A Fund With Low Volatility

You can make investing decisions by trying to anticipate what the economy will do in the months and years ahead and how markets will react. But Permanent Portfolio fund (symbol PRPFX) takes the opposite tack and pretty much clings to a diversified but static basket of different kinds of assets. Says manager Michael Cuggino: "The future is unpredictable, and investors who rely on forecasts are going to be wrong more than right."

Cuggino divides assets into six categories: precious metals, Swiss-franc bonds, global real estate stocks, natural-resources stocks, domestic growth stocks, and U.S. Treasury and high-grade corporate bonds. As he describes it, this diverse collection of securities puts investors in the position to gain from various outcomes. "The key is discipline," Cuggino says. "People tend to run with the winners and don't buy when there's blood on the streets."

For example, if deflationary forces rise, then Permanent Portfolio's Treasury-bond holdings should perform well; if inflation spikes, then gold and Swiss francs should kick in. It works as a balanced fund does, except that the diversification is broader and the allocations more static than those of most balanced funds (Cuggino rebalances when weights move more than 10% above or below his targeted allocations).

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Permanent Portfolio's aim is to preserve capital and return a few percentage points better than the inflation rate, with low volatility. In this it has succeeded. In the ten years through September 30, the fund returned an annualized 9%. This year has been rough -- Permanent Portfolio surrendered 13.5% year-to-date through October 15, although it has outpaced Standard & Poor's 500-stock index by 24 percentage points. Unless the fund finishes 2008 strongly, this will be its first down year since 1994.

Cuggino, an accountant by training, does have an opinion on the outlook. "The U.S. economy will right itself in the next couple of years, once confidence is restored and businesses and individuals want to transact with each other." But don't expect him to alter Permanent's allocations, which he hasn't adjusted since he took the fund's helm in 1991.

Permanent Portfolio charges an annual fee of 0.95% and requires an initial minimum investment of just $1,000.

Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.