haven’t been this high since February 2004, according to FactSet:


FactSet

Then again, if you look at the chart, you can see trailing price-to-earnings valuations were much higher at the end of the dot-com bubble than they are now.

”Valuations are extended, but not outrageous,” Cuggino said. “Starting in the third quarter of last year, you have had several quarters of better than expected earnings growth,” he added.

Once again, this emphasizes that the Permanent Portfolio is meant to serve as a hedge for investors who want very low volatility, or for investors who are particularly concerned about high stock valuations or political or international instability.

Also see: Trump is right about record earnings — and these companies are getting even more profitable

Even though the fund isn’t designed to match the long-term performance of the S&P 500, we are showing 10-year total returns here to illustrate how much better the fund has performed during down cycles for stocks:

/zigman2/quotes/205061618/realtime
US : U.S.: Nasdaq
$ 45.03
-0.29 -0.64%
Volume: 0.00
Aug. 14, 2020
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/zigman2/quotes/210599714/realtime
US : S&P US
3,372.85
-0.58 -0.02%
Volume: 1.71B
Aug. 14, 2020 5:11p
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