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The Inflation-Fighting Doomsday Fund

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Inflation is already at 5% and probably headed higher. Here’s a 39-year old survivalist portfolio poised for a return to its glory days.

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

Perish the thought. Here’s his diplomatic take on the protestations from the Federal Reserve that it has inflation totally under control: “We’re hoping they’re right.”

But he adds, “We’re managing for them to be wrong.”

Hope for the best, prepare for the worst. Evidently some investors the share the sentiment. They have entrusted $2.9 billion to 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 trusts.

These are unsettling times. The latest government report clocked inflation at 5% over the 12 months through May, double the average rate over the past decade. Will the rate subside? It might not. It might feed on itself.

If the price and wage spiral gets worse, Cuggino, crying crocodile tears about the U.S. economy, will probably do very well. He made a small fortune in the last episode of despair on Wall Street. He could make another.

The idea for the Permanent Fund goes back to Harry Browne, a minor celebrity among hard-money fans who enjoyed a spot of limelight as the 1996 and 2000 presidential candidate on the Libertarian ticket. Cuggino sums up Browne’s claim to fame: “He called the run in gold in the 1970s.”

Coming off that gilded era for precious metals, Browne came up with a formula for an all-weather portfolio, one that could survive inflation, recession, global unrest and perhaps even asteroids. It was beautifully simple. It called for 25% allocations each to cash, gold, long-term Treasury bonds and stocks.

Some entrepreneurs with skills in direct marketing put together a mutual fund to implement the Browne philosophy. As an outside advisor to this venture, Browne did no money management; he was only the philosopher and evangelist.

The Permanent Portfolio opened its doors in 1982. The timing was not great. Had it started seven years earlier, it would have covered itself in glory. But 1982 turned out to be the start of a decades-long bull market in which cash and gold were a drag. The fund management company struggled to bring in assets.

A few years later, Michael Cuggino, fresh from an accounting degree at Massachusetts’s Bentley College, started an auditing job at the Boston office of a firm that is now part of Ernst & Young. He remembers: “They give you some clients and say, ‘Here you go, kid.’ The fund was on my list.”

While looking over the books, the auditor became captivated by what this client was trying to do: preserve peace of mind for investors worried about prices, interest rates and recessions.

Cuggino, 58, thinks back to his teenage years. He says, “I remember waiting in lines with my parents for gas to go to my hockey games. I remember $800 gold, the Hunt brothers cornering silver, the oil crises, 15% to 20% short-term lending rates.”

He remembers recessions, too. “My dad was a truck driver. Two of the companies he worked for went out of business.”

At 28, Cuggino quit E&Y to travel west, taking a part-time job as treasurer of the fund while also using space in the fund operator’s San Francisco office to hang out a shingle for a CPA practice. In time, the CPA practice melted away and Cuggino was working full-time for the fund managers.

Trouble arrived, courtesy of the Securities & Exchange Commission. In 1999 the government decreed that the owners of the fund management company had improperly billed fund shareholders for overhead and marketing expenses. The legal contretemps was a long time brewing; an SEC report indicates that its genesis was in a red flag thrown down a decade earlier by a sharp-eyed auditor at Ernst & Young, one Michael Cuggino.

It was time for the owners to get out. They put the operation up for sale. It was no plum. At year-end 2001 it had a mere $173 million of assets under management, divided among four funds—the original Permanent Portfolio plus separate portfolios for short-term Treasuries, corporate bonds and growth stocks. Those sister funds are still around, but they never took off.

Other fund operators, Cuggino says, were either not interested or else candid about planning to grab the assets and merge the funds into their own products.

Cuggino put up 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 headache, they swallowed it, and, in any event, the legal power over the management contract was in the hands of the funds’ outside directors. They knew Cuggino and liked his pitch: He believed in Harry Browne’s investment philosophy and vowed to carry it on. A price tag was set in 2002, with the deal closing in 2003.

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

If the business had gone south, this 39-year-old speculator would have lost his life’s savings. But 2002, very unlike 1982, was a great time to be selling a defensive fund. Investors, licking wounds from the great crash of 2000-2002, were willing to sacrifice some upside in order to get a safe anchor.

In 2006 Harry Browne died, at 72, of Lou Gehrig’s disease. But even with the figurehead gone, money cascaded 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 business. His annual revenue from management fees hit $130 million.

Easy come, easy go. A new bull market of low interest rates and ebullient stock multiples was underway. Nobody needed gold or cash. Over the ten years through June 16, Morningstar reports, the Permanent Portfolio has delivered a disappointing return of 5.4% a year. For eight years, beginning in early 2012, the fund underwent an unremitting exodus of customers. Assets shrank by 89%.

Then came the pandemic and the resurgence of worrywart 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 departed.

The inflow will likely accelerate if there is more grim news for holders of long-term bonds, the kind that get killed by rising inflation and interest rates. “There are two generations of investors that have never experienced rising inflation,” Cuggino says, and they may be in for a shock. So far this year Vanguard’s long-term Treasury fund has lost 13%.

Cuggino has veered a bit from the original Browne recipe. In lieu of 25% cash, he has 35% in short-term, high-quality bonds. He has a 10% slot for Swiss francs, a bet against the U.S. dollar.

Instead of 25% to a diversified stock portfolio, he allocates 15% to fast-growth, high-priced companies like Nvidia (semiconductors) and Twilio (software) plus another 15% to a combination of resource producers 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 (malls).

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

If the economy reverts to its behavior from the time when Cuggino was a teen, his hard-money concoction should do well or, at least, do better than a classic mix of stocks and bonds. “I think we’re timely in a way we weren’t five years ago,” he says. “China buzzing Taiwan airspace. Russia massing troops. A pipeline shutdown. I feel like it’s 1979 again.”

How To Play Defense

The defensive Permanent Portfolio (ticker: PRPFX) is available without a load at big brokerage firms. Annual expenses run to 0.83%, or $830 for a $100,000 stake. Or you can create a similar line-up on your own. Here’s one way to do that with exchange-traded funds:

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