Gyroscopic Investing

I've been keeping an eye on it to see if it might be useful for small HSA accounts and the like.  Alas, something has been going very, very wrong lately.  Here it is (blue line) compared to VTI/TLT/GLD/SHV (green line):

Yeesh. Makes me glad I happened to sell it all in late December. Not because I thought anything was wrong with it at the time, of course. Just wanted to go all in to the DIY 4x25 version.

Oh wow. That is a disturbing chart.

Yeah, I have been watching as well. Bad times.

I went with TD Ameritrade.. glad I did.

I also decided against doing a single fund thanks to advice here. I guess I just don't understand how the underlying assets are reflected in the stock value. Isn't the stock subject to it's own supply and demand in addition to the value of the underlying assets?
If one is willing to own a single stock it's easy enough to own 4 of them and re-balance periodically.

I think PERM has a sprinkle of silver included in the allocation. Silver has been even more of a dog than gold lately, so it might be dragging on the fund.

JonathanH wrote: I also decided against doing a single fund thanks to advice here. I guess I just don't understand how the underlying assets are reflected in the stock value. Isn't the stock subject to it's own supply and demand in addition to the value of the underlying assets?
If one is willing to own a single stock it's easy enough to own 4 of them and re-balance periodically.

PERM is an ETF, not a stock (and not an open ended mutual fund like PRPFX/VTSAX and not a closed end mutual fund like GTU/PHYS).  Like any ETF (e.g. GLD or VTI or TLT), the linkage between its share price and the value of the underlying assets is driven by the ability of its Authorized Participants to freely exchange shares at their market value for the underlying assets (and vice versa).  Because they're allowed to do this, they can make money by arbitraging any difference (in either direction) between the market value of the shares vs the value of the underlying assets.  If the shares are worth more than the assets the AP buys assets on the open market, trades them for shares, and then immediately sells the shares (they actually probably short the shares first, but the bottom line is they make money on the deal and the process tends to reduce the market value of the shares).  If the shares are worth less than the assets, the AP buys shares, trades them for assets, and sells the assets on the open market (also making money on the deal, and tending to increase the market value of the shares).

There's also a buy/sell spread for the ETF's shares - but this doesn't have much to do with the linkage to the underlying assets.

As melveyr suggests, the performance difference between PERM and a 25% each mix of VTI/GLD/TLT/SHV is almost certainly due to the allocation difference (rather than drift relative to the value of its underlying assets).  In addition to silver (5%), PERM holds some real estate (5%) and has its own slice and dice mix of stock categories rather than a total market index like VTI.

If we compare PERM and PRPFX it's hard not to notice their portfolio similarities. It might be that PRPFX served as an example for the folks behind PERM.

foglifter wrote: If we compare PERM and PRPFX it's hard not to notice their portfolio similarities. It might be that PRPFX served as an example for the folks behind PERM.

Yes, PERM almost looks like a blend of the HBPP and PRPFX (sans PRPFX’s 10% Swiss Fran assets).  But I wouldn't think PERM's stock allocation and 5% silver would be enough to cause the recent large discrepancy between PERM and the HBPP.

rickb wrote:

JonathanH wrote: I also decided against doing a single fund thanks to advice here. I guess I just don't understand how the underlying assets are reflected in the stock value. Isn't the stock subject to it's own supply and demand in addition to the value of the underlying assets?
If one is willing to own a single stock it's easy enough to own 4 of them and re-balance periodically.

PERM is an ETF, not a stock (and not an open ended mutual fund like PRPFX/VTSAX and not a closed end mutual fund like GTU/PHYS).  Like any ETF (e.g. GLD or VTI or TLT), the linkage between its share price and the value of the underlying assets is driven by the ability of its Authorized Participants to freely exchange shares at their market value for the underlying assets (and vice versa).  Because they're allowed to do this, they can make money by arbitraging any difference (in either direction) between the market value of the shares vs the value of the underlying assets.  If the shares are worth more than the assets the AP buys assets on the open market, trades them for shares, and then immediately sells the shares (they actually probably short the shares first, but the bottom line is they make money on the deal and the process tends to reduce the market value of the shares).  If the shares are worth less than the assets, the AP buys shares, trades them for assets, and sells the assets on the open market (also making money on the deal, and tending to increase the market value of the shares).

There's also a buy/sell spread for the ETF's shares - but this doesn't have much to do with the linkage to the underlying assets.

As melveyr suggests, the performance difference between PERM and a 25% each mix of VTI/GLD/TLT/SHV is almost certainly due to the allocation difference (rather than drift relative to the value of its underlying assets).  In addition to silver (5%), PERM holds some real estate (5%) and has its own slice and dice mix of stock categories rather than a total market index like VTI.

Thanks for the explanation!

jediclampet wrote: ...But I wouldn't think PERM's stock allocation and 5% silver would be enough to cause the recent large discrepancy between PERM and the HBPP.

Correct.  The fund is indeed a bit PRPFX-like with 20% gold/5% silver, and an emphasis on natural resource and real estate stocks.  I just did some checking to see how these might impact performance.  If they used indexes (e.g. SLV for silver, IGE for natural resources, IYR for real estate), performance would have been no more than 1% worse than the straightforward 4x25 mix.  And, the underperformance would have been more consistent than this big drop in the last couple of months.

Nope sorry PERM.  You've been crossed off my list.  Good reason to wait until a fund has some history before buying into it!

I'm not sure I'm crossing it off my list. But I am definitely putting a big yellow flag next to it pending some explanation as to what is causing this significant discrepancy in performance.

PRPFX and PERM = Fool me once, same on you; fool me twice, shame on me!

PERM is continuing to implode.

On www.etfreplay.com, here are the YTD total returns as of today, 6/1/2013:

HBPP (VTI/IAU/TLT/SHY): -1.6%
PRPFX: -3.2%
PERM: -5.8%

I was seriously considering investing some money in PERM for convenience a while back, but some astute folks on this forum pointed out the potential risks of investing in very small and/or very new funds like PERM. Thank you for that sound advice!

Anyone out there still think PERM's implosion relative to PRPFX and a 4x25 HBPP is solely due to differences in asset allocation? Given the persistence and size of the divergence, that possibility seems very unlikely to me.

Tortoise wrote: PERM is continuing to implode.

On www.etfreplay.com, here are the YTD total returns as of today, 6/1/2013:

HBPP (VTI/IAU/TLT/SHY): -1.6%
PRPFX: -3.2%
PERM: -5.8%

I was seriously considering investing some money in PERM for convenience a while back, but some astute folks on this forum pointed out the potential risks of investing in very small and/or very new funds like PERM. Thank you for that sound advice!

Anyone out there still think PERM's implosion relative to PRPFX and a 4x25 HBPP is solely due to differences in asset allocation? Given the persistence and size of the divergence, that possibility seems very unlikely to me.

PERM as I recall has a narrowly defined asset allocation for its equities and it doesn't index the stocks. This is a problem. By contrast, while PRPFX also doesn't index, it has broader latitude in stock picking and it also has a 30% allocation to equities instead of 25%.

Thus in a near term market condition where we see everything except stocks getting clobbered both funds are at a disadvantage because they don't index. But PRPFX has more room in stock picking and that extra 5% is helping too.

PERM seems designed to underperform big time during periods of prosperity.

A mere 5% difference in stock allocation doesn't explain much. On www.etfreplay.com, increasing the HBPP's stock allocation from 25% to 30% only increased the total return from -1.6% to -0.5%. With PERM, we're seeing a much larger discrepancy than that.

I guess a few other possibilities are:

1. Your suggestion that PERM's small number of individual stocks may just be duds in the midst of this stock rally
2. Since stocks are hot and conservative funds like PERM are not, money may be flowing out of PERM so quickly that it's selling at a very deep discount
3. PERM's management might be looting the fund in anticipation of shutting it down and running off to Belize to retire on the beach

Tortoise wrote: A mere 5% difference in stock allocation doesn't explain much. On www.etfreplay.com, increasing the HBPP's stock allocation from 25% to 30% only increased the total return from -1.6% to -0.5%. With PERM, we're seeing a much larger discrepancy than that.

I guess a few other possibilities are:

1. Your suggestion that PERM's small number of individual stocks may just be duds in the midst of this stock rally
2. Since stocks are hot and conservative funds like PERM are not, money may be flowing out of PERM so quickly that it's selling at a very deep discount
3. PERM's management might be looting the fund in anticipation of shutting it down and running off to Belize to retire on the beach

I've got the sector weightings from the semiannual report but I don't know how to attach it.  The sectors seem pretty diversified to me, albeit kind of heavy on the REITS (about 5% of the total portfolio).  I don't think #1 (stock duds) is the reason for underperformance.

Could you explain reason # 2 a little.  I noticed PERM's market cap went from 28 M to 19 M nearly overnight a couple of months ago.

Sorry to ask such a newbie question, but I have some money in PERM so I am really curious.

I think they just picked the wrong stocks.  Probably Apple, and I see a few other's with less than great performance lately...

I don't recall seeing the Permanent Index (PDF) constitution posted here previously.

The methodology seems OK and the asset weighting seems reasonable to me except for one thing:

Permanent Index wrote:

• Long Term US Government Bonds 25%
• Short Term US Government Bonds 25%
• Precious Metals 25% divided into
  • Gold 20%
  • Silver 5%
  [/li]
• Equities 25% divided into
  • US Large Caps 9%
  • US Small Caps 3%
  • Global Large Caps ex US 3%
  • Global Agribusiness 1.67%
  • Global Mining ex Gold and Silver 1.67%
  • Global Natural Resources 1.67%
  • US REITs 5%
  [/li]

Where is the rest of the equities? 

I didn't look for the fine print (if any) about how the index can vary from that...  But the PERM fund has that fine print so they don't have to follow the index if they don't feel like it. 

The fund's full list of 95 holdings are linked from the info page.

I attribute their performance to their stock picking.

AgAuMoney wrote: I think they just picked the wrong stocks.  Probably Apple, and I see a few other's with less than great performance lately...

I don't recall seeing the Permanent Index (PDF) constitution posted here previously.

The methodology seems OK and the asset weighting seems reasonable to me except for one thing:

Permanent Index wrote:

• Long Term US Government Bonds 25%
• Short Term US Government Bonds 25%
• Precious Metals 25% divided into
  • Gold 20%
  • Silver 5%
  [/li]
• Equities 25% divided into
  • US Large Caps 9%
  • US Small Caps 3%
  • Global Large Caps ex US 3%
  • Global Agribusiness 1.67%
  • Global Mining ex Gold and Silver 1.67%
  • Global Natural Resources 1.67%
  • US REITs 5%
  [/li]

Where is the rest of the equities? 

The percentages in each equity class are pretty clearly percentages of the total, rather than percentages of the 25% of the total invested in equities (9% + 3% + 3% + 1.67% + 1.67% + 1.67% + 5% = 25%).

Has anyone compared PERM's results to index funds/ETFs in these proportions?

rickb wrote:percentages of the 25% of the total invested in equities (9% + 3% + 3% + 1.67% + 1.67% + 1.67% + 5% = 25%).

Has anyone compared PERM's results to index funds/ETFs in these proportions?

Oh.  I had misread Ad Orientum's earlier remark as saying PERM had 30% equities when he actually was saying PRPFX had 30%.

I haven't looked closely at the PERM bonds, but the only thing that looks very unindex like to me is their stock allocation.

jediclampet wrote:

Tortoise wrote: A mere 5% difference in stock allocation doesn't explain much. On www.etfreplay.com, increasing the HBPP's stock allocation from 25% to 30% only increased the total return from -1.6% to -0.5%. With PERM, we're seeing a much larger discrepancy than that.

I guess a few other possibilities are:

1. Your suggestion that PERM's small number of individual stocks may just be duds in the midst of this stock rally
2. Since stocks are hot and conservative funds like PERM are not, money may be flowing out of PERM so quickly that it's selling at a very deep discount
3. PERM's management might be looting the fund in anticipation of shutting it down and running off to Belize to retire on the beach

[...]
Could you explain reason # 2 a little.  I noticed PERM's market cap went from 28 M to 19 M nearly overnight a couple of months ago.

Sure, #2 basically means that with a very small ETF like PERM, there are fewer buyers and sellers, meaning liquidity is lower. So it's not as easy to pair buyers with sellers, which causes the bid-ask spread (the difference between what buyers are willing to pay and what sellers are willing to accept) to widen. That means a very small ETF often sells at a noticeable premium or discount relative to its net asset value (NAV). As rickb pointed out earlier in this thread, those premiums and discounts tend to be arbitraged away eventually--however, it's not instantaneous.

If a small ETF were to lose almost 1/3 of its total assets practically overnight, as it appears may have happened with PERM if it really went from $28M to $19M in assets, I think that would almost certainly result in the ETF selling at a deep discount relative to NAV for at least a little while.

rickb wrote: Has anyone compared PERM's results to index funds/ETFs in these proportions?

Unfortunately the free version of ETF Replay only allows portfolio backtesting with a maximum of 5 ETFs, so I hacked an estimate by taking a weighted average of five different 5-ETF portfolios. Each one had 25% TLT (long-term Treasuries), 25% SHY (cash), 20% GLD (gold), and 5% SLV (silver). I set the remaning 25% to either VV (large-cap U.S. stocks), VB (small-cap U.S. stocks), VEU (international stocks), VNQ (U.S. REIT), or GNR (global natural resources). I then calculated the weighted average return of those five portfolios, using PERM's weights of 9%, 3%, 3%, 5%, and 5%, respectively. Here's what I got:

Version with 25% VV: -2.2% YTD
Version with 25% VB: -1.7% YTD
Version with 25% VEU: -5.5% YTD
Version with 25% VNQ: -3.9% YTD
Version with 25% GNR: -7.5% YTD

Weighted Average ("indexed PERM estimate"): -3.9% YTD

That's definitely lower than the plain-vanilla HBPP's YTD return of -1.6%, so it does seem like PERM's asset allocation explains part of the story. But given that PERM's actual YTD return is a noticeably lower -5.8%, I still don't think asset allocation explains the whole story. It seems like additional factors are at work here.

Again, I suspect the rest of PERM's underperformance might be explained by a combination of unfortunate stock-picking and/or a deep discount to NAV caused by a large recent sell-off of shares. But that's just a theory.

PERM is currently selling at about a 0.15% premium, see http://etfs.morningstar.com/quote?t=PERM

rickb wrote: PERM is currently selling at about a 0.15% premium, see http://etfs.morningstar.com/quote?t=PERM

Doesn't the negative sign on the -0.15% mean it's a discount, not a premium? (On PERM's web site dated 5/31, for example, they list a discount of $-0.07/$24.17 = -0.29%.) Even so, point taken--that's not a big discount. There goes that theory.

Today is a good day to resurrect this thread. Just checked the real-time quote and the latest reported trade was on Thursday. The trading volume is 0. Yeah, what's happening to PERM? Is this a complete shutdown in the aftermath of yesterday's sell-off?

Someone traded 515 shares today.  That's so low it doesn't sound real.