Inflation is already at 5% and is likely to increase. Here’s a portfolio of 39-year-old survivors ready for a return to their glory days.


Is Michael J. Cuggino, seller of a fund designed to withstand inflation and other disasters, hoping for tough times ahead?

Perish thought. Here is his diplomatic take on the Federal Reserve’s protests that inflation is totally under control: “We hope they’re right.

But he adds: “We manage so that they are wrong.”

Hope for the best, prepare for the worst. Obviously, some investors share the sentiment. They put $ 2.9 billion in Cuggino’s permanent portfolio, which mixes a small amount of growth stocks with a large amount of defensive assets: short-term bonds, Swiss francs, precious metals and real estate investment funds.

These are troubling times. The government’s latest report recorded inflation of 5% in the 12 months to May, double the average rate of the past decade. Will the rate go down? This may not be the case. He could feed on himself.

If the spiral in prices and wages escalates, Cuggino, crying crocodile tears over the US economy, will likely do just fine. He made a small fortune in the last episode of Desperation on Wall Street. He could do another one.

The idea for the Permanent Fund dates back to Harry Browne, a minor celebrity among big money fans who was given a spotlight spot as the 1996 and 2000 presidential candidate on the Libertarian Ticket. Cuggino sums up Browne’s claim to fame: “He called the race for gold in the 1970s.”

Coming out of this golden era of precious metals, Browne came up with a formula for an all-weather portfolio that could survive inflation, recession, global unrest, and possibly even asteroids. It was beautifully simple. He called for allocations of 25% each in cash, gold, long-term Treasury bonds and stocks.

Some entrepreneurs with direct marketing skills have formed a mutual fund to implement the Browne philosophy. As an outside advisor to this company, Browne did not do any financial management; he was only the philosopher and the evangelist.

The Permanent Portfolio opened in 1982. The timing was not right. If she had started seven years earlier, she would have covered herself with glory. But 1982 turned out to be the start of a decades-long bull market in which silver and gold were a drag. The fund management company struggled to contribute assets.

A few years later, Michael Cuggino, a recent accounting graduate from Bentley College in Massachusetts, began auditing work in the Boston office of a company that is now part of Ernst & Young. He remembers, “They give you clients and say, ‘Here, kid.’ The fund was on my list.

Browsing through the books, the listener was captivated by what this client was trying to do: preserve the peace of mind of investors worried about prices, interest rates and recessions.

Cuggino, 58, looks back on his teenage years. He says, “I remember standing in line with my parents for gasoline to go to my hockey games. I remember the $ 800 gold, the Hunt brothers grabbing silver, the oil crises, short-term loan rates of 15-20%.

He also remembers recessions. “My father was a truck driver. Two of the companies he worked for went bankrupt.

At 28, Cuggino left E&Y to travel west, taking a part-time job as the fund’s treasurer while using the space in the fund operator’s office in San Francisco to hang a shingle. for a CPA firm. Over time, the CPA practice died out and Cuggino worked full time for fund managers.



The problem happened, courtesy of the Securities & Exchange Commission. In 1999, the government decreed that the owners of the fund management company had improperly charged fund shareholders for general and marketing costs. The legal setback had been brewing for a long time; an SEC report indicates that its genesis was in a red flag thrown a decade earlier by a keen-eyed auditor at Ernst & Young, one Michael Cuggino.

It was time for the owners to come out. They put the operation up for sale. It was not a plum. At the end of 2001, it had only $ 173 million in assets under management, spread across four funds: the original permanent portfolio plus separate portfolios for short-term treasury bills, bonds of companies and growth stocks. These sister funds still exist, but they never took off.

Other fund operators, according to Cuggino, were either uninterested or sincere about the intention to seize the assets and merge the funds into their own products.

Cuggino raised his hand as a buyer. If there was any resentment on the part of the owners of the management company over the audit that triggered their SEC puzzle, they swallowed it, and, in any event, legal power over the contract. management was in the hands of external filmmakers. They knew Cuggino and loved his pitch: he believed in Harry Browne’s investment philosophy and pledged to pursue it. A price tag was set in 2002, with the deal closing in 2003.

Cuggino deposited the money and issued a promissory note for the balance. What was the price? He won’t say it, but hints that it was not far from 1.5% of assets under management, which would be around $ 2.5 million.

If the business had gone wrong, the 39-year-old speculator would have lost his life savings. But 2002, unlike 1982, was a great time to sell a defensive fund. Investors, healing the wounds of the great crash of 2000-2002, were ready to sacrifice part of the rise in order to have a secure anchor.

In 2006, Harry Browne died at the age of 72 from Lou Gehrig’s disease. But even with the figurehead’s demise, the money poured in. At its peak in 2012, the Permanent family of funds had $ 18 billion in assets under management, 100 times the amount it had when Cuggino agreed to buy the company. Its annual revenue from management fees reached $ 130 million.

It’s life. A new bull market of low interest rates and buzzing stock multiples was underway. No one needed gold or silver. In the ten years up to June 16, Morningstar reports, the permanent portfolio generated a disappointing return of 5.4% per annum. For eight years, starting in early 2012, the fund suffered from a relentless exodus of clients. Assets fell 89%.

Then came the pandemic and the resurgence of worrying investing. The permanent portfolio’s 28% return over the past year puts it near the top of its Morningstar asset allocation category, and in each of the past four quarters, more money has come in than taken out.

The influx will likely accelerate if there is darker news for holders of long-term bonds, the kind that is being killed by rising inflation and interest rates. “There are two generations of investors who have never experienced a rise in inflation,” Cuggino says, and they might be shocked. So far this year, Vanguard’s long-term treasury fund has lost 13%.

Cuggino has strayed a bit from Browne’s original recipe. Instead of 25% cash, he owns 35% high-quality short-term bonds. It has a 10% slot for Swiss francs, a bet against the US dollar.

Instead of 25% to a diversified stock portfolio, it allocates 15% to fast-growing, high-priced companies like Nvidia (semiconductors) and Twilio (software), plus an additional 15% to a combination of producers of resources and real estate. In the latter category are Freeport McMoran (copper and gold), Texas Pacific Land Trust (oil royalties), Rio Tinto (assorted minerals), Prologis (warehouses) and Simon Property Group (shopping centers).

Browne’s 25% allocation to gold has been refined to 20% for gold and 5% for silver. What about bitcoin? Forget it. Said Cuggino: “I can’t say if a unit is worth a tulip or a gold bar. There is no other metric than the Biggest Fool Theory. And then there are the hackers. “I would hate to go to our shareholders and tell them, ‘Your bitcoin has been stolen. “”

If the economy returns to its behavior from when Cuggino was a teenager, his concoction of hard cash should do well or, at least, do better than a classic mix of stocks and bonds. “I think we’re more timely than we were five years ago,” he says. “China is buzzing Taiwanese airspace. Russia massing troops. A pipeline shutdown. I have the impression that it is again in 1979.


How to play defense

The permanent defensive portfolio (ticker: PRPFX) is available free of charge from major brokerage firms. The annual expenses are 0.83%, or $ 830 for a participation of $ 100,000. Or you can create a similar line-up yourself. Here’s one way to do it with exchange traded funds:



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