Three Funds Dodge Drops by Moving to Cash

NEW YORK (TheStreet) -- When markets crashed last spring, plenty of frustrated investors raged at fund managers. The experts should have sold stocks and shifted to cash, angry shareholders said.

Most fund managers dismiss such thinking. The short-term direction of markets is hard to predict, managers contend. Funds must stay invested to benefit from those brief periods when stocks skyrocket.

But a few managers take a different approach, shifting to cash and bonds when clouds appear on the horizon. This unorthodox strategy enabled some funds to limit losses during the downturns.

Should you go completely to cash at the first sign of trouble? Probably not. But adding a cash-holding fund to your portfolio might help protect your assets when the market dives.

One of last year's winners was the Stadion Managed Fund(ETFFX Quote), which normally fits in Morningstar's(MORN Quote) large-blend category. As markets weakened in late 2007, portfolio manager Tim Chapman began shifting to cash. The fund shunned stocks until April. The defensive move spared shareholders and has enabled the fund to return 3.9% annually, on average, during the past three years, outdoing 99% of its competitors, according to Morningstar.

To determine its asset allocation, Stadion follows 15 indicators, such as the ratio of stocks hitting highs and lows. When the market looks healthy, the fund can have all of its assets in equities. As the indicators turn sour, Stadion begins moving to cash.

Chapman says he doesn't always get it right. Last year, he shifted to stocks several times when his signals turned positive and moved back to cash when he realized he was wrong. This year, he sat in cash for a month while the market rallied.