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.

TST Recommends

So, for restless investors in a time of unusual uncertainty, here are two successful conservative allocation funds with differing investing styles: the

( JAMNX)James Market Neutral Fund and the

(PRPFX) - Get Report

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?

Well, yes and no, says James. There are risks in shorting stocks, but the fund generally has a short position equal to its long position, so it is not making a big directional bet on the market. And it keeps cash or a high-grade liquid asset, such as U.S. Treasury bills or certificates of deposit, equal to the market value of the securities sold short in a separate account from which it will not borrow. Right now the fund is 60% long, 60% short and 40% in cash.

Two stocks James holds long and ranks very highly -- he ranks 9,000 stocks on a monthly basis to make his picks -- are health maintenance organization

Sierra Health Services

( SIE) and energy producer

Apache Corporation

(APA) - Get Report

.

James likes Sierra's growth potential in an aging America, even though many fund managers are shying away from health care as the chance of a John Kerry victory in November's presidential election remains a possibility.

"If Kerry is elected and gets his proposals through, then it would harm the industry," says James. "But since the Congress will likely remain Republican, we don't expect much change no matter who wins."

Apache's shares have climbed alongside oil prices this year, but James says the company still meets his criteria and is cheap at 11 times earnings. Some other energy names recently added to the fund's portfolio include

Devon Energy

(DVN) - Get Report

,

TXU Corp.

( TXU) and

Methanex

(MEOH) - Get Report

.

On the short side, James has already had great success with

Delta Airlines

(DAL) - Get Report

and has maintained his short position as the company's large debt load tilts it toward bankruptcy. He is also betting against fuel cell manufacturer

Ballard Power Systems

(BLDP) - Get Report

.

The one criticism of the James Market Neutral fund is its seemingly abnormally high expense ratio of 2.48%. The fund is a relative bargain, however, when compared with the average hedge fund utilizing a similar strategy but charging 2% of assets plus a performance fee of 20% of profits.

"I guess you could liken us to a hedge fund, since we have a negative beta and a very low volatility," says James. "But our basic view for this fund is that we want to capture the spread between good and bad stocks no matter the market."

Permanent Portfolio Fund

Rainy day money. Sleep-at-night money. Kids' school money. Michael Cuggino, portfolio manager for the San Francisco-based Permanent Portfolio fund, does not care what his investors call it, he just wants to make sure it's there for them when they need it.

"We say the world is an uncertain place, and everybody has a certain portion of their money they do not want to risk," says Cuggino. "Because of that desire, we designed a portfolio that protects our shareholders' assets under any environment."

Under the current tough environment Cuggino's fund is up 3.18% year to date. And like James' Market Neutral fund, the Permanent Portfolio thrived during the bear market of 2001 and 2002, outperforming the S&P 500 by 15.7% and 36.5%. For the record, the last time the fund lost money over the course of a year was in 1994, only the third time in the fund's 22-year existence that it ended the year below where it started.

The Permanent Portfolio's long-standing formula for outperformance is asset allocation. And not just your run-of-the-mill, 60%-stocks-and-40%-bonds allocation. We are talking about an asset allocation that includes gold (20%), silver (5%), Swiss Franc denominated bonds (10%), natural resource and real estate stocks (15%), aggressive growth stocks (15%) and U.S. Treasury bill and bonds (35%). (And in case you are wondering, the precious metals portion of the portfolio is in actual bullion and bars held in depository banks, not mining stocks!)

Cuggino says the reason for choosing off-the-beaten-path assets like precious metals and Swiss bonds is their lack of correlation not only to U.S. equities but to each other. Precious metals and equities generally tend to move independent of each other. And Swiss bonds denominated in francs, for example, act as a hedge on a weakening dollar because the Franc maintains its value better than the U.S. currency, which is often manipulated by the government.

And the fund's effort toward diversification does not stop at selecting diverse asset classes, it also adds an extra measure of safety by mixing assets within those asset classes.

In the aggressive stock portion of the portfolio, for example, the fund holds biotech

Amgen

(AMGN) - Get Report

,

Harley-Davidson

( HDI), homebuilder

Ryland

(RYL)

and

State Street Bank

(STT) - Get Report

. Not a lot of correlation there, to say the least.

Just how serious is Cuggino about asset allocation? He even spreads out his real estate choices by REIT classification holding residential operator

Archstone-Smith

( ASN), retail REIT

Federal Realty

(FRT) - Get Report

and shopping center specialist

Equity One

(EQY)

.

The other key to playing it safe, says Cuggino, is the fund's discipline in rebalancing the portfolio if one asset class grows or falls too far.

"Wall Street has a different idea of a balanced fund," says Cuggino. "We never change allocations. That's why we consider ourselves a calm port in stormy waters."

As originally published, this story contained an error. Please see

Corrections and Clarifications.