This Red-Hot Fund Could Suddenly Turn Cold

NEW YORK (TheStreet) -- Permanent Portfolio(PRPFX) has enjoyed a remarkable run. During the past ten years, the mutual fund returned 11% annually, ranking as the top-returning competitor in Morningstar's conservative allocation category. The number two fund lagged Permanent Portfolio by 3 percentage points, while the S&P 500 trailed by 7 percentage points.

Seeing the compelling results, investors have poured into the fund. Permanent Portfolio's assets climbed from $333 million in 2005 to $17.2 billion now. But the new shareholders are not likely to be pleased with their investment. After enjoying an epic hot streak, the fund seems likely to be faced with a period of mediocre results. The problem is that the fund depends heavily on Treasuries, precious metals and Swiss francs -- assets that could be peaking after long rallies.

As the name suggests, Permanent Portfolio is designed to protect shareholders over the decades under a variety of harsh conditions. To accomplish the mission, portfolio manager Michael Cuggino maintains a rigid strategy. As protection against recessions and deflation, he always keeps about 35% of assets in Treasuries. To guard against inflation, the fund has 5% in silver, 10% in gold, and 15% in real estate and natural resources stocks. About 10% goes into Swiss francs, a rock-solid currency that often rises when the dollar falls. The fund also has 15% in growth stocks that should shine when the economy expands.

While the formula has proved ideal for the unsettling markets of the past decade, there are many indications that the good news may be ending. During the past month, the fund lost 1.6% and trailed 98% of its peers. Most portfolio assets sank -- and nearly all of the holdings seem overpriced and susceptible to more losses.