The Canadian Permanent Portfolio

[Smith1776]

There hasn't been much written about how to prudently implement the Permanent Portfolio here in Canada. This is understandable, as Canada only forms a small part of the world's stage. The country has some 3% of the world's equity market as measured by market capitalization. Additionally, we only have a population of about 36 million people. We are, in effect, about the size of a large U.S. state in many ways. I think partly as a function of our small size, Canada has a relatively limited "menu" of investment funds to choose from.

I think it's also worth mentioning that Canada's banking system is an oligopoly that is dominated by our so-called "Big Five": BMO, TD Canada Trust, RBC, Scotiabank, and CIBC. Many observers such as Bruce Livesey, author of Thieves of Bay Street, notes that this oligopoly structure has made the pricing of investment products extremely onerous to the country's citizens. Canada has some of the highest (if not THE highest) investment management fees in the world. 3% management expense ratios with 1% trailer fees, deferred sales charges of 7% and front end load fees all in tandem are not uncommon. In all fairness, I have seen a few select mutual funds with management expense ratios as low as 0.33%, but that is certainly more an exception than the rule.

Because of the above factors, I've found that implementing a Permanent Portfolio in Canada cost effectively and efficiently can be a problem. However, after considerable time searching for the best options, I do think that a reasonable implementation of the Permanent Portfolio can be had in Canada without too much trouble.

A couple of discount brokers we have in the country offer commission free ETF trading. Qtrade offers a select menu of ETFs that are commission free to both buy and sell. A competing broker, Questrade allows all ETFs to be purchased for free, but are subject to regular commission charges when being sold. This allows for cost efficient investment, especially for people like myself who are in their twenties and are still early in the accumulation phase of their career. With a smaller portfolio, these trading costs eat into returns more severely than with larger portfolios.

An additional wrinkle with investment in Canada is that fixed income Treasury Bills and Treasury Bonds can only be purchased in minimum $5,000 denominations when bought directly. This means that a "pure" Permanent Portfolio is difficult to achieve with a portfolio that is less than $20,000 in size. Here's how one might implement such a $20,000+ portfolio with Questrade

12.5% Total Canadian Stock Market - XIC (MER 0.06%)
12.5% Total U.S. Stock Market - XUH (MER 0.07%)
25% Royal Canadian Mint Gold - MNT (MER 0.35%)
25% Long Term Treasury Bonds
25% Short Term Treasury Bonds

There would be limited options to investors who have less than $20,000 to invest, but the following solution I've found would be decent for people using Questrade.

12.5% Total Canadian Stock Market - XIC (MER 0.06%)
12.5% Total U.S. Stock Market - XUH (MER 0.07%)
25% Royal Canadian Mint Gold - MNT (MER 0.35%)
25% BMO Long Term Treasury Bond ETF - ZFL (MER 0.23%)
12.5% BMO Short Term Treasury Bond ETF - ZFS (MER 0.22%)
12.5% iShares Premium Money Market ETF - CMR (MER 0.28%)

This portfolio is similar to the first, but the Long Term Treasury Bonds have been replaced with an ETF holding the same securities. No problems there. However, the Short Term Treasurys pose a problem. The Short Term Treasury ETF, ZFS, has the riskless AAA securities we want, but the duration is on the long side for cash at 2.75 years or so. As such, we need to complement it with something like money market funds, but the only one available is invested in commercial paper in addition to federal obligations. This is a bit of a necessary evil to get the principal stability we need. CMR has a duration of about 0.13 years.

The above solutions work, but they necessitate investing with Questrade, which is notorious amongst consumers for having poor customer service, and frequent account mistakes and mismanagement. Many simply see this as being the cost of doing business with Canada's lowest cost broker. We can turn to Qtrade for an alternative, as they are known for better service and quality, but they only allow commission-free trading with a select menu of ETFs that can be found here: https://www.qtrade.ca/investor/pricing/free-etfs. The following is a portfolio that I think works well with Qtrade's limited selection.

8.33% Powershares Canadian Dividend ETF - PDC (MER 0.55%)
8.33% iShares TSX Completion Index ETF - XMD (MER 0.61%)
8.33% iShares U.S. Small Cap ETF - XSU (MER 0.36%)
25% Royal Canadian Mint Gold - MNT (MER 0.35%)
25% Powershares Long Term Government Bond ETF - PGL (MER 0.28%)
12.5% iShares Short Term Government Bond ETF - CLF (MER 0.22%)
12.5% iShares Premium Money Market ETF - CMR (MER 0.28%)

If you have a portfolio bigger than $20,000 simply replace the bottom 3 funds with direct Treasury security purchases. However, this should suffice for those with smaller portfolios until a larger nest egg is accumulated. There are some things to note. The three equity funds should provide sufficient diversification and some exposure to U.S. equities. Also, I didn't elect to use the TSX 60 index fund ETF because it is synthetic and thus has dividend reinvestment basically enabled by default, which is generally not desirable with the Permanent Portfolio. The Government Bond ETFs have some exposure to provincial bonds in addition to federal debt, but I think that it is ok to accept some credit risk in exchange for free trades in many cases until a larger nest egg is accumulated. The money market fund is in there again because CLF has the same problems as ZFS does -- the duration is a bit too long at 2.75 years or so.

I've thought long about this, and I think that Canadian investors should use the Royal Canadian Mint ETRs if they insist on using "paper gold" as they are the most robust form of paper gold I've found in Canada, with physical redemption options and full backing. I'm even willing to accept some trading costs in this case to get that added security.

These are just some thoughts I've had about implementing the Permanent Portfolio in a fairly tough environment like Canada with limited options and oligopoly pricing. Hopefully there are other Canadian investors on these forums and that this thread proves useful to people.

[JohnnyFactor]

The long-ish duration of ZFS is not bad because ZFL is a bit too short. Together, they balance out and come close to an intermediate duration fund. Not ideal, but at least it's not lop-sided.

I've been back and forth on the US and international funds. Harry Browne has pointed out numerous times that you want the returns of the country you live in, so I'm sticking to VCN until further notice.

Questrade used to be awful but that doesn't seem to be the case any more. I have no issues with them after 2 years.

This is a great post. Thanks for spelling it all out so comprehensively.

[Smith1776]

The long-ish duration of ZFS is not bad because ZFL is a bit too short. Together, they balance out and come close to an intermediate duration fund. Not ideal, but at least it's not lop-sided.

I've been back and forth on the US and international funds. Harry Browne has pointed out numerous times that you want the returns of the country you live in, so I'm sticking to VCN until further notice.

Questrade used to be awful but that doesn't seem to be the case any more. I have no issues with them after 2 years.

This is a great post. Thanks for spelling it all out so comprehensively.

Thank you for the kind words!

It's good to hear that Questrade has improved. I remember hearing some serious horror stories about misplaced funds and improperly reported tax information and other such things. The commission free ETF purchase program that they have is super enticing.

I am also glad to see some confirmation that I am not the only Canadian Permanent Portfolio user around here. May I ask what you are using for your gold holdings? Or, at least, whether you are holding physical bullion or a security?

[JohnnyFactor]

My gold is still in a state of flux. I was holding MNT but recently switched to CGL.C for the free trades. I'm starting to think it's not worth it though. The trust structure is just too deep and opaque.

I don't have any physical right now but will be keeping 15% (of portfolio value) with the Perth Mint soon. It's expensive though. Cost works out to 9.5% per transaction plus 1% annum. For that price I get private secure segregated storage, insurance, geographical diversification, and bullion coins in my name.

[grapesofwrath]

I don't have any physical right now but will be keeping 15% (of portfolio value) with the Perth Mint soon. It's expensive though. Cost works out to 9.5% per transaction plus 1% annum. For that price I get private secure segregated storage, insurance, geographical diversification, and bullion coins in my name.

I use Perth Mint depository services. I don't know where you get those fee figures from. For this program they charge a 2% purchase fee for accounts (value includes cash in their account) <$250k and 0% fee (pay just buy/sell spread) if total account is greater than that. And then I just choose the unallocated storage which is free. I have no intent of flying over their to stroke it or collect it. And if they going to steal it they going to steal it... Since gold is the one asset that has zero yield I want minimum cost to hold it else its just a slow bleed.

[JohnnyFactor]

Wire transfer fee: $20
If I transfer $2000 at a time, that's 1%. Waiting until I have $4000 reduces it to 0.5%, or $8000 for 0.25%.

Currency conversion fee: 2.5%
What my bank charges to send money in AUD or USD.

Buying fee for unallocated: 1%
Spread is only $3 from spot, which is excellent, but the 1% erases that advantage. And I have to settle for a claim on working inventory-- no bars or coins.

Buying fee for allocated: 1% + 5% Minting cost
This gets segregated coins and Perth becomes the Bailee on the holdings. Equivalent to stashing them myself, except with a 1% annual fee (this includes the insurance premium).

As outrageous as that is, it's not a lot more than buying local and keeping them in an insured box at the bank.

[Smith1776]

My gold is still in a state of flux. I was holding MNT but recently switched to CGL.C for the free trades. I'm starting to think it's not worth it though. The trust structure is just too deep and opaque.

I don't have any physical right now but will be keeping 15% (of portfolio value) with the Perth Mint soon. It's expensive though. Cost works out to 9.5% per transaction plus 1% annum. For that price I get private secure segregated storage, insurance, geographical diversification, and bullion coins in my name.

It's funny, I've found myself jumping a bit between those two ETFs myself. My portfolio isn't quite large enough yet to justify an excursion into international storage via the Perth Mint or anything similar, but as it grows over time I certainly plan on doing so.

I do seem to recall Craig Rowland himself recommending the Perth Mint.

[PP67]

You might find some earlier posts on the Canadian PP interesting...

viewtopic.php?f=1&t=5701

[JohnnyFactor]

You don't need a large portfolio to justify using international gold storage. It is the point of the gold after all. Harry Browne once said all you need is $4,000 dollars to get started with the PP and keep $1,000 of physical gold in a Swiss bank. You need the geographical diversification, the 'hard asset' nature of bullion and the ability to keep the governments hands off it.

Don't forget that the gold portion (and the entire PP for that matter) is designed to protect your money. It's a defensive portfolio that requires hard protections put in place. We do things that look odd to your typical 60/40 investor-- until the world crashes and everyone wants a piece.

[Smith1776]

You don't need a large portfolio to justify using international gold storage. It is the point of the gold after all. Harry Browne once said all you need is $4,000 dollars to get started with the PP and keep $1,000 of physical gold in a Swiss bank. You need the geographical diversification, the 'hard asset' nature of bullion and the ability to keep the governments hands off it.

Don't forget that the gold portion (and the entire PP for that matter) is designed to protect your money. It's a defensive portfolio that requires hard protections put in place. We do things that look odd to your typical 60/40 investor-- until the world crashes and everyone wants a piece.

Hmmmm very interesting. Perhaps I'm mistaken, then. I'll take your word for it and investigate how significant the costs for international storage would be relative to my situation. It would certainly aid in peace of mind.