Funds With a Conservative Calling

It's hard to fault investors looking to play it safe with conservative allocation funds nowadays. Stocks have spent the summer fluctuating wildly. Bond yields have been falling when everybody -- including Fed Chairman Greenspan -- expected them to be rising. And the presidential race is closer than ever.

The conservative allocation fund category, however, has its own inconsistencies. Some funds rely on investment styles, such as shorting stocks or buying foreign bonds, which sound scary enough to send a nervous investor rushing to stash his rainy day dollars back into simple yet lackluster money market funds.

So, for restless investors in a time of unusual uncertainty, here are two successful conservative allocation funds with differing investing styles: the (JAMNX Quote)James Market Neutral Fund and the (PRPFX Quote)Permanent Portfolio Fund.

James Market Neutral Fund

Barry James introduced the James Market Neutral fund in 1999, but the fund's first year in existence was no party for the Alpha, Ohio-based fund company. In a year that saw the S&P 500 rise 20.57% and the Nasdaq vault an astronomical 74%, the James Market Neutral fund lost an inauspicious 10.8%, definitely not the kind of reception James anticipated.

"It was painful, but we knew it could not last," says James, whose prediction proved quite correct. The market quickly fell, the investors regained their sanity, and the fund has been in the black ever since, even showing slight gains during the severe bear markets of 2001 and 2002, when it outperformed the S&P 500 by 13.6% and 23.7%, respectively.

Fast forward to today's struggling market and the fund is up 3.51% year to date vs. a negative 0.21% for the S&P 500 and a yield of 1.47% for the three-month Treasury Bill, a benchmark for conservative investors.

James says his fund lost money during its inaugural year because stocks with no earnings had the highest returns in 1999. And conversely, stocks with earnings lost ground. Not exactly the best environment for a fund that shops for stocks with strong fundamentals and rapid earnings growth -- and shorts stocks lacking those same two qualities.

Wait a second. How can a so-called conservative mutual fund short stocks? Isn't that the type of risky strategy used in hedge funds?