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Gold and the Permanent Portfolio in Australia

Monday, October 28, 2013 20:42

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On my way back from the Gold Symposium a couple of weeks ago I caught up with Davin Hood who runs the Cor Capital Fund, which is based on Harry Browne’s Permanent Portfolio investment strategy (Craig Rowland’s blog is a good source for information on this strategy). David’s view (see his latest Quarterly Investor Report) is that “this is not a normal business and credit cycle and that global central bank policy will have unintended consequences that may result in asset bubbles, volatility and losses for concentrated investors and speculators” and as such, the Permanent Portfolio approach that Cor Capital employs covers these risks by having a “portfolio prepared for a range of outcomes at all times”.

This agnostic approach is best demonstrated by Davin’s answer to the question of why the gold price has not responded to the recent US government debt ceiling drama: “We don’t know but we don’t really care. It is only ever the fast money that rotates into or out of an asset in anticipation of others doing the same. … In an environment where there is a loss of confidence in the US dollar and US bonds owning a hard asset that is liquid will protect the wealth of our unit holders, even when taking potential Australian dollar appreciation into account. Within the Cor Capital Fund this is of course not a ‘bet’ we are making but just a risk we are covering.”

Cor Capital follows the strategy of a fixed 25 per cent in each of Australian Equities, Australian Fixed Interest, Australian Cash and Gold (unhedged, and held at the Perth Mint) but has a much tighter rebalancing band of +/-1.5% or more compared to +/-10% under Harry Browne.

Most of the work done on how the Permanent Portfolio performs is done in a US context (like Craig’s book, also worth reading if you are interested in the concept) so I was interested to see that Davin has done a back test of the strategy in the Australian context which shows since 1970 (see page 10 of the Information Memorandum):

	Cor Strategy	Australia Equities	Australian Cash
Annual Average Return	10.5%	10.6%	9.1%
Std. Dev. of Annual Returns	8.9%	23.9%	4.5%
Value of $1 invested in 1970	$62.12	$66.20	$37.27

This is similar to the US studies, which show a good, low volatility return. Now I’m not making a recommendation to invest but I think this strategy has merit and is worth investigating. Even if you are not comfortable with the 25% allocations and have your own allocations between asset classes, the idea of forced rebalancings back to your target allocations is a good discipline to follow IMO.

Unfortunately, Cor Capital is currently limited to “sophisticated investors”, which means an initial investment of $500,000 (lesser amounts may be accepted but you would have to demonstrate net assets of at least $2.5 million or gross income of $250,000).

Source: http://goldchat.blogspot.com/2013/10/gold-and-permanent-portfolio-in.html

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