NEW YORK (MarketWatch) -- While many mutual fund managers boldly charge into stocks regardless of market conditions, others have kept their powder dry by holding more in cash.

For some of these managers, stashing cash has proved a valuable defense against the economic downturn. For others, boosting cash was a prudent decision at a time when stock valuations were too rich for their liking.

Whatever the reason, such moves in many cases mitigated the steep losses that other funds suffered in 2008. Of the 50 best-performing U.S. stock funds that reported cash holdings last year, the average portion in cash was 22.9%, while the median amount was 15.4%, according to data from investment researcher Morningstar Inc.

"[Cash] is part of my bag of tools to help manage people's money prudently and safely," said Ralph Shive, manager of Wasatch First Source Income Equity Fund FMIEX, -1.22% , which has about 15% of assets in cash.

"Holding cash is part of my style, based on the business cycle," said Shive, who typically holds between zero and 5% in cash. "I'm looking forward to a time when I can put it back in. I think about it every week, but I'm not there yet. We've got some serious structural problems."

The manager of one of the country's better-performing funds decided in August 2007 to build cash positions.

Since then, said Monem Salam, deputy portfolio manager at Saturna Capital, which manages the Amana funds, not much new investor money has been put into stocks. As a result, cash holdings of the Amana Income AMANX, -0.48% and Amana Growth AMAGX, -0.26% funds have swelled from single digits to about 30%.

"We're not selling to go into cash, but we're seeing money coming in and staying in cash," the fund manager said, adding that the few buys he's made have been in stocks he considers defensive.

There are still some warning signs for the markets and the economy, Salam said, including whether financial institutions have finished writing down assets, how large the U.S. deficit will be and the scale of job losses.

Amana Income lost 23.5% last year, while Amana Growth was down 29.7%. The Standard & Poor's 500 Index SPX, -0.48% , by comparison, lost 37%. The Amana funds' performance was helped by an Islamic-principles-based strategy, which prohibits owning financial-sector stocks. Salam said the funds may increase their stock buying in about four or five months. "We're just waiting for opportunities," he said.

Fund-industry giant American Funds beefed up the cash holdings of several flagship offerings last year. Growth Fund of America AGTHX, -0.03% -- the largest stock fund in the U.S. -- Investment Company of America AIVSX, -0.47% , AMCAP AMCPX, -0.22% and American Mutual AMRMX, -0.58% funds each had more 10% of assets in cash. The four funds' assets total about $200 billion. An American Funds spokeswoman said the firm doesn't discuss its strategies.

"Some managers do it right," said Ryan Leggio, a Morningstar fund analyst, of those who have high cash positions. Leggio said Morningstar is "agnostic" about the strategy. He added that there are some "great managers we've long admired" who use cash heavily in their portfolios.

Value approach

One of those managers is Rikard Ekstrand, co-manager with Bob Rodriguez of FPA Capital FPPTX, +0.07% , a value fund that has just under $1 billion in assets. While the fund typically has cash holdings in the single digits or low teens as a percentage of assets, starting 2004 it began building cash, which peaked at 43.6% of assets in November 2007.

Ekstrand said that, as a value fund, FPA Capital has strict criteria about the stocks it chooses. "We just weren't finding values good enough to deploy our cash," he said. Still, the fund lost 34.8% in 2008 largely due to concentrated investments in energy stocks.

Investors do raise questions about when the cash levels jump, Ekstrand said, but the fund's managers respond by explaining they can't find the right opportunities.

"We hate cash, but we hate stocks that don't fit our criteria even more," he said. He added that the fund has been spending its cash "in earnest" since October, buying mostly energy stocks. Cash holdings have dropped to 32% of assets from 38% on Sept. 30.

Another value investor, Charles de Vaulx, co-manager of IVA Worldwide IVWAX, -0.39% and IVA International IVIOX, -0.14% , is also holding more cash than he typically would.

De Vaulx's funds have about 18% of assets in cash right now, up from their typical 5% to 12%. In early October, the cash levels were up to 40% of assets, but since Oct. 10, De Vaulx has been buying assets.

"Holding cash is not about market timing, but reflects our inability to find cheap securities," he said.

De Vaulx said that his investors haven't complained about his cash holdings. "[When they see our results] people don't mind that we had cash for some of the year." While the funds launched in October, the global strategy that IVA Worldwide uses was down 12.1% in 2008, compared to the MSCI All Country World Index, which was down 42.2% for the year.

In fact, said De Vaulx, some financial advisers appreciate his cash holdings. "Some advisers say their clients resent it when they hold cash, so they're happy when we do it for them."

Salam at Saturna Capital said he's encountered similar sentiments. "Advisers have said to us, 'good job,'" for having so much in cash, he said. "They trust us to make the right decision about when to get back in the markets."

Fully invested

Yet the fact that some managers hold large amounts of cash and still collect a management fee for stock-picking may surprise some investors.

"When an investor initially invests in a fund, they probably do expect it to be fully invested," said Morningstar's Leggio.

But some stock-fund managers say holding cash is not their responsibility. They're hired to be fully invested in stocks, and if investors want a place to park cash they can go to a bank.

"Our institutional managers don't pay us to manage cash," said Jason Farago, spokesman at Lord Abbett & Co. "Cash looks great in hindsight, but you then run the risk of missing the rally when the market recovers."

"We believe that over a period of time, our [stock selection] formulas work," added Frank Ingarra, co-manager at Hennessy Funds. "It's all about time in the market rather than market timing."

Leggio is critical of managers who hold cash simply because of a market downturn.

"If a manager's scared of what's going on, then do you really want to be in this fund?" he asked. He added that investors can leave a fund if they don't like their fund managers being heavy in cash.

"You don't have to stick around," Leggio said. "There are plenty of great funds open that are fully invested."