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)

, which normally fits in

Morningstar's

(MORN) - Get Report

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.

"We are not trying to beat the market every year," he says. "The goal is to get decent returns in good years and avoid big losses in bad times."

To implement his strategy, Chapman uses exchange traded funds. During good times, he sells ETFs when they lose 5%. The goal is to keep small losses from becoming large ones. The fund has 10% of its assets in the

Technology Select Sector SPDR ETF

(XLK) - Get Report

and another 10% in the

Financial Select Sector SPDR Fund

(XLF) - Get Report

, portfolios that have been relatively strong in recent months.

Another fund that shifts to cash is

Capital Advisors Growth

(CIAOX) - Get Report

, which has returned 2% annually, on average, during the past five years, outdoing 75% of large-growth funds. As the markets collapsed last fall, Capital Advisors shifted 25% of its assets to cash. The fund normally has less than 5% in cash.

Managers Channing Smith and Keith Goddard are dedicated growth investors. Besides cash, they hold a mix of steady blue chips, companies with rising earnings and emerging small stocks that could grow into giants. During rough periods, the managers dial down risk, emphasizing blue chips and avoiding shaky small-caps.

The fund focused on blue chips and held no emerging stocks last year. Since then, the managers have turned more bullish, reducing cash and putting 5% of assets in small-cap stocks. Blue-chip holdings include familiar names, such as

Wal-Mart Stores

(WMT) - Get Report

and

Coca-Cola

(KO) - Get Report

.

Alnylam Pharmaceuticals

(ALNY) - Get Report

, a maker of respiratory drugs, is one of the managers' favorite growth stocks.

The Capital Advisors managers rely on indicators, such as the spread between Treasury yields and junk bonds, to guide allocation decisions. Spreads become wide when investors lack confidence and worry about rising defaults. Widening yield spreads prompted the managers to shift to cash last year.

"You can have some great months when yield spreads are wide, but on average the market does poorly," Goddard says. "We are trying to tilt the odds in our favor."

Cautious investors should consider the

Madison Mosaic Balanced Fund

(BHBFX) - Get Report

, which keeps 50% to 70% of its assets in equities and the rest in bonds. Manager Jay Sekelsky increases the equity allocation when stocks seem attractive compared to fixed income. Last year, Sekelsky kept the equity allocation around 60%. He recently raised stock holdings to near 70%.

The fund favors companies with solid balance sheets and strong competitive advantages. Big holdings include

PepsiCo

(PEP) - Get Report

and

Diageo

(DEO) - Get Report

, the maker of Johnnie Walker Scotch and Guinness beer. "In difficult economic times, people still drink," Sekelsky says.

-- Reported by Stan Luxenberg in New York

.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.