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An Easier Way to Pick Winning Funds

Should you buy the Pimco flagship or the Harbor version? Most investors should take the subadvised fund because it has an expense ratio of 0.53%, lower than what Pimco charges for its retail mutual funds.

Besides enjoying access to big-name managers, subadvisery fund companies also benefit from the flexibility they have to hire and fire. If a hot freelance manager suddenly turns cold, it is easy to fire him and screen for someone else. In contrast, it may be harder for traditional funds to get rid of long-term employees who are no longer excelling.

Subadvisery firms say that the key to their success is finding money managers that consistently apply distinctive styles. Such managers can repeat their success over long periods. A top subadviser is William Muggia, CEO of Westfield Capital Management, which oversees funds for Touchstone, a subadvised fund family. Westfield manages $15 billion in total assets with two-thirds of the money at institutional accounts and the rest in subadvised mutual funds aimed at retail investors. One of Muggia's best-performing mutual funds is Touchstone Growth Opportunities (TGVFX), which has outperformed most large growth funds for the past three, five and 10 years.

Whether he is working for Touchstone or institutions, Muggia follows a distinct growth approach. While many competitors look for consistent growth stocks, Muggia will take either growth or value names that are improving their earnings. "We will take any kind of stock as long we think that the earnings will do much better than Wall Street expects," says Muggia.

Touchstone Growth Opportunities has such traditional growth names as Amazon (AMZN) and Starbucks (SBUX). In addition, the fund has stakes in oil refiners, including Tesoro (TSO) and Valero (VLO). The refiners are normally considered cyclical names that fit in the value box. But lately they have been recording rapidly growing earnings as high international oil prices help to fatten profit margins.

Make no mistake, picking the best subadvisers is not easy, and many companies fail with the strategy. But the best practitioners have demonstrated a deft touch for carefully evaluating managers that can succeed over long periods.

Among the strongest subadvised fund companies is Aston Funds. Of the company's 14 funds with five-year records, 10 have outpaced their category averages. An intriguing choice is Aston/Montag & Caldwell Growth (MCGFX),which has returned 1.7% annually during the past five years, outdoing 75% of large growth peers. The fund buys blue-chips selling at discounts.

Holdings include Coca-Cola (KO) and General Electric (GE). The solid stocks have enabled the fund to rank as a low-risk choice that excels in downturns. During the turmoil of 2008, the Aston fund outdid 95% of peers.

Another top performer is Aston/Fairpointe Mid Cap (CHTTX), which returned 3.6% annually during the past five years, outdoing 95% of mid blend funds. The fund managers look for industry leaders that are increasing their sales and market shares. Holdings include Southwest Airlines (LUV) and medical device maker Boston Scientific (BSX).

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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