Many investors  worry that inflationary pressures in the developing world might bleed into the US economy and put a pinch on their portfolios. This fund provides an excellent insurance policy against that outcome.

As inflationary pressures continue to build overseas and in the US, many investors are searching for ways to protect the value of their assets. Permanent Portfolio (PRPFX, 800-531-5142) is a conservative-allocation fund that seeks to preserve–and hopefully increase–an investor’s purchasing power by beating the rate of inflation and keeping a damper on volatility.

The fund, helmed by Michael Cuggino, achieves this goal by investing in a variety of assets, including precious metals such as gold and silver; foreign and domestic real estate; shares of natural resources companies; Swiss francs; Treasury bonds and bills; and aggressive growth stocks.

By maintaining fixed allocations to these assets (See “Asset Allocation”), the fund has returned about 7 percent since its 1982 inception, more than double the annual pace of inflation over the period.

Gold and silver are traditional inflation hedges, and the value of these metals rises when a currency depreciates. These metals also benefit from safe-haven buying and typically post gains even as other assets lose ground. Permanent Portfolio maintains heavy allocations to physical metals, with 12.9 percent of assets in gold coins, 6.3 percent in gold bullion and 5.7 percent devoted to silver.

Natural resource companies are also ideal inflation hedges because the value of their production rises with higher commodity prices. The fund’s allocation to the sector is spread across well-known names such as Freeport-McMoRan Copper & Gold (NYSE: FCX), the world’s largest producer of copper; BHP Billiton (NYSE: BHP), which produces a variety of commodities including oil, aluminum, metals and coal; and Cameco Corp (NYSE: CCJ), a major uranium producer.

When it comes to the fund’s real estate holdings, Permanent Portfolio doesn’t invest directly in property. Rather, it holds positions in a number of real estate investment trusts (REIT), including multifamily residential, commercial and industrial properties. It’s largest holding, Vornado Realty Trust (NYSE: VNO), primarily operates office properties in New York and Washington, DC.

The Swiss franc features prominently in Permanent Portfolio, accounting for 10 percent of assets that are spread across Swiss government notes of various maturities. The Swiss franc is no longer a hard currency per se–until 2000 Swiss law required a 40 percent gold cover for currency in circulation. Nonetheless, the currency is still perceived as extremely stable because it’s backed by the Swiss government’s strong fiscal policies.

At more than a third of assets, US Treasury obligations such as bonds and short-term bills are the fund’s single largest allocation. This outsized exposure to Treasuries may raise some eyebrows; pricing on Treasuries is extremely distorted due to the Federal Reserve’s quantitative easing program. Nevertheless, these investments remain a bastion of stability.  

The fund’s aggressive growth allocation allows Permanent Portfolio to participate in bull markets. Accounting for just over 15 percent of investable assets, the fund’s aggressive growth component includes consumer names such as CBS Corp (NYSE: CBS), financials such as Morgan Stanley (NYSE: MS) as well as oil and gas, technology and pharmaceutical names.

The fund involves some risks. Like most investment vehicles, it swung to a loss in 2008 amid some of the worst turmoil in the financial markets. The fund’s value declined by 8.4 percent, which still ranked it in the top 8 percent of the conservative-allocation category. Thus far in 2011, Permanent Portfolio is down 0.7 percent.

Despite those occasional setbacks, the fund has an excellent long-term track record, ranking in the top 1 percent of its peers on a three-, five- and 10-year basis.