This year we added Pimco CommodityRealReturn Strategy to the Kiplinger 25. The fund (symbol PCRDX) is on fire -- up 16% year to date through May 2 and 19% annualized over the past five years.

But it's not performance we're chasing. Rather, we like the fund's portfolio-diversifying benefits and the inflation-countering credentials of holding a bushel of commodities. Some commodity prices may presently be overextended, but, given powerful demand for energy, metals and food from emerging markets such as China, it's hard to deny the argument that commodity prices should continue to rise over the long-term.

On their own, commodities are a volatile class of assets. But they add valuable diversification benefits to a portfolio, increasing the expected return and decreasing risk. This is because commodity price movements are generally out of sync with those of stocks and bonds. And commodities perform well in inflationary periods (some would argue that rising commodity prices trigger inflation, not the other way around).

The imaginatively constructed Pimco fund actually offers two layers of inflation protection: commodities and inflation-indexed bonds. The fund tracks the Dow Jones-AIG Commodity index, which holds a basket of 20 commodities, including petroleum, base and precious metals and foodstuffs.

You might consider commodities the wholesale level of inflation protection. At the retail level you gain protection through holding Treasury Inflation-Protected Securities (i.e., TIPS), which are the collateral that Pimco holds to achieve the commodity exposure. TIPS are indexed to consumer price inflation.

This is actually very much an actively managed fund. Manager Mihir Worah manages the TIPS portfolio and deviates modestly from the passively run DJ-AIG index if he detects low-risk opportunities (the Dow Jones index is adjusted only once a year). "I try to add value through hitting singles and doubles, not swinging for the fences," is how Worah, a Bombay-born, University of Chicago-educated theoretical physicist describes his role.

For instance, if Worah thinks corn is overvalued relative to sugar, he may raise the weight in sugar. If Chicago Board wheat futures are temporarily priced over those of Kansas City (this classic arbitrage trade actually happened recently), he'll sell Chicago and buy Kansas City. And he may adjust the fund's exposure to crude oil and natural gas contracts depending on where he sees value on the futures curves.

This is an unusually complex fund, so don't even think about purchasing the fund until you read the prospectus and understand what you're buying. Because commodity prices routinely oscillate wildly, think in terms of holding a fund like this for at least three to five years.

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