Kudos to Mark Hulbert for his interesting historical article on MarketWatch entitled “A Portfolio for All Seasons.” It was a nice discussion of what I think was one of the intellectual precursors of the Yale endowment portfolio. Harry Browne was a newsletter writer in the 1970s and 1980s. He proposed a permanent portfolio that would never need to be changed, except maybe for periodic rebalancing.
Browne’s idea was to invest in a basket of asset classes, each one of which has a low correlation with the others. As a result, when any one of the asset classes is performing poorly, there is a good chance that the others will at least be holding their own — if not actually appreciating in value.
Hmmm…investing in a basket of uncorrelated asset classes. This sounds familiar from both modern portfolio theory and David Swensen’s work at Yale. Browne had a particular portfolio mix in mind:
The basket that Browne recommended was equally divided between stocks, long-term Treasury bonds, gold and Treasury bills. In his 1987 book, he reported that, over the prior 17 years, back to 1970, this portfolio had produced as 12.0% annualized return. This was better than a buy-and-hold in either stocks or bonds, though behind gold.
Essentially, Browne proposed a mix of stocks, bonds, cash, and alternative investments. In 1987, this was pretty unusual. Most newsletter writers recommending gold were either gold bugs (buy gold and live in a bunker) or strategic asset allocationists (have a 5-10% portfolio allocation to gold as a concession to inflation or global catastrophe). The end-of-the-world crowd would never want to own stocks of corrupt corporations or bonds of currency-debasing governments. The 60/40 policy mix group would blanch at having such a large allocation to alternatives. Yale’s endowment model today is an interesting modification because it is equity-oriented, but also willing to hold significant allocations to unusual asset classes. One of the unique things I learned from the article is that Browne’s approach actually spawned a mutual fund. Hulbert writes:
Browne’s approach in the decades since has continued to perform as advertised. Consider the Permanent Portfolio fund /quotes/comstock/10r!prpfx (PRPFX 39.88, -0.38, -0.94%) , which was created in large part out of Browne’s work. Its current target allocations are 25% in gold and silver, 35% in U.S. Treasurys, 15% in aggressive growth stocks, 15% in real-estate and natural resource stocks, and 10% in Swiss-franc denominated assets.
…You might therefore want to remember Browne’s investment approach as you suffer through yet more of the markets’ frightening volatility. His permanent portfolio serves as a reminder that we don’t have to be constantly betting on the markets’ short-term gyrations, nor suffer from huge losses along the way, in order to produce decent long-term returns.
It sounds like the mutual fund hasn’t quite stuck to Browne’s original guidelines, but it’s clearly in the same spirit. The real point is that an endowment-type portfolio, while perhaps not very sexy, can generate nice long-term returns-and it might be able to keep clients from jumping out of the window. The endowment-type portfolio that we manage, the Arrow DWA Balanced Fund (DWAFX), is built in the same spirit. There are sleeves for domestic and international equities, fixed income, and alternative assets. Unlike Mr. Browne’s approach which called for equal-weighting, the size of our sleeves varies by relative strength-within boundaries-so that the portfolio can adapt to different environments. The fixed income position tends to act as a volatility buffer, with growth typically coming from the equity portion of the account. The alternative assets often provide an uncorrelated growth component. The approach was sound when Mr. Browne proposed it, sound when Mr. Swensen modified it, and seems to be working today-and there aren’t very many investment approaches that can make that claim.
Posted by Mike Moody 
