Discussing Permanent Portfolio Theory with Toroso’s Mike Venuto For this blog post, I sat down with Michael (Mike) Venuto, co-founder and chief investment officer at Toroso Investments, to discuss permanent portfolio theory (PPT). PPT holds equal allocations to stocks, precious metals, cash and long term treasuries. It is designed to reduce volatility and provide stable returns across a variety of economic climates. Global X offers an ETF within its Risk Management suite, PERM, which follows a strategy inspired by PPT. *Asset Allocations & Fund Structure represent target allocations and may not represent the exact allocation of the Fund at any given time
Mike, what is permanent portfolio theory? Venuto: The permanent portfolio theory was pioneered by Harry Browne around 40 years ago. It is based on holding equal allocations to cash, gold, stocks, and long term bonds, and rebalancing annually. Its goal is to provide stable returns across a variety of economic environments, relying on diversification of asset classes. Some of the largest, most sophisticated institutions in the world, such as the hedge fund Bridgewater Associates, implement strategies that are based on this portfolio construction. In 2013 and 2014, this diversification strategy really struggled. How come? Venuto: The answer will sound arrogant but quite simply the market was irrational. For two years growth stocks went up with no respect for valuation while gold went down. Whenever the market sold off and acknowledged this insanity, it quickly rebounded and went back to distorted valuations. In October 2014 or August 2015, for example, the market sold off and recovered almost immediately, negating the value of diversification across asset classes. How are these ‘permanent portfolio’ strategies doing now? Venuto: They are doing exactly what they are supposed to do and look very good versus S&P 500 so far this year. There’s four different asset classes offsetting each other and returns from each component are compounding. Right now, the allocations to bonds and gold are helping to counteract the negative returns in equities. So the only real answer is that the market is finally behaving rationally, probably because the artificial stimulus from the Fed has ended. PPT is working because, to quote Benjamin Graham, “in the short term the market is a voting machine; in the long run it is a weighing machine.” Portfolios based on PPT are currently behaving as designed, so seemingly the market was the irrational participant.