HB Fund or ETF

[hrux]

Hi Craig & Others,
Currently to the best of my knowledge there is only one operating mutual fund which attempts to mimic HB's Permanent Portfolio, that being Cuggino's PRPFX.  We all know that PRPFX deviates from HB in that it holds swiss francs, makes active equity selections and does not endorse a true 4 x 25 asset class approach.

My question:  Has anyone looked into establishing a low cost mutual fund or ETF wrapper based on a true HB 4 x 25 Permanent Portfolio while keeping the costs as low as possible?  If not, is anyone interested in forming a partnership to start one?

[KevinW]

My question:  Has anyone looked into establishing a low cost mutual fund or ETF wrapper based on a true HB 4 x 25 Permanent Portfolio while keeping the costs as low as possible?  If not, is anyone interested in forming a partnership to start one?

This thought has crossed my mind, but I'm not sure it's feasible for finance "civilians" to start a new fund.  The biggest obstacles I see are needing a very large pool of initial working capital, and clearing all of the regulatory and legal hurdles.  Those thoughts are as far as I've got on a feasibility analysis, though.

[Indices]

I think I mentioned this a few months ago on the Bogleheads forum (or I might be imagining I came up with this great idea). I'd love to do it, I work in public relations and could certainly promote it. But how do you get the start up capital? We'd probably need at least a million dollars if not more.

[hrux]

Startup costs are not as high as one might think (all relative).

For example:
It really depends on a few things - there is a whole ecosystem of service providers, as a small fund you are going to be outsourcing almost everything other than fund management to these folks.  They go from cadillac level plans to walmart level plans.  Here is an example of someone who is in say the bottom third in costs but has a good reputation:

http://www.ultimusfundsolutions.com/

So depending on whom you use, your annual costs in a small fund (say $10-$20m in AUM) could be anywhere from $70-$150K annually. Give or take part of this is dependent on how many states you are in.  If all your investors are in 1 state, then you have a lot less costs than if you launch in 50 states.  Figure about $500 for each state you are in (annually)  So that is a range of $500 to $25,000 ... but I included that in the figure above. But there are many variables - who does your compliance, what you pay your board, for example 2 things out of 50 variables.

The launch costs are not as bad, you can probably figure on $50K as an estimate give or take $10-$25K swing based on the attorney and some other variables.  So it's a quite expensive thing to do, ironically a hedge fund is much less expensive since the amount of regulation is tiny in comparison but you are limited to who can invest and your ability to advertise.  However, with the formation of a partnership we can spread the initial costs amongst the members. 

The major concern that I have is that the approach could be easily replicated by another fund company so first to market, size, scalability and costs will dictate the long term viability of the fund.

Thoughts?

[Wonk]

Startup costs are not as high as one might think (all relative).

For example:
It really depends on a few things - there is a whole ecosystem of service providers, as a small fund you are going to be outsourcing almost everything other than fund management to these folks.   They go from cadillac level plans to walmart level plans.  Here is an example of someone who is in say the bottom third in costs but has a good reputation:

http://www.ultimusfundsolutions.com/

So depending on whom you use, your annual costs in a small fund (say $10-$20m in AUM) could be anywhere from $70-$150K annually. Give or take part of this is dependent on how many states you are in.  If all your investors are in 1 state, then you have a lot less costs than if you launch in 50 states.  Figure about $500 for each state you are in (annually)  So that is a range of $500 to $25,000 ... but I included that in the figure above. But there are many variables - who does your compliance, what you pay your board, for example 2 things out of 50 variables.

The launch costs are not as bad, you can probably figure on $50K as an estimate give or take $10-$25K swing based on the attorney and some other variables.  So it's a quite expensive thing to do, ironically a hedge fund is much less expensive since the amount of regulation is tiny in comparison but you are limited to who can invest and your ability to advertise.  However, with the formation of a partnership we can spread the initial costs amongst the members. 

The major concern that I have is that the approach could be easily replicated by another fund company so first to market, size, scalability and costs will dictate the long term viability of the fund.

Thoughts?

I would seriously consider being involved in this venture.  I don't think there would be any difficulty gaining AUM momentum in the current market environment.  It would be a fantastic option for those looking for tax deferred vehicles and simplicity. The greatest obstacle I see is the absence of someone with experience to take the reigns.  Craig, you've spoken to HB's widow and former business partner.  I wonder if it would be possible to gain some sort of blessing from them in the event this type of venture gains traction.

[craigr]

I've thought of this in the past as well as I wished for the same thing. For a taxable investor there are significant advantages to be had by owning one fund.  The assets behind the scene can be managed in a way to minimize taxes for instance. The core problem is negotiating the regulations and handling the compliance while still being able to pay people. I would also want the fund assets held in a particular way (such as the gold). I'll look into the issues again and see what's changed.  I have many business contacts that could help provide guidance.

[hrux]

Obviously I believe this concept has merit.  Craig brings up a valid point on the gold, a diversified fund which holds physical gold.  Not sure what the restrictions for this are in the mutual fund arena.  Anyway if a partnership is warranted count me in.

[Bonafede]

This sounds like a fantastic idea, and I know I'm more than interested. If you we ever get to a point with this, please include me on the interested/partnership list.

Thanks!

-b

[foglifter]

I'm interested too.

[Wonk]

I would imagine the gold would have to be structured in a way that would not allow physical redemptions--like the way Central Gold Trust of Canada is structured.  This should bypass the collectibles tax and reduce rebalancing costs within the classes.  I wonder if the interest from long and short term treasuries could be structured so that they are held internally and not passed through to shareholders.  The goal would be to reduce pass-through taxable income of the fund and increase NAV instead.

[LNGTERMER]

This is a fantastic idea, and I would be interested in taking part of the launching of such fund.

[l82start]

same here, 

[SmallPotatoes]

Awesome idea.  I would love a low cost alternative to Cuggingo's PRPFX for my taxable account.

[KevinW]

I would also like to be on the list of seriously-interested folks.

I've also wondered whether a 4x25 fund could structure itself so as to reinvest coupon payments and dividends without generating distributions.

One thing I've considered is that Browne advised holding physical gold directly.  So it'd be nice to have two funds, a 4x25 fund that includes gold, and a 3x25 fund that includes everything except gold.  Then you would have the option of holding whatever amount of physical gold you're comfortable with by blending the two funds.

The major concern that I have is that the approach could be easily replicated by another fund company so first to market, size, scalability and costs will dictate the long term viability of the fund.

It seems like the financial services industry absolutely cannot resist the urge to make simple things more complex and expensive.  So, I would expect that imitation funds would always diverge from a pure Permanent Portfolio concept in some critical way.  You'd want to constantly be beating the drum that the fund always works the same way and keeps things "safe and simple."

[foglifter]

I wonder if the interest from long and short term treasuries could be structured so that they are held internally and not passed through to shareholders.  The goal would be to reduce pass-through taxable income of the fund and increase NAV instead.

I think this is how PRPFX is implemented - it keeps the overall yield at a minimum and pays very low capital gains and dividend only once a year. Here's the M* statistics for the last 5 years:


I'm not an investment professional, but my guess is the managers use bond interest payments and capital gains and dividends from equity during the year for rebalancing purposes. Given low turnover it looks feasible. 

[nomimono]

If this is done, it might be more beneficial if it was a traditional mutual fund rather than an ETF, or at least had both traditional and ETF class shares like Vanguard does. That way, all the people (including me) that are having trouble implementing the PP in their 401k may have a better shot at getting access to the PP through a traditional mutual fund. For my 401k for example, through our very restricted brokerage window I can get any mutual fund there is, but ETFs (or anything else for that matter) are still off-limits, so I'm in PRPFX for now.

I like the hands-on approach of managing my own investments in my taxable account, but for a 401k a one-stop fund that does all its own re-balancing and allows steady incremental investment and dividend re-investment would be a nice option.

[SmallPotatoes]

I wonder if the interest from long and short term treasuries could be structured so that they are held internally and not passed through to shareholders.  The goal would be to reduce pass-through taxable income of the fund and increase NAV instead.

I think this is how PRPFX is implemented - it keeps the overall yield at a minimum and pays very low capital gains and dividend only once a year. Here's the M* statistics for the last 5 years:


I'm not an investment professional, but my guess is the managers use bond interest payments and capital gains and dividends from equity during the year for rebalancing purposes. Given low turnover it looks feasible. 

This is aside the point, but I wonder: presently I have my Cap' Gains/Dividends and Interest Payments from my mutual funds set to reinvest.  Should I instead have them sent to a MM account for rebalancing later?

[foglifter]

This is aside the point, but I wonder: presently I have my Cap' Gains/Dividends and Interest Payments from my mutual funds set to reinvest.  Should I instead have them sent to a MM account for rebalancing later?

If it is in a taxable account I would turn off reinvestment option and do that manually for easier accounting. In tax-deferred it depends: in case of non-transaction-fee-free ETFs and mutual funds I reinvest. But if you have, say, a rollover IRA with no new cash inflow you might want to turn off reinvestment and use cash for rebalancing.

[SmallPotatoes]

This is aside the point, but I wonder: presently I have my Cap' Gains/Dividends and Interest Payments from my mutual funds set to reinvest.  Should I instead have them sent to a MM account for rebalancing later?

If it is in a taxable account I would turn off reinvestment option and do that manually for easier accounting. In tax-deferred it depends: in case of non-transaction-fee-free ETFs and mutual funds I reinvest. But if you have, say, a rollover IRA with no new cash inflow you might want to turn off reinvestment and use cash for rebalancing.

Thanks. I'm still very much in a Bogle buy-&-hold mode, but for PP purposes I see it makes more sense to take the cash and reinvest it yearly especially in my taxable. For my IRA I'll just leave it on auto-pilot since taxes aren't an issue there.

We now return to your regularly scheduled thread.

[brajalle]

I'd be interested in this, assuming the ER was low enough, although I may be willing to pay a tad more to start.  My Roth would definitely be transferred, and I may open a taxable.

[Wonk]

I received this link from a friend in the industry:

http://www.pfsfunds.com/startup.html

It's a catch 22 of sorts.  You can start a fund with a small amount of AUM, but with a higher ER to cover initial costs.  But in doing so, it's less attractive for expense-sensitive investors (which we all should be).  As AUM reach the $50-100MM range, it would be easy to keep ER low for the masses.  Looks like a network of high net worth individuals committed to this strategy would be a nice starting point.

[mcg]

If this is done, it might be more beneficial if it was a traditional mutual fund rather than an ETF, or at least had both traditional and ETF class shares like Vanguard does. That way, all the people (including me) that are having trouble implementing the PP in their 401k may have a better shot at getting access to the PP through a traditional mutual fund. For my 401k for example, through our very restricted brokerage window I can get any mutual fund there is, but ETFs (or anything else for that matter) are still off-limits, so I'm in PRPFX for now.

I like the hands-on approach of managing my own investments in my taxable account, but for a 401k a one-stop fund that does all its own re-balancing and allows steady incremental investment and dividend re-investment would be a nice option.

I agree that having two classes would be nice.  My SDA allows investing in mutual funds but the commission on mutual funds (even subsequent investments) is prohibitive.  ETFs, on the other hand, have a reasonable commission.