Or back up?

With talk of second recession in developed markets, many multi-asset fund managers are taking a more defensive stance. Mark Burgess, chief investment officer at Threadneedle, comments: "Our view is that at some stage the authorities are going to have to get ahead of the curve, most likely through a globally co-ordinated bout of quantitative easing. Getting to this decision, however, is going to be complicated and we may well need a catalyst in the form of a significant market crisis to make this happen. Indeed, we may be seeing the beginnings of this crisis now.

"Our equity portfolios have been increasingly defensively positioned and, in particular, are very underweight the European financials that are most exposed to the current problems. Our bond portfolios are close to the benchmark and should be performing fine, despite the significant market volatility."

Putting up defences

How can fund investors become more 'defensive'? The most obvious answer is cash, but with interest rates at historical lows and likely to remain so, fund managers such as Fidelity's Mr Greetham label cash as their "least favourite" asset class.

"There is no doubt that the most defensive asset is cash and, although it is only currently paying 0.5 per cent, that is preferable to suffering falls of 10 per cent to 20 per cent," says Andy Gadd, head of investment research at the Lighthouse Group. "The problem with moving into cash, however, is that timing the market is notoriously difficult - having suffered losses it could be a case of shutting the barn door after the horse has bolted. There is also a risk that you will be sitting in cash as the market recovers."

But Tim Cockerill argues that if you do feel that things will go from bad to worse, it is probably best to sell and hold cash rather than buy a defensive fund which could still fall in value. "If you hold cash you can then buy back in when the market is lower and that could be into recovery holdings or those more defensive ones," he says.

Of course, taking a 'defensive' stance with your portfolio is not just a matter of broad asset class selection. Glyn Williams, an investment funds analyst, says it is important to consider the mentality and attitude of the fund manager. He points to Frances Brookes' Troy Trojan Income fund as an example. The fund boasts very low volatility and has lost investors less than some cautious managed and bond funds.

Likewise, Invesco Perpetual's Neil Woodford has lost less over the past six months with the Invesco Perpetual Income and High Income Funds than many cautious funds.

Investing now

If you are looking to invest new money and are concerned about the current market volatility, you can either drip-feed money in to negate the risk of market timing, or consider multi-asset funds.

Multi-asset funds are good defensive plays as they will allow you to benefit from some of the growth if stock markets bounce back, but should also provide protection if markets fall further. Mr Connolly suggests the Cazenove Multi Manager Diversity fund, which invests one-third in equities, one-third in fixed interest and one-third in alternative investments, which can include hedge, commodities, gold, structured products or property. Other multi-asset funds to consider are Fidelity Multi Asset Strategic and M&G Cautious Multi Asset.

Other defensive plays that can shield your portfolio from market volatility include absolute return funds - but make sure you know what you are buying, as performance can vary broadly across the sector along with the investment techniques used. The Jupiter Absolute Return and Henderson UK Absolute Return funds use derivatives and have built into their processes qualities that are defensive. However, they are very different funds and investors should look carefully at what each one is doing. "The Henderson Fund is perhaps easier to understand as it is a long/short fund aiming to grow at around 8 per cent per year," says Mr Cockerill.

Bricks and mortar property funds, such as L&G UK Property, are another defensive option.

Defensive plays are not in short supply, but most analysts are arguing that for most investors it is a bit too late to be getting more defensive. "The trouble is that in re-shaping a portfolio to become more defensive means taking losses perhaps on the higher risk holdings and buying lower risk ones. When the recovery comes you have in effect crystalised some of your losses and reduced your recovery potential," explains Mr Cockerill.

There are, however, funds that can provide a middle ground between a defensive stance and more exposure to equities. The Artemis Strategic Assets Fund managed by William Littlewood is one which Mr Gadd favours. "With the aim of preserving capital, it takes a broadly 'multi-asset' approach when that's the right thing to do. But equities remain the fund's mainstay."

While the fund has grown significantly since its launch almost two years ago, performance has not been spectacular (see table below). The fund is fourth-quartile since the launch and has significantly underperformed the FTSE All-Share.

Another way to get exposure to equities and maintain a defensive position is via a gold fund investing in a portfolio of gold mining shares. As we pointed out last week (), gold mining equities have not risen anything like as much as gold bullion, making them look cheap. They are quite high-risk, but still offer some correlation to the gold price - a safe place to be when markets are choppy.

Source: Investors Chronicle Funds data, Fidelity

Performance figures as at 12 August 2011

Source: Investors Chronicle Funds Data, Artemis, *Morningstar

Performance figures as at 12 August 2011