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What do fund managers do with unpopular asset classes?

As investors chase their new-found love for developed market equities, take a moment to pity the poor fund managers who find the fickle markets giving their asset classes the cold shoulder.

"It can be pretty demoralizing," said Travis Hamilton, managing director at Khan Investment, which focuses solely on Mongolia. "I've had a number of people ask me, 'how do you get up every day and keep doing what you're doing?'"

"If you look back at 2012 or 2011, a number (of managers) were courting Mongolia. There was a huge amount of exuberance and enthusiasm. Almost all of them have packed up and left," he told CNBC.

(Read more: Will foreign investors give Mongolia another shot?)

Foreign investors abandoned one-time frontier-market darling Mongolia over the past 18 months amid a prolonged dispute between the government and private-sector partners over Rio Tinto's $6.6 billion Oyu Tolgoi mine. Foreign direct investment (FDI) fell 17 percent in 2012 and then fell a further 42 percent in the January-to-August period this year.

The government has since passed a new investment law in hopes of restoring foreign investor confidence and is negotiating with Rio Tinto to end the dispute.

Hamilton believes pulling out of Mongolia was just short-term thinking, as it may take at least 10 years to pay off. "Investors in any emerging market or frontier need to consider that," he told CNBC.

(Read more: Bond fund manager: I hate bonds)

While his fund hasn't faced redemptions, "it certainly is fair to say it has been very challenging in terms of attracting new capital to the strategy," he said. "All we can do (is) keep marketing and promoting the fund," as well as keeping current investors "very informed" of developments.

His fund hasn't suffered alone. Investors have pulled around $15.58 billion out of dedicated emerging market equity funds and $14.04 billion out of emerging market bond funds so far this year, according to data from Barclays.

Others have asset classes that aren't a niche market, like Mongolia. Financial advisors may generally consider fixed income a necessary core holding as part of most investors' portfolios, but bond funds globally have seen around $15.22 billion of outflows over the past three months, according to data from Jefferies.

(Read more: Goldman: Cut your emerging markets exposure by a third)

Fixed income managers are coping by talking down expectations.

"You have to be realistic," Cecilia Chan, HSBC's chief investment officer for fixed income in Asia, told CNBC earlier this month.

"When I talk to the customer, I try to be genuine. I'm not telling you that you will get rich buying bonds," she said, noting HSBC has around $50 billion worth of bonds under management.

A nomad rides on a camel in the South Gobi desert, Mongolia, in June 2013
Tomohiro Ohsumi | Bloomberg | Getty Images
A nomad rides on a camel in the South Gobi desert, Mongolia, in June 2013

"The great rotation, the attractiveness of equities as a headline story, the macro environment (are) supportive in terms of selling equity," Chan said. "But in reality, whether it will materialize into actual returns nobody knows. For equities, it comes with volatility, market timing as well. Bonds still are a lower risk asset class," she noted. "We need to manage risk."

Others take a similar approach to their unpopularity, being upfront about the likelihood of losses.

Fixed income has done well for the last 30 years, noted Kumar Palghat, chief investment officer at fixed income specialist Kapstream Capital, which has around 6 billion Australian dollars, or around $5.33 billion, under management. "It can't go on forever," he told CNBC.

(Read more: Take cover! Bond market 'hell' could be on the way)

He doesn't have a problem with telling clients his offerings face a difficult outlook.

"They have to step up and admit that their asset class isn't going to do as well," he told CNBC. "They didn't do well in 2013 and they're not going to do well in 2014," he said.

"I don't sell the product just to sell it. I'm happy to say bonds will underperform equities. Otherwise, you're just pushing a product," Palghat said. He noted, however, that he continues to see demand from longer-term investors such as pension and superannuation funds which can't have all their money in equities.

(Read more: Euro zone bond rally may be ending: Here's why)

He tells his clients that if they must be in bonds, there are strategies to minimize the capital losses that are likely to come from the expectations interest rates will rise.

To be sure, being unpopular can be a boon for bargain-hunting.

As investors pulled out of emerging market bonds, Hamilton's Mongolia fund started buying, picking up Mongolian debt at around 58 cents on the dollar.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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