While most funds strictly adhere to their investment mandates, more are permitting their managers to move into cash and bonds as a defensive play. And the strategy proved to be extremely wise in last year’s steep declines.

The Stadion Managed Fund, a large blend fund, began moving more of its assets into cash as early as the end of 2007. Over the past three years, it has returned an average of 3.9%, beating 99% of its competitors.

But the manager of the fund, Tim Chapman, admitted to TheStreet.com that the 15 indicators he uses, including market volatility, don’t always work. He sat in cash earlier this year as the market rallied, for instance.

Still, he defends he conservative approach: “We are not trying to beat the market every year. The goal is to get decent returns in good years and avoid big losses in bad times.”

Another fund that permits its manager to move heavily into cash is the Capital Advisors Growth Fund, delivering an annual average return of 2% over the past five years, outpacing 75% of its large-cap growth peers. When the markets collapsed in the fall of 2008 and the spread between Treasuries and junk bonds widened, which the fund’s managers view as poor consumer confidence, the fund moved 25% of its assets into cash.

Yet another fund that invests heavily in bonds, the Madison Mosaic Balanced Fund, will move as much as 30% to 50% of its assets into fixed income.

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